Monday, November 5, 2018

"The perils of digital protectionism", Vivan Sharan, Live Mint, 17th September, 2018

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Nearly three decades since the balance of payments crisis, a sense of regret is palpable within our polity. It is no longer possible to hyphenate the development trajectories of India and China. At the turn of the century, an Indo-Chinese economic rivalry was widely postulated in global publications, and was celebrated at home. But this did not come to pass, triggering a deep and as yet unresolved angst. India did not manage to create corresponding levels of prosperity and well-being at the wide base of its socioeconomic pyramid, and its companies have been eclipsed in size by Chinese counterparts.
In the digital economy too, Chinese internet giants are far larger, despite our head start in information technology. Consequently, some policy practitioners have begun to advocate a China-like approach to digital economy regulation. That is, India should create firewalls to ring-fence the triad of data, technology and capital, just short of creating a Balkanized Indian internet. However, this is a reductionist proposition.
At the outset, glorification of China’s regulatory approach presupposes that tight control on the aforementioned triad has led to greater equity within its digital markets. This misplaced notion is often accompanied by a legitimate fear of ending up with a “winner takes all” digital economy. In reality, the Chinese markets are also dominated by a handful of companies. The only difference is that large Chinese companies such as Baidu, Alibaba and Tencent are home-grown. This monopoly formation stems from the internet’s universal network effect characteristic. This is particularly useful for digital advertising-led companies. This effect inverts the economic logic applicable to traditional industries by allowing increasing marginal returns.
To manage inevitable cases of abuse of market dominance by large internet companies, India should ideally strengthen its competition regulation capacity. Instead, it has done the opposite by merging the nodal competition appellate tribunal with a purely administrative tribunal under the ministry of corporate affairs.
Moreover, China has a large internal market that allows its companies to achieve scale and then seek longer-term sustenance outside. Consequently, 11 Chinese companies feature in the latest list of the largest 20 global internet companies. Indian companies cannot pursue the same strategy partly because our large middle-class market lacks purchasing power. To wit, despite accounting for 10% of total transactions, mobile wallets accounted for less than 1% of total transaction value in the previous fiscal. Similarly, internet companies looking to scale here find requisite transaction volumes, but struggle to generate value. In the absence of fiscal wherewithal to provide any monetary equivalent of Chinese state support, India cannot afford to cut off capital flows towards Indian internet companies.
Recent conversations on a proposed domestic e-commerce policy framework should also highlight a related challenge. Even if we create domestic e-commerce giants through retail industry protections, we will continue to sell Chinese products. The developmental benefits of this will be negligible. As many as 95% of registered manufacturing micro, small and medium industries in India are micro enterprises—household enterprises with less than five persons. They cannot possibly be expected to compete with sophisticated industrial supply chains. The mobile market is a ready example of this. Chinese imports dominate the Indian retail market despite a duty regime that is supposed to incentivise local production.
A central question is whether we want the Indian economy to constitute of retailers and resellers, or of producers. India’s only serious chance at creating a production base is by leveraging inward flows of finance and technology towards serving global value chains. To do this, India must assimilate new standards, create differentiated products and services, target niche markets, improve forward and backward supply chain linkages, and actualize policy reform. A robust digital market can help accomplish many of these objectives. For instance, India can become a large exporter of creative content through digital markets—ostensibly the reason why the government designated audio-visual services as a “champion sector” earlier this year. Conversely, restrictions on market access will only enable a handful of indigenous firms to create their own digital retail monopolies.
As far as data is concerned, India’s best chance at generating value through data flows is via enhanced market access. The global system that regulates this access is increasingly contingent on the principle of reciprocity. For instance, the European Union’s General Data Protection Rules and the US’ Clarifying Lawful Overseas Use of Data Act, have led to a wide consensus on the regulation of cross-border data flows. Both these approaches emphasize the role of trust and standards, which is consistent with the way such jurisdictions have approached market access issues more broadly.
India’s contribution to the evolving global discourse on digital economy regulations cannot be to reproduce the Chinese template. We must rise beyond a reductionism that only perpetuates panic and instead empower our entrepreneurs and firms to service global markets by deepening access to data, technology and capital.
India can become a large exporter of creative content through digital markets
Vivan Sharan is a partner at Koan Advisory Group, New Delhi.

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