The relationship between regulation and innovation is classic rocky terrain, with strongly-held opposing views by actors on either end of the spectrum. Silicon Valley, or Bengaluru in the Indian context, asserts that by the very nature of the beast (regulation) must inevitably lag behind technology-driven innovation.
For India’s technology czars, even optimally-designed regulations can end up throttling the pace of innovation or its real potential. A commonly-cited example in recent times is the manner in which different states in India have gone about regulating online cab aggregators like Uber and Ola. The FDI policy on online retail, again infusing artificial distinctions between inventory and marketplace models, curtails the value add that the digital economy could possibly offer.
Whether DC or Delhi, governments and regulators usually counter with either narratives of citizen interests that stand impinged by innovation (privacy, gene integrity, secure and sustainable environment) or promoting innovation through regulation (even better). While the former has led to extensive literature on responsible innovation, particularly in the context of modern biotech innovations earlier and artificial intelligence at present, the latter assertion is less probed in the present innovation and regulation scholarship.
Michael Porter, who recently visited India, is a pioneer in advancing positive correlations between regulation and innovation in the environment protection domain, arguing that well-designed regulations paved the way for innovative technology. He believes that “strict environmental regulations do not inevitably hinder competitive advantage against rivals; indeed, they often enhance it.”
This hypothesis, though not often seen to work in India’s high-technology domains, recently influenced the creation of ‘payments banks’ through sheer regulatory innovation by the Reserve Bank of India. Today, the Ministry of Electronics and Information Technology, the Ministry of Finance, and the Ministry of Power are all broadly aware that unless vital concerns such as consumer grievance redressal mechanisms and cybersecurity stand addressed, trust cannot be built into the system. And unless such trust gets built in, the digital transition in vital sectors such as finance and energy will stand seriously hampered. In line with this thinking, we should hopefully witness more of Porter-type regulations – ones that put in place a regulatory framework for more consumer-friendly innovation.
In this context, NITI Aayog has recently released its draft Three Year Action Agenda, 2017-18 to 2019-20. This comprehensive document, among other things, touches upon some of these themes pertaining to regulation and innovation. Specifically, chapters 11, 14, and 15 of the Action Agenda do so when respectively exploring the broader areas of digital connectivity, science and technology, and the creation of an innovation ecosystem. Here, we focus on NITI’s progressive take on regulation in the context of innovation, the alternate discourse of a muscular regulatory state within ministries, departments and regulatory bodies, and the urgent need to reconcile both.
India was witness to heated debates revolving around differential pricing for data services when Facebook unveiled its grand Free Basics plan. Endeavouring to settle this debate once and for all, the Telecom Regulatory Authority of India (TRAI) favoured an absolutist conception of net neutrality, one with no possibility of differential pricing or access to the internet pipes. Recently TRAI came out with a consultation paper on traffic management practices in the context of the broader net neutrality debate, signalling thereby that furthering access through differential pricing could not be a potential exception.
Refreshingly, the NITI Aayog does not appear to endorse this “no further discussion” stance, leaning towards a policy for differential pricing that encourages fair trade-offs in the interests of both better competition among players and lower prices, and free internet plans to enhance internet access. This is important because the TRAI approach basically ended up being a conversation-stopper on a “basic internet” policy. How does one define “basic internet”? Is access to all parts of the virtual world equally beneficial or are there a basket of services access to which must be prioritised in the interests of knowledge dissemination, economic growth and political awareness? If so, what would such basket look like? These are all questions meriting much deeper examination than the TRAI ban, largely influenced by the net neutrality discourse in the US and the Federal Communications Commission (FCC) interventions during the Barack Obama era. Current FCC boss Ajit Pai is, in fact, pushing for a reversal of these policies. Finally, each country has to decide what is best for itself with its background conditions and context in mind. We hope the NITI Aayog’s outlook can lead to more such conversations, as well as a regulatory framework well-designed to promote “basic internet” rather than twiddling our thumbs till the National Optic Fibre Network and other last-mile access projects finally materialise. As the NITI Aayog observes, there are creative ways to marry net neutrality with free or low-price access to the internet.
Similarly, NITI also touches upon the lack of data protection and privacy laws in India – a critical component for building trust in the digital economy. With no law directly addressing data protection or privacy, and in the backdrop of the recent cases of mishandling of Aadhaar information, the lack of regulation in this sphere is increasingly becoming a cause for concern. Section 43A of the Information Technology Act does exist, and so do the subsequent 2011 rules addressing data protection and the need for privacy in sensitive personal data or information. Both the statute and the rules suffer from several drawbacks, including the lack of strong enforcement mechanisms or punitive outcomes for breach of privacy, absence of clear rules on data ownership, retention, transfer and localisation requirements, causing enormous scope for misuse. NITI Aayog’s highlighting of this problem should lead to more thought on this subject and comprehensive regulations particularly in the digital economy context.
Porter’s thesis can be helpful in guiding the NITI Aayog’s view on regulations: a light-touch perspective without too many entry barriers, some market and innovation facilitation through a broad structural framework within which players can operate and a ‘wait-and-watch’ rather than ‘my-way-or-the-highway’ approach. But the NITI Aayog is one among the many players in the ecosystem and the bureaucracy’s internalisation of such an approach is way trickier. Whether it be the RBI’s proposed master directions on e-wallets or TRAI’s latest consultation paper on network testing before commercial launch, there is a parallel discourse of a muscular regulatory state with more ex ante powers. We believe that the latter philosophy could be detrimental in the context of an innovation economy. What the state perceives as shaping the market structure could well result in being mind-altering for the innovator. Technology-driven innovation requires more risk taking by the state in the form of investing more belief in the power of innovation to transform. In that spirit, NITI Aayog’s broad observations on regulation are truly the right way ahead and one must hope to see a larger philosophy on regulation emerging from these “light touches” in the agenda.
Ananth Padmanabhan is a fellow at Carnegie India and Raushan Tara Jaswal is a researcher presently with the same institution.