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Expectations from BUDGET 2017: What India needs to do to realize $350 Billion in GDP contribution from the Internet Businesses

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By Mrinal Sinha

By 2025, the Indian GDP will be $4.2 Trillion. At that time, if we only manage to do as well as China had done by 2010, internet based businesses will contribute a staggering 5.5% of the Indian GDP which is a little more than $230 Billion. If we accelerate adoption now, the Internet may easily contribute as much as $350 Billion, taking our GDP to about $4.4 Trillion. Either way, these signs portend towards the Internet becoming bigger than the Infrastructure sector.

While this size of the Internet industry is a strong possibility, there are a few policy decisions that we expect in Budget 2017 to accelerate it.

First, incentives to create an Internet adoption juggernaut

With smartphones reaching all corners of India, universal Internet access is perhaps among the easiest goal to achieve from a public policy standpoint. The only technology infrastructure worth pursuing with missionary zeal is the Internet.

Telecom infrastructure has now spread to the remotest parts of the country. However, it needs to be upgraded to offer the desired speed. I would be delighted to see special tax incentives for 3G/4G speeds in even the smallest towns and villages. However, the manner in which the incentives need to be structured is also critically important. Therefore, one potential way to achieve universal Internet access would be to allow telecom companies to depreciate their capital expenditure in an accelerated fashion.

One might ask whether it is possible to create demand for the Internet in the short term. The short answer is a resounding “Yes”. If all that the internet does is to promote digital payments, why not mandate universal Internet and bundle internet costs into Transaction Discount Rate. MAKE IT EVERY INDIAN’S FUNDAMENTAL RIGHT.

Second, arm the Competition Commission of India (CCI) with special powers to protect free market competition swiftly

Startups around the world have proven that they are the best vehicles for creating disruptive innovation. It is for this reason, that even Google chose to hive off Niantic Labs and Verily LifeSciences despite having incubated them internally.

It is the inherent nature of incumbents to try to crush a start-up. Further, if the startup poses a long term existential threat to the incumbent, or operates in a space that the incumbent hopes to occupy in the future, then the nature of the incumbent’s response is especially vehement. This has been seen in India when telecom incumbents tried to impair mobile app businesses and when banks took on payments providers.

The right thing for the Indian consumer and eco-system is free market competition. This is the exact force that any incumbent tries to suppress. Further, in protecting startups against anti-competitive actions, speed is critical. Therefore, the CCI must be tasked with (a) protecting startups with speed & power; and (b) the purview of its power must be increased to allow the type of high punitive damages on incumbents that create enough deterrence.

Third, identify priority sub-sectors and create programmatic push for these: programmatically create India’s Silicon Valley – IT STILL DOES NOT EXIST

The Government must identify Key sub-sectors and design a coherent system of forward looking programs to support them. In my mind, the Key subsectors that deserve such programmatic push are (i) Fintech, (ii) AI, machine learning, and analytics, (iii) Commute and transportation, (iv) E-commerce, (v) Battery vehicles, (vi) Space technology, (vii) Agri-tech, (viii) Media, streaming, gaming, and entertainment, (ix) the Internet of Things (IoT), (x) Local language based UI development, and (xi) Ed-tech.

Government policies, such as adoption of electrical buses for city transport, provide an enabling force for the creation of new industries such as electric vehicles. Similarly, the smart city project should create a similar impetus for IoT startups.

However, a lot more needs to be done. The Government must embrace these sub-sectors thematically and create a multi-pronged push. For instance, multiple innovations must be enabled in the battery operated vehicles space from tech to business model innovations.

Fourth, create enablers and guidelines for large Indian institutional capital holders to invest in technology venture capital

An economy of the size of India needs risk capital for startups at every stage! namely at the seed stage or less than $1 Million investments, early stage $1-5 Million investments, growth stage of $5-50 Million, and large scale growth stage of $50-200 Million.

The optimal way to deploy capital in a fast growth, high disruption asset class is to let the experts do this job; in other words, technology venture capital firms. The Government must signal that to India’s largest institutional asset holders to move a small but significant part of their assets to venture capital firms as LPs, in addition to making direct investments. To enable this, the Government could consider giving Corporate Tax to mutual funds or insurance companies that allocate at least 5% of their AUM to Internet / Tech businesses.

Fifth, leverage Government spends and programs as anchor businesses to enable volumes for start-ups

There is no alternative to India’s development other than for Government organizations to provide businesses to private enterprises. Unfortunately, the collateral damage of CAG and anti-corruption-activism of the last few years has resulted in reluctance of Government bodies in awarding business to private enterprises. THIS MUST CHANGE.

It is time for the Government to constitute a committee to reinforce exactly this than setting up a PSU to solve a problem that can be solved through private businesses more efficiently.

Even though tendering and contracting guidelines are well set, perhaps it is time to reinforce and tweak the ground rules based on which a Government department could conduct business with a startup or private enterprise. It is critical that the CAG be a signatory to this committee’s report.

Socialism and government activism in business may seem revolutionary in the short term but only erodes consumer’s interest in the medium-to-long term. As much as we curse and blame India’s aviation sector, it is undeniable that private airlines enabled the low price connectivity that the erstwhile Indian Airlines, or Air India could never dream of achieving. The same is true for every sector and sub-sectors.

Governments may think they are pursuing revolutionary goals in the short term, but in reality they are only pushing us back by a few decades by opting to be a player in the game rather than a pure regulator.

Six, embrace deregulation and resist the urge to create government institutions for doing what the private sector can!

Ten years ago, I noticed politics and intellectually weak regulations kill an industry I loved: microfinance. There was something utterly depressing and intellectually inconsistent about the way microfinance was killed. Even the regulators refused to see the obvious: that for a poor citizen, the value of liquidity (availability of capital) is far greater than concerns of cost of capital (interest rates). Regulations capped interest rates at 20-25%. THAT among other things dealt a death blow to microfinance. It effectively sucked credit availability away from poor citizens and told them that they should borrow instead from unregulated moneylenders at 200-250%.

Pricing caps have been and are a favored weapon of policy in India; and for obvious reasons: because they can be implemented and understood even by intellectually lazy people; never mind whether they actually do the job or not. We have seen Governments and Governance Institutions of different colors and hues implement pricing caps in many sectors: school education, college education, microfinance, and of course payments.

For once, a Government body seems to be getting things right this time as the Wattal committee report argues for deregulating Transaction Discounting Rates. That and other facets of the report must be embraced swiftly and whole-heartedly. The same principles must be followed in all sectors, by all governments.

And yes, as a corollary, Governments must cease investing money and support behind Government organizations and initiatives that compete or propose to compete with private players. No matter how right it looks, over a period of time Governments are not configured to serve consumer interests. Imagine a Government department running a car pooling app! A friend who runs a car pooling company pairs up men with men and women with women in car pools. Another startup I know, pairs people removed one link from each other on their Facebook friends lists: it means that the app will automatically only pair me with a friend of a friend – and NOT with any other person. Can Governments be this innovative at a detail level? There is no way they can. Nor should they try. Taking the same idea forward, the same principle applies to private travel apps vs government travel apps, private payments apps vs. government payments apps, and private e-commerce apps vs. government e-commerce apps. COLLABORATION WITH PRIVATE SECTOR IS A MUST!

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