Ex-ante regulations can hurt the growth of India’s digital markets

The ex-ante framework poses a challenge as regulators often lack business expertise and may disregard potential scenarios for the evolution of sectors and markets.
The ex-ante framework poses a challenge as regulators often lack business expertise and may disregard potential scenarios for the evolution of sectors and markets.

Summary

What India needs is a post-ante review of the effects on competition so that investments in this still-nascent area do not slow.

The basic tenets of any competition legislation are to ensure the welfare of markets, promote economic prosperity and make sure all players get an equal chance to compete. This has so far benefited both large and small players, allowing the country to develop an ecosystem of innovation and growth. With a tech-based startup ecosystem penetrating across sectors in India, it is now the third-largest in the world. India has over 800 million internet users. This potentially makes it one of the largest internet markets in the world. Combined with a considerably cheaper workforce, it presents a potential that is vastly untapped. The journey from potentially the largest to becoming the largest internet market is critical for the country to grow into a middle-income country over the next two decades.

On 19 December, the Finance Committee Report on Digital Markets in India proposed ex-ante regulations, and a new digital competition law to curb anti-competitive practices in digital markets in India. Their purpose is to ensure fair competition and contestability. Its need arises from the fact that competition policy alone is inadequate to address the challenges posed by digital markets. Therefore, these regulations can complement the existing competition policy framework. Additionally, they might lend certainty to the regulatory environment and increase transparency. This is in line with the debate on regulatory interventions in digital markets in matured markets in the US and EU. However, India is nowhere close to the scale of those markets. While a reference might make sense, the adoption of the so-called ex-ante framework, which has become the gospel of the West, has the potential to spell disaster for the Indian market. Even in the context of the EU, our research has shown that the ex-ante provisions in their Digital Services Act may result in sizable economic losses (offsetting gains from the free trade agreements) stemming from the pain they would inflict on innovation and productivity.

The ex-ante framework poses a challenge as regulators often lack business expertise and may disregard potential scenarios for the evolution of sectors and markets. This can stifle innovation and hinder the growth of the nascent digital ecosystem in India. Such a framework is meant to pre-determine what is permissible and what is not. However, innovation does not always have a fixed path. What is required, therefore, is a case-to-case ex-post analysis of the impact of innovations on competition, and not ex-ante entry barriers.

Undeniably, the unprecedented growth of digital markets is leading to the emergence of tech monopolies, which the regulators want to prevent. While this approach seems logical, monopolies are highly unlikely considering every country, except China, experiences both domestic and international competition. So long as a country does not impede the success of entities, market forces will determine the winners. Unless India desires to follow the path of China, it is crucial to position the country as an attractive investment destination. If not here, investments will be directed elsewhere, making it more challenging for domestic entities to compete on a global scale.

Additionally, there are suggestions to impose fines based on the global revenues of companies. While large global corporations may have the resources to withstand such measures, smaller entities that are already financially strained may struggle to survive, leaving the industry with only big and dominant players. This could have adverse consequences for competition. Digital markets are becoming increasingly essential to the modern economy, and failing to capitalize on the potential of “digital India" would mean missing out on a significant opportunity.

It may be beneficial to draw inspiration from the regulatory strategy employed by the Reserve Bank of India (RBI), the country’s central bank. RBI’s gradual and observant ex-post approach has fostered a nurturing and stable environment for fintech companies, both in the public and private sectors. Recently, RBI introduced a regulatory sandbox, enabling startups to collaborate closely with the regulator and test their live products in a controlled environment to address potential challenges. This approach facilitates innovation by tech firms while ensuring consumer protection. A similar approach is being favoured by the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority of India (IRDAI), although they are in the early stages of implementation.

While India’s large startup ecosystem presents vast potential, it remains largely untapped. Recognizing this, the government has acknowledged the importance of leveraging the country’s strong culture of innovation to empower more individuals with technology through the development of unique digital infrastructure. Initiatives such as the Open Credit Enablement Network (OCEN) , Unified Payments Interface (UPI) and the Open Network for Digital Commerce (ONDC) are significant endeavours in this direction. Nevertheless, it is crucial not to overlook the contributions of private entities in building infrastructure that enhances digitization. The current culture of internet usage and technological advancements in the country is a result of collaborative efforts between the government and private players. This initiative needs to continue in the area of competition, which can be achieved through collaboration between the competition authorities, sectoral regulators and stakeholders.

These are the authors’ personal views.

Badri Narayanan Gopalakrishnan & Poonam Mehra Singh are, respectively, a fellow at Niti Aayog, and an associate professor, NITIE, Mumbai.

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