India has the highest per user data usage in the world. The online space has flourished — innumerable applications compete for user attention. The internet economy in India is quite open and minimally regulated. This is now beginning to change because of three emerging motivations.
First, India is beginning to systematically assert its sovereign power to regulate internet-based activities. New regimes for regulation of personal data, e-commerce, content of video streaming services, and related spheres are in the offing.
Second, the government is increasingly using technology policy as an instrument of foreign policy and national security. From denying market access to inflict costs upon adversaries (for instance, the ban on certain Chinese apps), to using State power to access personal data for law enforcement, to localisation for data security, a variety of new interventions are emerging.
Third, the government is keen to ensure that the digital economy adds more value in India. In a report titled India’s Trillion Dollar Digital Opportunity, the government has outlined an agenda to create $1 trillion in economic value from the digital economy by 2025. The government is increasingly insisting that foreign-based internet firms undertake more activities in India — from storing data to creating jobs — and pay more taxes. It seems that this objective is also getting conflated with the promotion of “national champions” — domestic firms that take market share away from foreign firms.
These motivations are leading to a shift away from laissez-faire in India’s internet economy. However, the measures that are flowing from these motivations come with certain risks.
First, since both producers and users gain when services are used, denial of market access inflicts costs on users as well. The internet economy runs on imaginative innovation — it is mostly about inspiration, as perspiration can be automated. It was technologically straightforward to create Facebook or TikTok, but it took imagination that is difficult to properly replicate. Access to global innovations can be beneficial for India.
Second, it is difficult to understand the costs of government intervention in the internet economy. For products such as automobiles, one can compare the price of comparable products in India and in the world market to estimate the cost of government intervention. In the internet economy, price is usually not a useful metric. What matters is utility of the service, and it is difficult to measure the effect of government intervention on it.
Third, the problems that generally plague government efforts to promote specific sectors are accentuated in the internet economy. In the fast-changing internet economy, it is difficult to choose which segments to promote. It is also difficult to select the most efficient policy instruments, because comparing alternatives is hard. Given the relative lack of capacity of the Indian State, such subtle decisions are likely to go wrong. Further, as firms become influential, they can capture the policy process to gain undue benefits.
Fourth, the framing in terms of domestic vs foreign firms can take attention away from the binding constraints to the growth of the digital economy in India. There is a tension between helping domestic firms capture more share of India’s market, and helping these firms become global leaders. If Indian firms capture domestic markets due to favourable treatment from the government, they may become less efficient and innovative, and, as a result, the digital economy may grow at a slower pace, albeit with a larger share for domestic firms. The government should, therefore, exercise power over the internet economy with extreme caution.
First, precisely-tailored interventions should be chosen over blunt instruments such as bans. We should avoid placing barriers on collaboration and investment. Measures such as barring investments and partnerships from certain countries could backfire, as skilled people may move abroad to access this investment and collaboration.
Second, for development of the digital economy, the government should focus on finding efficient ways of addressing basic problems (“market failures” — monopoly abuse, externalities, public goods). For instance, it is reasonable for the government to regulate firms with large collections of non-personal data to bring some of this data to a marketplace. Since such data is excludable but substantially non-rivalrous, this move can be beneficial. However, if the government goes too far — by forcing data-sharing for free or at a low price or too soon — it would destroy the incentive to collect and store such data.
Third, it is better to solve known problems than to take a compliance-heavy, preventive approach. Compliance costs impose entry barriers and create a bias for scale. The proposed data protection law takes an excessively compliance-heavy approach.
Fourth, when the government is taking measures to promote specific segments or firms, it must use objective metrics of success to discipline the firms. The real tests are market-based. If Indian firms compete and gain market share outside India, it would be a sign of success.
Indians have access to a thriving online environment. From the flourishing of start-ups to the bursting forth of artistic talents, the online space is unleashing boundless potential. To the extent possible, we should preserve the openness of the internet.
Suyash Rai is a fellow at Carnegie India
The views expressed are personal