Why Protect Steel, Not Telecom: How Does The Government Pick Winners?

Even when Narendra Modi became prime minister, despite what some of his ministers said, it was always obvious that he was more statist, in the mould of leaders in Singapore or China as compared to free-market economies like those in Europe or the US. As his term comes to an end, this has been proven time and again, by the government’s refusal to pursue a serious privatisation agenda, by its unwillingness to open up areas like coal mining to private sector firms or its step treatment towards private sector oil companies.

Indeed, with the reversal in the e-commerce policy hitting foreign investors like Amazon and Walmart—in doing that, it benefits local firms like Reliance Industries and Big Bazaar—the question that needs to be asked is whether Modi is trying to create national champions in the manner that China has in the past with its Baidu and Ant Financial for instance.

While it is not possible to make a conclusive statement on whether Modi wants to create China-style national champions, it is not clear that this is a great strategy either, even assuming it can be pulled off. Take the case of ISRO which has, by default, become India’s national champion in the satellite space over several governments, not just the Modi one. There can be little doubt ISRO has several accomplishments that India can be proud of, including its prowess in low-cost launches of satellites, but the flipside of the special status is that India’s satellite market remains closed for all practical purposes—while the new satellite policy was announced in 2000, the entry of competition was delayed by the fact that the detailed guidelines and procedures were made public only a decade later. As a result, satellite tariffs in India are several times the global rates; that is the exact opposite of what happened in telecom thanks to the policy of allowing competition to the state-owned players. Indeed, India has a very small fraction of the capacity it needs to increase rural broadband penetration from 2-3% today to 100%—satellite is a good way to do this. India needs 1,800-2,000 Gbps of capacity, but we have just 50-100. And with ISRO playing a big role in clearing private sector permissions to build satellites, the net result is no serious player has got clearances so far.

Or take the case of Chinese home-grown champions like Baidu that were created by closing the market for global search engines like Google, or AliPay (Ant Financial) in the payments space that was helped by the support the government gave it. The argument here is that, were India to emulate China, it would have its own homegrown giants. While it is true India has no Baidu-equivalent, it is worth keeping in mind that Google has just hired engineers to help design computer chips in India, it has a team of 2,000 people in India working on various cloud solutions as well as machine-learning and it has already trained one million people to work as developers on the Android platform—the target is to train 2 million eventually. This is not to say a home-grown Baidu wouldn’t have created important skills in the country; of course it would, but India hasn’t done badly since an open economy encourages others—not just Google—to start doing development work in India since there is no fear of their intellectual property being stolen. Indeed, most top US tech firms, including Intel and Qualcomm, have large Indian back offices doing development work—such as designing chips—here.

And no one can argue that the open systems created by UPI and Aadhaar—where public APIs allow various developers to build apps on top of them—haven’t worked better than perhaps an AliPay kind of system. With all manner of players from Paytm to Flipkart (PhonePe) and various banks offering UPI and competing payment products, India has amongst the most robust—and fast-growing—payment systems in the world; transaction volumes on UPI rose from Rs 3 crore in August 2016 to Rs 109,923 crore in January 2019. Interestingly, RBI wants to develop competitors to even NPCI—that developed UPI—so that there can be even more innovation once there is more competition.

If Modi’s policy towards creating national champions is unclear, it is also not clear what criterion is used to select industries that need protection. The classic example here is steel and telecom. Import duties on steel were raised sharply once there were complaints about dumping and how this was hitting the steel industry and the banks to who they owed money. While this hit user industries, who would have got more competitive with lower steel prices, the government hasn’t shown anywhere near the same concern for the telecom industry which continues to haemorrhage. Interestingly, as this newspaper has pointed out on various occasions, unlike the steel industry, the telecom industry is not looking for favours, it is just looking for an end to government rapaciousness. First, the government rigs auctions to keep bids high, and then it charges the industry an annual revenue-share levy that was charged in lieu of paid-for spectrum in the days when spectrum was free (goo.gl/z8aB8M). Apart from this, the telecom regulator’s policies have, by and large, been seen as hitting the older telecom companies.

Should the Modi government get re-elected, an important lesson for it is that selecting winners is not a strategy that pays off. Apart from India benefitting from its strategy of not trying to curb the growth of global tech giants—with a view to promoting local players—the fact is that picking winners implies stifling competition and innovation that, in even the medium-term, hurts the economy and also opens the government to charges of cronyism. Indeed, in the recent Rafale controversy, the UPA tried to pick winners—in the form of HAL—and we all know how that went as well as its long-term implications of not allowing the defence production industry to take off. – Financial Express