View: Draft e-commerce policy will wreak havoc on Indian startups


By Nehaa Chaudhari

On March 4, the US government announced that India would no longer be entitled to benefits under the Generalised System of Preferences programme, which allowed many Indian goods to be exported to the US duty-free. According to the US trade representative, this is because India had “implemented a wide array of trade barriers” that harmed US commerce.

Last year, India had increased binding restrictions on foreign investments in ecommerce. It proposed guidelines that would make it mandatory for certain internet intermediaries to set up Indian companies & permanent registered offices in India. It also 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 ecommerce policy, released last month. The proposed policy has many aims, including “empowering domestic entrepreneurs”, levelling the playing field for startups, and encouraging their participation in the digital economy. But the strategies 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 ‘ecommerce’ in the title of the draft policy is misleading. The policy equating ecommerce with the digital economy offers recommendations on wide-ranging areas well beyond just ecommerce, including data governance, intermediary liability, intellectual property, competition, consumer protection, investments and cloud infrastructure.

A related concern is of the draft policy defining ecommerce in broad terms to include the sale, purchase, marketing, or distribution of digital services, with no further clarity on scope or limitations. Making policy for all internet-based services should not be the job of an ecommerce policy. The compliance burden on stakeholders, particularly startups, would otherwise be tremendous, which, in turn, would restrict innovation.

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The draft policy is also harmful for startups with 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 they also require internet intermediaries to proactively monitor content on their platforms, which is against the 2015 Supreme Court ruling 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. For most startups, cross-border data flows are intrinsically connected to services critical to their operations, such as cloud computing and storage services. 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 GoI 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 GoI 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 disincentivise innovation.

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The requirement to establish an Indian entity will also dissuade businesses from placing India at the forefront of their business and innovation strategies. 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. 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 GoI wants to encourage entrepreneurs to establish companies in India, its focus must be on ease of doing business reforms, as opposed to forced compliance requirements. In essence, the policy will benefit not startups, but big Indian businesses. This will isolate Indian startups, as well as Indian consumers from the rest of the world.

The writer is public policy lead, Ikigai Law





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