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Can India Enjoy Self-Rule Of Its Internet Economy?

It depends on the path the government chooses.

02/02/2017 6:57 PM IST | Updated 03/02/2017 8:57 AM IST
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Two years back, Indian newspapers were celebrating the success story of internet-led businesses. It was all about how these businesses, many of them with mammoth valuations, were shaping the country's internet economy and were changing the lives of the people who were working for them as well as those who were buying from them. Cut to the present, the euphoria has somewhat subsided and these businesses are now aligning to ground realities, trying to become profitable and sustainable in all aspects.

Will India be like the US or China, or will we be like Europe with foreign companies dominating our e-commerce? That is something only the government can decide.

Such cycles are normal in the internet, which has massive scale economies. The India internet story is still intact and will grow from here. According to a recent report by Nasscom, India's internet usage is the fastest growing in the world. In fact, our internet user base reached 350 million in 2015, becoming the second largest in the world behind China. The user base is further expected to more than double to 730 million by 2020. With the recent demonetisation drive of the government, the spotlight has got only grown bigger on the internet and its by-product—digital marketplaces. And why not? The government sees the internet as a future driver of the Indian economy's growth and development, and has firmly placed its weight behind it through a slew of digital initiatives. They expect the internet economy to scale new heights.

Indeed, the internet has been already provided numerous jobs, and in a fairly high value and sustainable manner. It won't be a surprise if the internet story grows bigger and stronger over the next decade.

However, amidst all these positive developments, the matter of concern is whether our internet success would be attributable to our own efforts or to those driving it from outside, and the pros and cons of these two approaches must at least be debated. Let's look at some global facts and figures. Currently, the Chinese GDP is $8 trillion, while that of Europe is $16 trillion. However, Chinese internet alone occupies $1 trillion of the market cap, whereas, in Europe, it is just $60 billion. The US economy is $16 trillion, and the internet is worth $2 trillion. So while China and US internet valuations are 12.5% of GDP as a benchmark, in Europe the same ratio is 0.03%. So, what's the matter with Europe? The answer is that Europe has a large internet- and e-commerce-using population, but they are dominated by US companies. So will India be like the US or China, or will we be like Europe with US and Chinese companies dominating our e-commerce? That is something only the government can decide.

Without the large access to capital of successful operations abroad, Indian internet companies cannot compete for the long haul, and will either die or be bought.

One of the salient features of the huge Chinese internet market is that the government exercises complete control over its domestic internet industry and protects it watchfully, while their companies expand easily into India. As India's internet market is expected to grow rapidly in the coming years, it is high time that the government decides whether India should follow the footsteps of China and protect its internet market, or that of Europe that has its internet destiny in the hands of outside entities. Without the large access to capital of successful operations abroad, Indian internet companies cannot compete for the long haul, and will either die or be bought. VCs will shy from investing if they see strong long-term competition from companies with both strategic will and operational capital.

In fact, it has been a well-defined policy stance that has played a critical role in the success of tech firms, be it in the US, China, Korea, Japan, or Germany. Policy has been key globally because scale advantages of firms from large economies can often be used to defeat firms from smaller ones, the only exception being when labour is the primary cost such as in IT services. To cite an example, Indian banks benefited from a 25% Indian ownership rule (helped create now behemoths HDFC, Axis, Kotak Bank). Similarly, telecom and insurance benefited from the 51% Indian ownership rule (helped create Airtel, Idea, Bajaj Allianz). Also, steel firms had anti-dumping duties (helped Tata, JSW, SAIL). These policies were required to ensure a level playing field for Indian companies and helped them grow to become the leaders of economy.

Benefits of government backing

Firstly, it would provide the much needed drive to our Prime Minister Narendra Modi's ambitious Startup India Standup India initiative that requires well-defined internet policies to take off, which otherwise can be easily hit by a dumping-like strategy. A case in point also highlighted by Kalaari Capital VC, Vani Kola recently in her blog.

An advantage of having a government-supported internet market is that it increases net-neutrality.

Secondly, an advantage of having a government-supported internet market is that it increases net-neutrality. Allegedly, many foreign tech companies tried to pay astronomical sums of money to internet providers for buying speed of loading. This results in local companies and start-ups losing many prospective customers due to the alleged violation of "net neutrality". But, if the internet is sheltered by the government domestically, with concrete policies, such malpractices can be avoided and local companies will thrive and would have a faster and wider reach to the consumers.

Thirdly, it allows you at some stage to export your internet businesses to other companies like the US and China are able to do, and retain key IP, and major decision-making roles within India.

It's a decision which must be made with a clear intent. Policy support for the internet sector needs to come at the earliest, as time is of the essence. There has to be a clear rationale and well-rounded approach to ensure the growth of this tech and e-commerce ecosystem. I sincerely hope PM Modi takes interest in policy-shaping that is critical in building and strengthening the vision of digital first India. After all, the onus is on the government—how does it want to see the Digital India story shaping in the long run? Does it want a digital-driven home-built economic change in the country or are they happy with a mere nudge that won't disturb the status quo of the "Make Abroad" Indian internet story? The answer lies in the decisions of the government and policymakers, and in their hands is the digital future of our country.

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