Social Utility Needs to be Part of the Debate on Intellectual Property Rights in India

The government’s IPR policy seems to lack a holistic understanding of the complexities attached with “traditional” knowledge (to be free and open for public access) vs. some kind of privately locked knowledge capital.

Credit: Reuters

Credit: Reuters

Literary critic Northrop Frye once said “Poetry can be made out of other poems; novels out of other novels”. A few months ago finance minister Arun Jaitley released the National Intellectual Property Rights policy  defining it as a “first of its kind” policy covering the multivariate aspect of intellectual property forms in a single framework for promoting an “innovative and creative”vision for India. The policy in its objective to promote intellectual property rights (IPRs) as a marketable financial asset in India, seeks to incentivise IP owners by granting them monopoly rights. The enforcement of the policy in the coming months and years is naturally expected to impact sectors as diverse as software, environmental goods, pharmaceuticals, health biotechnology, electronics and communications etc.

While a lot has been written in analysing the details of such an IPR policy (complying with WTO’s agreement on TRIPS- Trade Related Intellectual Property Rights) with the likely pros and cons of the policy on the potential growth of the mentioned sectors and its’ implementation in India; it would be interesting here to make an effort to understand the economics of intellectual property, its impact on emerging market structures and highlight the limitations of legal jurisprudence on it.

Richard Posner (2005) in a paper titled, “Intellectual Property: The Law and Economic Approach”, offers valuable insights on the economics of intellectual property with a useful cost-benefit analysis. We may assume to agree that patentability provides an additional incentive to firms to produce and protect their innovations; however, the information required and the cost incurred in securing and publishing the patents (often for a limited time period) as a means to strike an optimal balance to safeguard good, innovative practices, may not be the most feasible or optimal balance to strike quite often. Posner argues how fixed costs incurred in creating the intellectual property often constitute as a higher percentage of total costs, while the marginal cost (cost that vary with output) incurred in providing the information to the consumers is the lowest. In emerging market structures, this causes a gradual oligopolising effect allowing few larger firms with greater market shares to monopolise their standing in the given market over time.

Let’s take the case of tackling intellectual property theft with a problem like digital piracy in India, the cost of legislating against such a problem and the enforcement cost of such a law by the agency and other institutional structures is massive, in comparison to the cost incurred in circulating pirated copies over the internet where the marginal cost of such “illegal” distribution is almost zero. Unless the marginal cost of undertaking such an action is made to rise, there is very little that a state or a firm can feasibly do on its own to effectively operationalise and finance countervailing measures, including the role of legislative actions (for example, with a law criminalising piracy as an act by itself with a strong deterrence).

Moreover, this greater gap between the fixed costs and marginal distributive costs fundamentally exacerbate the embedded inequalities in market structures in emerging markets, creating more distortions allowing bigger firms to finance such high fixed costs in the objective of monopolising profits from“innovative practices”. If the new entrant to a market (say pharmaceuticals) is asked to incur the same high fixed costs, the average total costs of a new firm is likely to go up to the level of the incumbent firm (the one with the market advantage or the higher market share).

A classic article written by Kenneth Arrow (1962), pointed that “the market value of intellectual property often cannot be estimated in advance as a result of which the risk aversion may result in the underproduction of such property from a social standpoint”. This is a further complication that surfaces beyond the cost problem raised above.

It becomes pertinent then to mention here that the larger discourse on the economics of intellectual property rights and the law or policy in its favour quite often covers a more unilateral position based on the firms’ profit maximisation interest arithmetic (calculated on net investment-gross return). Additionally, any IPR legislation introduced without the reflection of some larger net social utility (driven from the people’s choices than a firm’s own vested interest) and without significantly damaging the interests of a new entrant in a domestic indigenous market seems counterproductive and detrimental to an economy’s ability to grow sustainably and independently.

Coming back to India’s own National Intellectual Property Rights policy, the basic thrust of the policy raises more doubts by specifying all “knowledge” should be “transformed into IP assets”. We don’t know what “knowledge” here specifically means or includes, creating a likely tilt away from the potential accessibility of important public goods in the future. The policy also admits that the intellectual property of foreign firms has gained from the changes made to India’s intellectual property laws after joining the WTO and that the size of the Indian IP is small. Therefore, the policy proposed seems to lack a holistic understanding of the complexities attached with “traditional” knowledge (to be free and open for public access) vs. some kind of privately locked knowledge capital.

Any policy that envisions to protect an intellectual property (in its claim to promote and protect innovation) as against a tangible property, or a law, that aims to criminalise some form of intellectual property theft must involve a deeper cost-benefit analysis into its’ potential impact on the innovative (cap)abilities of a sector at a domestic level and on the ability of new firms to enter the market. It is also  critical to question the envisioned optimal regulation of “intellectual property” from the standpoint of an economics of law that draws parallels between intellectual and tangible property based on its’ usability, while approaching concepts of innovation, public goods and marginal-cost pricing with strong evidence.

The author is Assistant Professor of Economics, Jindal School of International Affairs, O.P Global Jindal University.