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India must not be hasty toward ex-ante regulation of digital economy

Due to its peculiar ‘increasing returns to scale’ economics, sticky market power, and inability to render timely remedy by competition authorities, the digital economy worldwide is receiving considerable attention. While the European Union (EU) has notified Digital Services Act (DSA) and Digital Markets Act (DMA), other jurisdictions, such as the United States (US), Australia, South Africa, the United Kingdom (UK), are contemplating additional regulation of the digital economy and big players in it. There are lessons from this for India, which need to be examined.

In its 53rd Report in 2022, the Parliamentary Standing Committee (PSC) of Finance, India recommended the enactment of the Digital Competition Act (DCA) on the lines of the EU’s DMA. Following the PSC recommendation, the Corporate Affairs Ministry constituted a committee to draft a bill. As per media reports, the committee is likely to publish a draft bill soon.

While the public discourse is overwhelmed by the stickiness of market power and urgency to ex-ante regulate companies posing such market power, we argue that such haste may lead to waste. In the last two years, after a massive disruption caused by Covid-19, the seeds, India sowed in terms of its digital public infrastructure (DPI) during the last 10 years, have started showing good results.

Presence Of Competition
Pertinently, India has already taken steps that have had the effect of bolstering competition in digital markets. Unique home-grown innovations like the United Payments Interface (UPI) and Open Network for Digital Commerce (ONDC) have significantly expanded digital access and provided a ‘level playing field’. This is breathing fresh competition in the digital economy.

ONDC has, in a sense, disrupted India’s food-tech space by forcing dominant players to compete more aggressively on merits. While these results are early, they affirm that India is likely to get a “market-based solution” to the market power problem in digital markets. Therefore, there is strong merit in allowing these initiatives of the government to deliver without causing encumbrance by a new law that may disturb this new digital ecosystem that nests India’s Start-Ups.

Several rankings reveal that India ranks in the top three countries worldwide in terms of the number of start-ups and unicorns. This achievement has been possible due to several pathbreaking initiatives of the Modi government such as opening and linking bank accounts with digital identity under the Jan Dhan-Aadhar-Mobile (JAM) trinity, UPI – the instant payment system, and now the ONDC – to infuse openness in a closed e-commerce space. These are excellent examples of the state creating enabling digital public infrastructure and resurrecting markets, instead of putting the state in a perpetual bind of regulation for which it may not have the required preparedness. A pertinent question at this stage is: have we weighed the risks of departing from traditional competition law and the costs of entering the era of sectoral regulation?

Too Early For Ex-ante Regulation
‘Systematically Important Digital Intermediaries’ (SIDI) companies, to whom any ex-ante regulatory regime will apply, have doubtlessly enhanced customer experience in India. A quick review would reveal that SIDIs of both foreign and Indian origin have added tremendous value to Indian consumers. Consider, for example, that the offline retail experience for the average Indian consumer may not be comparable to an average consumer elsewhere. So online retail becomes that much more important for India. Today, many Indian businesses, including small-and-medium enterprises, depend on services from the so-called SIDIs to run their operations. Most importantly, newer retail business models are being tried on the anvil of ONDC. While India must continue to deliberate on effective ways of regulating them, including ex-ante regulation, there is no compelling, time-sensitive reason to opt for a law like the EU’s DMA immediately. While weighing their options, policymakers will undoubtedly consider whether a DMA-type law is premature.

While the PSC and others may have attempted to articulate cogent reasons (from a law and policy standpoint) to enforce ex-ante regulation in digital markets, it is perhaps best for India to adopt a wait-and-watch approach for now. The debate around the desirability and effectiveness of ex-ante regulation in the long term is still ongoing, particularly in the context of developing economies. What’s more, enforcing an ex-ante law is likely to present serious administrative concerns. After all, a regulatory undertaking of that size and scope demands enormous resources, technical expertise, knowledge, and skill. If and when India concludes that ex-ante regulation in the digital economy is needed, it must augment its enforcement capacities and capabilities.

As other jurisdictions implement their ex-ante competition laws, Indian policymakers can review their real experiences. Those learnings will also enable the government to think through and analyse what such legislation could mean for stakeholders in our digital economy.

Let us be mindful that the EU and the US both offer valuable lessons in understanding the market power problem in the digital economy. But due to the absence of large-scale digital public infrastructure, both old jurisdictions offer “insignificant lessons” on how to remedy it. India is in a unique position to solve a market problem with a market solution. After all, if a pill can cure a headache, why cut the head? Moneycontrol

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