The Tricky Challenges of Regulating Service-in-India

Trends indicate that ‘Service-in-India’ is where investor interest really lies. This poses challenges for Modi’s policy makers at multiple levels particularly since technologies are not static, unlike the policies that circumscribe them.

Representational image. Credit: Creative Commons/CC BY-SA 2.0

Representational image. Credit: Creative Commons/CC BY-SA 2.0

It has been two years since the last general elections and currently a range of assessments of the Modi government’s performance are dominating headlines. Despite the recent debate between the finance minister and the central bank governor on whether or not India is a “one-eyed king in the land of the blind’’, it is clear that for foreign investors, the country’s growth is exceptional. Evidence for this is in the equity inflows over 2015-16, which touched around $41 billion, up from around $32 billion in 2014-15.  

While the final data is awaited, a large share of equity inflows were targeted at service industries. Therefore, FDI growth is not yet a cause for ‘Make-in-India’ triumphalism. Rather, trends indicate that ‘Service-in-India’ is where investor interest really lies. And within the services sector, e-commerce and other over-the-top (OTT) services have attracted among the largest shares of inbound capital. This poses challenges for Mr. Modi’s policy makers at multiple levels particularly since technologies are not static, unlike the policies that circumscribe them. Moreover, disruptive innovation is a concept that is still far from understood by government.

The Department of Industrial Policy and Promotion’s (DIPP) recent guidelines for FDI in e-commerce are a case in point. The policy finally recognises multi-crore investments by e-commerce companies in the “marketplace” model as legitimate; by allowing FDI in “business to business e-commerce”. Buyers and sellers transact on e-commerce marketplaces directly, facilitated by technology platforms that underpin them. Such clarity on whether FDI is allowed should ordinarily be cause for celebration. However, problems remain.

The DIPP’s policy pronouncement came with strings attached – marketplace companies cannot “directly” or “indirectly” affect the price of products sold through their proprietary platforms. The net result will be that only companies that are backed by investors with deep pockets will be able to survive. Litigation will inevitably ensure, on subjective interpretations of “directly” and “indirectly” and courts will be relied upon to define economic policy.  This is something that the finance minister has spoken out against in his recent comments on taxation policies and the active role of the judiciary, and yet there is dissonance within government.

One of the main reasons why brick and mortar retail purportedly cannot compete with e-commerce is the heavy product discounting on internet marketplaces. This is linked to economic logic – if a seller does not need to keep a large inventory as is the case in a dynamic marketplace, lower business costs allow the margins for discounting. These discounts also derive from large marketing budgets of e-commerce incumbents with foreign investors. Consequently, sellers do not have to spend a dime on the most critical function of frontend retail. So what happens to the small retailer?

Whatever happens should in no case be decided through courts or committees of government. It should be decided through fair competition and transparency in the business ecosystem. Both the small and large players in retail should do their part to allow for this. Large businesses must utilise their technological prowess to create channels of reporting and feedback, that can lead to a clearer understanding of transactions, taxation and all other grey areas as government sees them. The reluctance on part of big businesses to share data is an untenable 20th century legacy.  And small businesses should simply evolve by adopting technology wherever possible. Nothing stops small retailers from selling on internet platforms; either their own or those offered by incumbent e-commerce companies that have managed to integrate thousands of small sellers already.    

A favourite quote of many “India watchers” is that whatever you can think of the country, the opposite also holds true. This also seems to be the case in India’s business ecosystem, technology centric services included. For instance, large telecom service providers (TSPs) have been lobbying for differential pricing of “Over the Top” (OTT) services on the internet. That is, they have been demanding government intervention in pricing of internet services, based on usage of different consumer applications. To be clear, this is a case of the private sector asking policymakers to regulate the best level playing field for businesses that exists today; the internet.

Conversely of course, technology entrepreneurs contend that differential pricing should not be allowed as it will kill competition and a free internet. As a result of this debate, the Telecom Regulatory Authority of India (TRAI) has been busy taking wildly differing positions over the issue. A year ago, TRAI was accused of favouring TSPs, whereas today, it seems to have taken a more considered stance in favour of keeping the internet unfettered.  At the core of the TSPs’ demands are an inherent inability to provide OTT services that can compete with rapid innovation. For instance, TSPs fear revenue losses owing to voice over internet protocol based international calling.

The question to ponder over is: whether a sustainable solution to competitiveness concerns such as those raised by small retailers or large TSPs, is more regulation? What are the origins of some of the largest internet based service companies in the world? The answer to the latter is that many of them were not necessarily Internet-focussed from the start, but adapted to changing realities.  

Disruptive innovations enhance competitiveness in a way that protectionism in any form cannot.  In India, a predominantly young country reliant on the service sector, the inexorable role of technology in business and job creation, should not be undermined by myopic regulation. Technology in turn can help leapfrog some of the seemingly intractable challenges the country faces today including in education and healthcare delivery. India’s growth may be unique, but the Modi government should recognise that so are its stark socio-economic circumstances that must be overcome.

In the case of the internet, the role of government should be limited to provision of secure and resilient digital infrastructure for universal access (whatever happened to ‘BharatNet’?); as well as to demand from businesses, as much transparency as technology allows.

*Vivan Sharan is a Partner at Koan Advisory Group.

Disclaimer: Koan Advisory Group works with OTT service providers and e-commerce companies.