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Are Indian Internet companies justified in calls for protectionism?

LiveMint logoLiveMint 01-05-2017 R. Sukumar

A chorus is being orchestrated in Indian media and government circles about the need to protect Indian Internet companies from US firms such as Uber Technologies Inc and Inc. Nationalism is a sure way to get everyone’s attention these days, but policymakers in New Delhi are, wisely, not buying into any of the arguments being presented—at least, not so far.

In the past few months, some of the purportedly Indian companies seeking protection, including Flipkart Ltd, and ANI Technologies Pvt. Ltd (which runs Ola), have worked towards forming a lobby group. An executive at a multinational venture capital firm tells me that a person has been identified to head this body, although no announcement to this effect (or indeed, about the body’s formation) has been made. Meanwhile, Ravi Mehta, an executive from one of the investors in Flipkart, Steadview Capital, has been meeting venture capital and private equity firms, policy makers, and journalists, seeking to build an argument for protectionism. I met Mehta in March.

The argument is a persuasive one on the surface: China kept US Internet firms out, and managed to build its own Internet behemoths, and India should do the same; US multinational Internet firms operating in India are dumping capital and using predatory pricing to hurt Indian companies; this capital dumping is also threatening to stifle local innovation.

For now, the argument is only about US Internet companies, and specifically Uber and Amazon. Other than Alibaba, none of the Chinese Internet companies has a direct presence in India and even Alibaba’s is, at the moment, a small presence. One Chinese Internet company Tencent Holdings Ltd, has just bought into Flipkart; another, Didi Chuxing, bought into Ola sometime back.

The problem with the argument for protectionism is in the definitions.

Amazon is listed in the US (Flipkart’s largest investor Tiger Global Management has a stake in Amazon, although it reduced this significantly last year). Uber is a classic start-up, as yet unlisted. It is funded by venture capital, and some of the limited partners (or investors who put money into funds raised by venture capital and private equity companies) whose money is in it, may also have money in Ola and Flipkart. Indeed, most venture capital firms raise money overseas. This means the cost of capital for investments in both Indian and US (or for that matter any) start-ups is pretty much the same.

Indian law has a very clear definition of the “Indianness” of a company. Incorporated in India, and majority owned and controlled by Indians and Indian entities. Flipkart definitely doesn’t meet that definition. Ola may.

And, of course, all four companies, Amazon, Uber, Ola and Flipkart, by virtue of operating in India, create jobs for Indians, serve largely Indian customers, and are helping Indian small businesses and entrepreneurs (every driver who owns a cab is one).

Indian law also has a very clear definition of predatory pricing, but this comes under the competition policy’s so-called abuse of dominance section. Put simply, this means that only a market leader can be accused of predatory pricing, or pricing products or services at a price lower than cost and aimed purely at hurting the competition. This is one reason why Reliance Jio Infocomm Ltd’s pricing strategy hasn’t fallen afoul of the Competition Commission of India. I think the law need to be amended, but that is a larger issue. For the record, Flipkart was offering substantial discounts long before Amazon entered India, and all four companies have grown the market (mostly at the expense of incumbent, traditional companies) by playing the price card. So, this cry for help by the protectionist lobby is not very different from a schoolyard bully calling for help from a teacher at the entrance of a more muscular bully.

The government should, of course, work to spur local innovation, which is more likely in small product and services companies doing their own thing, not well-funded start-ups built around a core idea that has been ripped off a successful company in another market. And for such companies, a partnership with or an acquisition by a multinational technology company is desirable.

If the government feels the need to do something at all, it should focus on protecting consumers, ensuring the law of the land is followed, and providing a level playing field for everyone (small and big, Indian and foreign, incumbent and disruptor alike).

The market will take care of the rest.

R. Sukumar is editor, Mint.

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