How India can save itself from digital colonisation

Indian polity and business have come a long way since the hot day of July 24, 1991, when the licence raj was formally dismantled by the Narasimha Rao government. Twenty-five years hence, the neo-liberal narrative has progressed in an intermittent but unidirectional fashion, hitting another crest with the Narendra Modi government's declaration of making India the most "open" economy in the world.

Popular discourse highlights the growth in FDI, entry of global brands, exuberant press coverage and millions of happy customers spoiled for choice. However, consumption is only one part of the story. How are the vulnerable and "work-in-progress" parts of Indian industry faring against increased external competition? Is there a level-playing field? Are we leveraging our strengths? Are we opening-up where we shouldn't?

This vulnerability is most visible in the world of technology. Amazon has parked close to $3 billion in cash to overthrow local e-commerce leader Flipkart. Uber is closing the gap with Ola. Facebook owns India's top 3 phone apps. Almost all of India's smart phones are powered by either Google Android or Apple iOS.

Kevin Maney, technology columnist with the Newsweek says: "Silicon Valley is the new Rome… dominating much of the planet, injecting its technology and ethos everywhere it lands and funnelling enormous wealth back home."

India has lately been at the receiving end of this grim-sounding funnel, getting digitally colonised. Our 250 million+ internet users, growing annually at a spectacular 40 per cent, comprise the last frontier for global tech giants, and they are pulling no stops to grab the lion's share of this pie, as soon as possible.

Should this really be a point of concern? Didn't Chinese ventures like Didi Chuxing, WeChat, and Alibaba succeed in wearing down foreign entrants? Anecdotal comparisons aside, we need to ask ourselves whether this is a fair parallel.

After all, Didi Chuxing had $10 billion of cash in its battle with Uber. Amazon faced a strong adversary in Alibaba, backed by China's formidable sovereign wealth fund (SWF). In contrast, Ola and Flipkart cannot match the fire power of their American rivals. A lack of domestic capital and scale implies they have to depend primarily on edgy foreign investors and risk losing market share while competing.

Though it may sound "regressive" in today's Twitter-friendly liberal India, it is nevertheless important to recognise the value of our huge consumption base and adopt a policy of strategic protectionism. For starters, the government must have more skin in the game.

Its recently instituted start-up fund committed a mere $75 million for FY16 - a marginal contribution vs the $2 billion private venture capital (VC) invested in India year to date. What is stopping us from creating an SWF with a mandate to invest into start-ups, besides the usual suspects of listed equities and credit?

Robust precedent models can be found in plenty. More than 30 per cent of Temasek's S$ 240 billion portfolio taps into unlisted equities, backing firms such as Airbnb, Didi Chuxing, China Internet Plus, and the now public Alibaba.

Saudi Arabia's public investment fund invested $3.5 billion in Uber this year and the Qatar Investment Authority backed Flipkart as early as 2014. Releasing domestic capital from public-sector managed pools such as Life Insurance Corporation of India (LIC) and Employees' Provident Fund (EPF) is also an idea worth considering.

To gain context, only 1 per cent of LIC's policyholder-backed investments amount to a significant $2.8 billion, comparable to the current annual VC inflows into India. Start-up capital being long-term can be a natural match for life insurance liabilities. With zero debt on its balance sheet, LIC has the flexibility of raising regulatory capital and provision for the "riskier" portfolio, i.e. there are no shortage of ways to execute.

Secondly, we need to ask ourselves whether there is an inequity of platforms available to different parties to voice their concerns and lobby for favourable regulations. Why can Jeff Bezos directly push for an inventory-led model or Tim Cook for lighter sourcing requirements at the level of the PMO, while a Sachin Bansal goes through the hoops of organising a forum?

Why did it take a citizen-driven initiative to shun away Mark Zuckerberg's Free Basics, which was for long receiving an easy ride both from the political class as well as the media? Do multi-national firms in India get more regulatory forgiveness?

These are important questions which should challenge any policy action in the name of liberalisation.

Manufacturing presents a more obvious case for strategic protectionism. Chinese dumping on the back of free trade agreements is alarming local manufacturers. India importing nearly half of its 3 million tonne aluminium consumption from China despite having adequate domestic capacity, is as counter-intuitive as Saudi Arabia importing oil.

This story repeats itself in other essential commodities. Unless issues such as difficult land acquisition, high cost of capital and power, an inverse duty structure and logistics continue affecting unit economics of domestic units, it is unfair to have zero-duty trade with nations which have optimised their industrial cost base. Make in India works only if someone buys from India.

We must remember that rich nations - the modern paragons of free trade - achieved their economic supremacy through high tariffs and subsidies till the early 20th century and still protect key sectors where they lack competitive advantage. Even recently industrialised nations such as South Korea heavily controlled foreign investment, welcoming it with open arms in certain sectors while shutting it out completely in others to give time to difficult industries to absorb new technologies and establish new organisational capabilities.

With India hoping to play an increasingly important role on the global stage, it should recognise and leverage upon its strengths in its dealings with the rest of the world. A long-term vision of nurturing our industry and entrepreneurs should be hardwired within our policy framework. That is the only way to unleash our true potential.

References

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Also read: I was duped by Amazon India. This is my story