Why we should not vouch for protectionism, again!

In the Times of India editorial DIGITAL INDIA IS DYING dated(July 4, 2016) the author has made a pitch for some sort of protectionist policies being implementing to ‘save’ the digital start-ups in India which are in a nascent stage from their international or more importantly American competitors with deep pockets. The author makes a compelling case for Flipkart, Snapdeal and OLA which are facing stiff competition from Amazon and Uber.

The author airs his fears of India becoming the digital colony of America just like Europe has been while praising china for it closed market which have given it a home grown versions of google and Facebook.

While I don’t dispute the writers claims about Indian digital companies facing an uphill task against their American rivals but I doubt if we should ever take sides. We had a closed economy for a good 40 years simply because we felt so burnt and exploited of foreign colonial exploitation that had just ended that we missed the global growth story.

During the much heated debates in parliament at the time of ‘FDI in Retail’ the then Prime Minister Dr. Manmohan Singh had rightly pointed out that protectionism is not the answer to competition and if we give in to the lure of protectionism we will be doing a great disservice to the consumer.

We can take a look at the situation from the view point of the three parties involved here namely consumers, start-ups and the nation as a whole.

Consumers

We the everyday Indians, the biggest consumers of the 21^st century are the market the world looks up to and is willing to woo us. Given such a situation our demands are simple, we want a good quality product (goods or services) that we can afford. While completion allows scope for both protectionism will no doubt kill them. If the playground is no longer even for all the participants we can face bad product simply because the policies of the state will favour the desi companies.

Imagine Amazon or Uber getting banned in India because of their foreign nature we will be stuck on using their Indian counterparts (Flipkart, Snapdeal, Ola etc.), which are not known exactly for their amazing service. (I have a first-hand experience of really bad service from Snapdeal and somewhat mixed experience of Ola although I love Flipkart).

Similarly imagine a scenario where consumers are forced to give up products from Apple, HTC, Motorola Samsung in favour of Micromax, Lava, Spice etc. No doubt these companies have greatly improved over last few years and have been constantly working to improve upon but that is just because competition drives the desire to be better, faster, and cheaper. Competition provides a scope for improvement, as companies compete to win over consumers, we get better a product (or great deals). Which would all be gone in a protectionist environment (i.e. gone will be the Flipkart’s Great Sales or similar).

Start-ups and Digital Companies

While a protectionist environment may seem like an ideal place for start-ups, the picture doesn’t look so rosy if we take a closer look. The very first reason our digital companies are facing stiff competition from American companies with deep pockets is because they are not the originals creators of the idea. Flipkart and Snapdeal are e-commerce marketplaces which was a concept more or less introduced by Amazon and Ola started after Uber had started expanding into some countries. The fact of the matter here is that most of our companies are a rip off from their original American counterparts. What these companies actually did was just to modify the services to suit Indian taste and temperament. And when Americans started doing the same, they felt the heat of competition.

Although the deep pocketed nature of American companies is hurting them badly (according to some reports Amazon is employing Data Scientist to analyse Flipkart’s Discount patterns and offer near impossible deals on some very specific products which forces the Flipkart to offer more discounts on the entire category or range of such products to retain customers while it bleeds money), the fact of the matter is that Indian companies are surviving it and as such are forced to innovate and create better services. Continuing the Flipkart case, it has lost around 2000 crores due to discounts and sales but at the same time sales have crossed 10000 crores growing 10 times in 3 years. Moreover in order to win over customers, Flipkart (and other companies) are trying to get more and more Indians involved, reach more cities (OLA caters to more Indian cities with more services than Uber which is present in a handful of cities). Flipkart is continuously improving its systems for better customer experience and developing specialized services (Flipkart may open up its logistics arm eKart for courier services)

Looking beyond the realm of e-marketplaces we have great examples of companies like Paytm and Freecharge which have built upon a very solid ideas and have reached multi-million dollar valuations while still improving their services to provide better services without any significant foreign threat to their businesses.

Nation

The most important constituents of this debate are perhaps the nation and the economy. In a closed system, the competition dies and so does the need and desire to grow. When companies in India grow (Indian or American), they move the wheels of economy and the nation grows. While in an ideal environment I would like to see Indian companies dominate the scene protectionism should not be a resort for a variety of reasons.

Firstly, protectionism will surely lead to crony capitalism. Today we close the market for American companies, tomorrow it may get restricted to companies which are friends with the ruling dispensation and it will be the consumer who will have to pay for that friendship. A market that is as open as it gets helps build a transparent system that cares for the users, and respects competition.

Secondly, such a policy will cut-off from the world and leave us vulnerable to a lot of other problems. China may have its Baidu and Tencent, their variants of Google and Facebook but that also leaves them cut off from rest of the world which is on Google and Facebook. Since Google is no longer in China owing to its policies doesn’t that hurt the prospects of businesses in China who want to be on Google and Facebook but can’t.

Moreover since these are restricted to china it has often been alleged that these services are heavily monitored and censored by Chinese government for seditious content, (and thus dies the freedom of speech).

In the end, what Indian start-up ecosystem needs from Digital India is a transparent system that fosters innovation. We don’t need an Indian version of Facebook, or Google or Apple, what we need and want are Indian engineers and Entrepreneurs solving India’s problems and building companies that are have an Indian leadership but a global vision.