Return of the License Raj?
India sets out to re-debate protectionism
Indian nationalists are attempting to push their country towards China-style mercantilism in hobbling US consumer giants Amazon and Uber from making inroads against local brands Flipkart and Ola, demanding that the government protect local companies against what they call predatory pricing.
The debate has been roiling corporate India ever since two of the country’s leading entrepreneurs Sachin Bansal and Bhavish Aggarwal, the founders of Flipkart (US$2.3 billion in annual sales) and Ola (US$70 million) respectively – raised a cry for enforcing protectionist measures. The two have accused the US multinationals of market manipulation and distortion of the level playing field. In their fight against foreign-origin rivals, the two are urging that the government design policies which favor home-grown companies.
The raising of the nationalism flag by founders of the two majors at the Carnegie India’s Global Technology Summit in Bengaluru a few months back is gathering momentum. It is also finding resonance with some industry players who are finding the heat from foreign competitors tough to handle on home turf.
The two start-up owners are working towards forming a lobby group and building an argument for protectionism. “Take the example of Brexit and Trump,” e-commerce major Flipkart’s executive chairman, Sachin Bansal said. “Jobs for Indians in the US and EU will come down, and we need to be prepared for such a situation. We shouldn’t fashion a policy according to what the West thinks. We should try and adopt a local relevant standard.”
Bhavish Aggarwal, CEO at Ola, Uber’s main rival in India, cited the example of China’s Alibaba and the way the company used foreign capital but precluded any foreign company from surviving in China and cutting into their market. The two entrepreneurs argued that benefits from the growth of global companies do not accrue proportionately to local labor markets when compared with the benefits from the growth of local firms.
Certainly China has been brutal in its expropriation of overseas technology, demanding that in return for market access, foreign companies develop cooperation with local firms. It built its high-speed rail system from scratch into the world’s most extensive that way, with the government also actively putting roadblocks in the way of such global tech giants as Google, Amazon and Facebook to allow the development of its own domestic versions – which allows them extensive control of intellectual property.
Their strident opposition to multinationals has earned the two executives both bouquets and brickbats. While their supporters feel that in a global economic environment – characterized by rising trade barriers everywhere – it is imprudent to support foreign players over local ones, their critics say globalization and a thriving marketplace with co-existence of both foreign and local players is the way forward. The critics can point to import substitution and the so-called License Raj, which strangled the Indian economy for four decades before Manmohan Singh began to pry it open in 1990, to the benefit of millions of Indian consumers.
“Both companies have leveraged financial muscle and clever strategies to succeed,” said Giriraj Patel, CEO of a New Delhi-based IT firm. “In their journey, these companies too have driven hundreds of smaller entrepreneurs out of business across India. Who complained then? So for them to now suddenly take a stand that bigger foreign firms are spoiling the market is a tad sanctimonious.”
Many are also raising this pertinent question: Are the cash-lush Indian unicorn companies so weak that they now require the government to protect them against their competitors? However, some analysts point out in its zeal to project India as a global economy open to foreign investment, the current nationalist government has been bending over backwards to appease deep-pocket multinationals. In such a scenario, creating a level playing field is essential, they say.
Legal experts also point out that in India anti-dumping laws aren’t yet effective in sectors in which Ola and Flipkart operate although there are robust trade laws for sectors like manufacturing, banking and pharma. This is surprising for an overregulated economy like India, Asia’s third largest after China and Japan, which is known for its plentiful and encyclopaedic business laws.
Indian consumers argue that below-par service is the prime reason for the erosion in market share of local firms (including Ola and Flipkart) which is making them sweat. A call for protectionism is thus a convoluted rent-seeking effort on consumers’ behalf, they add.
Some feel that a call for government protection is tantamount to urging the state to bring rules that only get foreign capital in India, but restrict foreign consumer internet companies from setting up shops. Given market reality, the most prudent strategic response would be for local players to innovate product and service offerings and differentiate themselves from the global players.
Experts add that India’s internet billionaires also need to brush up on their business acumen and seek greater synergies with the government and to develop a collective representation akin to industry bodies like NASSCOM which they currently don’t have. On the contrary, multinationals in India like Amazon, for example, have assiduously built relationships with the government to articulate their needs and demands in an organized manner.
Consumers say the ultimate decider for the success of any business is the quality of service.
“If the government saves these companies, then it is the consumers who will lose,” said consumer protection lawyer and advocate Aditi Kejriwal. “The ultimate clincher in a competitive marketplace should be quality and service. Rather than raising protesting the presence of foreign competitors, why aren’t Indian companies improving their service and thinking of global expansion? These companies are just focusing on mass client acquisition without building their own strengths.”
Protectionism is a dead concept, critics of protectionism say, and that perform or perish should be the mantra. Renowned Indian economist Arvind Panagariya too, has argued that developing economies such as India have gained enormously from the freeing of trade resulting in the Indian growth miracle and the concomitant reduction in poverty and other social ills.
Ever since nationalist PM Narendra Modi came to power in 2014, his government too has consistently endorsed the virtues of globalization and the need for foreign capital to catalyse the economy. Finance Minister Arun Jaitley has iterated that India may still be a developing country but is no longer influenced by the rising clamor for protectionism around the world, and is instead looking to further open up its economy to spur investment and trade.
“To reform more, open up further, attract more investment, “We (also) seek a lot of investment into India. And therefore, we have liberalised our policy, created more instruments and our FDI policy is amongst the most open the world over,” said Jaitley at an event.
“Look at markets like South Korea and Russia. Here successful companies have built trust with the consumers. And even though foreign players are very dominant in these markets, local businesses are thriving not because they get protection, but because they have won the consumers’ trust and are on top of their game,” Kejriwal said.
The lawyer adds that if at all the government should protect anybody, it is the consumers by ensuring that the law of the land is followed, and that there’s a level playing field for everyone – both Indian and foreign players. The market will take care of the rest.
Neeta Lal is a Delhi-based editor & journalist