India’s protectionist e-commerce policy will hurt its startups

About two months from now, the US government will start to impose duties on Indian goods entering the US. On 04 March, Washington D.C. announced that India would no longer be entitled to benefits under the General System of Preferences program, which allowed many Indian goods to be exported to the US duty-free. Per the US Trade Representative, this is because India had “implemented a wide array of trade barriers” which harmed US commerce. Last year, India had increased binding restrictions on foreign investments in e-commerce; proposed guidelines which would require certain internet intermediaries to compulsorily set up Indian companies and permanent registered offices in India; and mandated that financial data be stored and processed only in India.


The latest in a series of technology policy instruments to further a protectionist, nationalist agenda, is the draft national e-commerce policy, released last month. The proposed policy has many aims, including “empowering domestic entrepreneurs”, leveling the playing field for startups, and encouraging their participation in the digital economy. But, the strategies that it outlines for achieving these goals will end up harming Indian startups, raising market entry barriers, and preventing them from the innovation that will disrupt existing business models, and increase consumer choice.


The use of “e-commerce” in the title of the draft policy is misleading. The policy equates e-commerce with the digital economy offers recommendations on wide-ranging areas well beyond just e-commerce, including data governance, intermediary liability, intellectual property, competition, consumer protection, investments, and cloud infrastructure. A related concern is of the draft policy defining e-commerce in broad terms to include the sale, purchase, marketing, or distribution of digital services, with no further clarity on scope or limitations. Under this definition, most (if not all) online services could qualify as e-commerce, and be impacted by the draft policy. Making policy for all internet based services cannot, and should not be the job of an “e-commerce” policy, nor is the Ministry of Commerce empowered to do so.  Needless to say if the scope of “e-commerce” is not limited, the compliance burden on stakeholders, particularly startups, would be tremendous, which in turn would restrict innovation.


The draft policy contains some more recommendations that will disproportionately harm startups, without tangible benefits in return. Some of these include intermediaries being asked to take steps to prevent the online dissemination of pirated content, platforms being required to have mechanisms to notify trademark owners/licensees about potential infringement, payment gateways needing to restrict payments to “rogue websites”, and, platforms being liable and responsible for ensuring the authenticity of content on their platforms. Not only will these obligations burden companies with additional financial costs, including investment in technical expertise, but, more importantly, they require internet intermediaries to proactively monitor content on their platforms, which is against the 2015 ruling of the Supreme Court in Shreya Singhal v. Union of India.


The draft policy severely restricts the cross border flow of data, and goes well-beyond India’s draft Personal Data Protection Bill, authored by a government appointed Committee of Experts, after stakeholder consultations, last year. The free flow of data across borders is crucial to the success of India’s startups, and in turn, the well-being of India’s digital economy. For most startups, cross border data flows are intrinsically connected to services that are critical to their operations, such as cloud computing and storage services. Many other startups extensively utilize other services such as fraud detection technologies, big data analytics, and AI/ML tools, including translation, among others, offered by global service providers. Cross border data flows enable these global providers to leverage economies of scale through distributed systems around the world, and keep costs low. Startups pushing the boundaries of research and development, are often the most in need of cutting-edge services, and may also be the most cash-strapped. Access to services of global providers at affordable prices allows them the freedom to innovate. Restricting the free flow of data across borders will raise the cost of providing services to local businesses, in turn raising their costs, in turn making final products and services more expensive for end consumers in India.


The draft policy also recommends the government consider reserving the right to require companies to disclose algorithms and source code. While ensuring transparency and accountability in algorithmic decision making is the primary stated aim for such disclosure, the policy also suggests that the government consider this measure in the context of facilitating technology transfers to India, and developing indigenous applications for security and local needs. Such forced disclosures and technology transfers have no place in a vibrant business ecosystem, and will only serve to dis-incentivize innovation. Companies have intellectual property claims in their business information, and the Indian government is bound by international commitments, including at the World Trade Organization, to honour and protect IP rights. Moreover, companies that have undertaken significant investments in developing technologies are unlikely to stick around in markets where they are forced to reveal core business information such as source codes, and place themselves at a competitive disadvantage.


Other recommendations in the draft policy, such as the requirement to establish an Indian entity, will also similarly dissuade businesses from placing India at the forefront of their business and innovation strategies. They will particularly hurt Indian entrepreneurs. Most prominent “Indian” startups are incidentally companies incorporated in other countries such as Singapore. Entrepreneurs set up companies in foreign countries because they are more business friendly, and it is easier for startups to raise funds there. India’s foreign investment and lending norms are restrictive, making it hard for foreign investors to offer money to companies incorporated in India. And, because India’s domestic startup funding sector is not nearly mature enough to meet the demands of its startups, they need foreign investment if they want to grow, or even survive. If the government wants to encourage entrepreneurs to establish companies in India, its focus must be on ease of doing business reforms, as opposed to forced imposing forced compliance requirements.


The e-commerce policy’s protectionist strategies will not only deny startups the opportunities to leverage the opportunities that the global economy offers, but will also result in creating unfair competitive advantages for large Indian companies. While the draft policy alludes to dangers posed by large corporations generally, because it situates them in an “Indian v. foreigner” narrative, big Indian businesses are likely to be insulated against any fall-out from the e-commerce policy. In essence, the policy will benefit not startups, as it purports to do, but big Indian businesses. This will isolate Indian startups, as well as Indian consumers from the rest of the world.


Nehaa Chaudhari is the Public Policy Lead at Ikigai Law, a technology focused policy and law firm that advises startups and other technology companies.



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