Flipkart-Walmart deal: Time for India to produce home-grown internet giants

In two recent commentaries in this space on digital data (‘Time for Some Datagiri’) and e-commerce (‘Seriously, It’s Flopkart’), this writer had argued that India needs to take some clear calls on its internet economy.

On digital data, we had submitted that GoI should frame rules that mandate local storage of Indian internet users’ data. On e-commerce, we had pointed to adverse fallouts of overwhelming foreign capital domination in terms of building a local innovation ecosystem.

Since then, Walmart has bought Flipkart and many foreign internet firms have raised objections to data localisation — including to RBI’s rules — that financial data must be stored locally. Therefore, this is the perfect time for GoI and relevant regulatory institutions to get smart about shaping the future of India’s internet economy.

Any smart policy needs to be backed by a big idea. The big idea here is that India should use its market power. Take e-commerce. Under 3% of India’s retail market is now online.

Smartphone penetration, data transmission capacity and vernacular interfaces for internet transactions are all growing rapidly. Per-capita income and, therefore, consumers’ spending power will also keep growing. That means India’s ecommerce market has staggering — there’s no other word for it — growth potential.

So, India’s e-commerce sector may now look like a fight between the US’ Walmart and Amazon, with Chinese and Japanese deep-pocketed investors being other influencers.

But that doesn’t mean all is lost. In fact, there’s everything to play for. The same applies to internet economy in general — whether digital payments, social media and new technology tools with direct business applications.

Given that India has time to create a smart internet economy policy, what are the priorities? First, as both suggested by this writer, and explained in detail by T K Arun (‘The Six Plots in the Flipkart-Walmart Deal’, goo.gl/G4XFHQ), rules that keep ownership in hands of Indian founders must be framed. Rules like these benefited Indian banks.

The basic idea is that all shares are not equal. Every share held by founders of a startup will count for more than every share held by, say, a foreign venture capital firm. This will allow control to remain with local entrepreneurs even after substantial foreign investment.

Plus, clever corporate structures used by US and Chinese internet giants, where promoters own a minority of stock but still call the shots, must be allowed in India. Will this discourage foreign investors? No. Because the upside of India’s internet economy is simply too big.

Second, and as argued previously, there must be restrictions on foreign e-commerce companies selling at negative margins by using capital sourced from other geographies. This will help level the playing field substantially.

If a foreign investor raises funds locally and engages in deep discounting, it should be treated differently from cases where capital is being dumped.

Third, there must be incentives for Indian investors who bet big in home-grown internet firms and new technologies. Take voice assistants. Currently, Amazon’s and Google’s software and products dominate both the ideas and market space in India.

But Indian engineers developing Indian language voice assistants are acottage industry. This effort needs big backers. Chances are that an Amazon or a Google will back these firms and incorporate them in their business. Indian capital should be incentivised to invest in such local technology ventures. Again, incentives for Indian capital won’t dissuade foreign investors, because the pie will grow very big.

Fourth, on digital data, GoI should simply hold firm and not be persuaded by any major global internet player. Put in adequate privacy controls so that Indian law enforcement agencies can’t abuse locally stored digital data, and just go ahead and mandate data localisation. No foreign major will leave the Indian market. There’s too much money to be made.

India has the market power to create rules that will produce home-grown, locally-owned internet economy giants. Let’s do it.