Instant cross-border payments vs. current account inconvertibility

by Ajay Shah and Bhargavi Zaveri-Shah.

The Reserve Bank of India announced a project that may potentially link an Indian payments system, UPI, with PayNow, a peer-to-peer payment system operated by the Monetary Authority of Singapore. A UPI-PayNow linkage will facilitate instant peer-to-peer cross border payments. It would be a striking solution to the long-standing problems of high transaction costs faced by cross-border transactions. It would help increase India's internationalisation.

In this article, we examine the legal foundations for making this project a reality for the end consumer and merchant. We argue that connecting Indian payment systems with cross-border payment systems would face significant procedural complexities involving current account transactions. While UPI-PayNow connectivity is desirable -- as is connectivity between diverse cross-border payments systems -- barriers to convertibility on the current account can render this connectivity illusory.

Current account inconvertibility

What does a desirable cross border payments system look like? It should allow economic agents to make and receive payments with high speed and low cost. It should impose the minimum inconvenience upon every user. In the field of international trade, there is a clear distinction between tariff barriers and non-tariff barriers, in recognition of the idea that there can be substantial barriers to trade even when an overt tariff barrier is absent.

As per India's commitment to the IMF's Articles of Agreement, Indian residents enjoy full current account convertibility. This means that Indian residents should be able to exchange Indian currency, free of restrictions, for any foreign currency of their choice at market determined or pre-fixed (in case of managed currency regimes) rates. Article VIII(2) of the IMF's Articles of Agreement codifies the obligation of full current account convertibility for its members, thus:

Subject to the provisions of Article VII, Section 3(b) and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.

Section 3(b) of Article VII deals with the replenishment of scarce currency. Section 2 of Article XIV deals with transitional arrangements. None of these provisions, which are more exceptional in nature, apply to normal circumstances.

A multilateral treaty such as the IMF's Articles of Agreement is given binding effect by enacting domestic law to that effect. In India, the International Monetary Fund and Bank Act, 1945 ("IMF Act"), was enacted to give effect to the IMF's Articles of Agreement. However, at the time of its enactment, the IMF Act excluded the said Article VIII(2) as India was not a fully current account convertible country at that time.

When India graduated to current account convertibility in 1993, the Foreign Exchange Regulation (Amendment) Act, 1993 amended FERA to reflect a more liberalised current account regime. However, it allowed the RBI to wield considerable discretion in introducing frictions for making and receiving cross-border payments on the current account. At the same time, the IMF Act was not amended to give binding effect to the said Article VIII(2) of the IMF's Articles of Agreement as domestic law.

After FERA was replaced by the Foreign Exchange Management Act, 1999, more transactions in foreign exchange became feasible for Indian residents than was once the case. However, the economic notion of full current account convertibility of being able to buy and sell foreign exchange, free of all restrictions, for current account transactions, was not realised in the new law. The FEMA, six years after the 1993 announcement, allows the Central Government to impose restrictions on current account transactions. The current account is less restricted than the capital account. But in 2021, Indian residents continue to face barriers to realising the benefits of `full current account convertibility'. Several barriers, both substantive and procedural, exist that make current account transactions difficult or costly for the average Indian retail consumer and merchant, that are not found in countries that have current account convertibility. These barriers are of two types:

1. Some hurdles are explicitly imposed by the foreign exchange law and its ad hoc enforcement.
2. India has restrictions on capital account convertibility. To ensure that the payments ostensibly made or received for current account transactions are not applied towards settling obligations arising from restricted capital account transactions, banks are appointed as gatekeepers. Banks, in turn, have implemented an elaborate procedural machinery to effectively vet each foreign exchange transaction made by a consumer. This creates frictions that hinder current account transactions.

The IMF Articles of Agreement envisage this possibility and attempt to pre-empt it. Article VI(3) of the IMF Articles of Agreement, which allows members to impose controls necessary to regulate international capital movements, specifically provides that, "no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments."

There is a third set of rules and regulations under FEMA that violate the spirit of current account convertibility, even if not the strict text of the IMF's Articles of Agreement. These rules and regulations mandate exporters and earners of foreign exchange to repatriate their foreign exchange earnings within a certain period after their realisation. While this period is generally in the range of six to nine months, again, like all other provisions of FEMA, this too is amenable to revision by the RBI and the Central Government.

Barriers to instant peer-to-peer cross-border payments

While the technicalities may differ across transaction type, the bank in question, the merchant and the jurisdiction of the counter-party involved, the hurdles that consumers and merchants face when making cross border payments for current account transactions can be broadly classified into three categories:

Legal restrictions on current account transactions

In exercise of the power conferred on the Central Government under the FEMA, the Central Government has enacted the Current Account Transaction Rules, 2000. These rules prohibit some current account transactions altogether. For example, they prohibit remittances for "hobbies" or the purchase of banned magazines. They also mandate the prior approval of the Central Government for certain types of current account transactions, such as remittances for cultural tours or publishing advertisements in foreign print media. For a third set of transactions, the rules impose caps that may be revised by the RBI from time to time. This effectively means that authorised dealers in foreign exchange must check the rule book when undertaking current account transactions, for they may fall in any of these categories. Particularly, since the restrictions are imposed by rules and legislation made by agencies (not the Parliament), the frequency of revisions is likely to be higher and allow for lesser transition time as they often take effect overnight.

Restrictions linked to payment instruments

Several restrictions against current account convertibility operate through rules about the payment instrument or payment service provider even when it is used for current account transactions.
The Current Account Rules, 2000 impose restrictions on the usage of international credit cards (ICCs) from an Indian issuer. Some of these are in the letter of the law. For example, the rules explicitly prohibit the usage of an ICC for making payment to foreign airlines in a currency other than INR. Other restrictions manifest themselves through enforcement processes. For example, there have been instances of the RBI having issued enforcement letters to holders of ICCs for availing cloud computing services by a foreign company not having operations in India. The basis of the enforcement actions was that the ICCs were meant to be used for current account transactions 'while on a visit outside India'. The outcomes and due process underyling the enforcement actions undertaken by the RBI are rather opaque. The RBI does not issue reasoned orders for its enforcement actions, unlike most other regulators in India. Owing to this opacity, we are not able to know whether holders of ICCs actually ended up paying fines for having used their credit cards for certain current account transactions and the legal foundations of such enforcement actions.
Similarly, until 2015, Indian residents could use the services of online payment gateway service providers (OPGSPs) for the receipt of export proceeds of upto USD 10,000. Later, in order to promote online e-commerce, the RBI allowed Indian importers to use the services of OPGSP to make payments of upto USD 2,000 for imports. Additionally, the RBI mandated OPGSPs that wish to facilitate cross border payments from or to India to set up liason offices in India.

Transaction vetting by banks

RBI has vested banks with the responsibility of acting as gatekeepers for ensuring that payments ostensibly made for current account transactions are not used for engaging in capital account transactions. Technically, this requires banks to vet every single cross border transaction in order to judge its compliance with the FEMA.
To make cross border outward remittances easier for Indian individual residents (as distinguished from corporate bodies and other artificial juridical entities), the RBI issued a `Liberalised Remittance Scheme', which sets annual caps on the amount of foreign exchange that Indian residents can repatriate outside the country, for both capital and current account transactions. This means that making outward remittances requires a payer to fill up atleast one form swearing compliance with the limits and the terms and conditions of the LRS.
Counter intuitively, the friction is exacerbated for inward remittances in the INR denominated bank account of the recipient. To comply with the letter of the law, banks have put in place a system that requires the beneficiary to furnish the bank with a whole bunch of information, such as the purpose of the inward remittance, the bill numbers where the remittance is on account of exports, etc. This form is required to be filled up and submitted for every transaction. Depending on whether the recipient bank is a public sector bank or not and its operational efficiency levels, these forms may require to be furnished in hard copy by visiting a bank branch. It may involve a couple of phone calls from bank representatives asking this, that or the other clarification. For a first time or the occasional recipient of a foreign payment, this practically puts inward remittances on a T+1 settlement cycle!

Current account convertibility means that there is no difference between going onto an e-commerce website and buying from an Indian merchant vs. buying from an overseas merchant. But Indian residents are often asked to perform know-your-customer checks, uploading images of identity documents, when buying from an overseas merchants. In contrast, domestic purchases only require supplying money and not the burden of KYC procedures. This violates globally accepted notions of full current account convertibility, and will be a significant hurdle to making instant cross-border payments a reality for the average Indian consumer.

The problem of convertibility on the current account

Current account convertibility means that cross-border transactions, for the purpose of current account activity, are as frictionless as domestic transactions. Many people believe that India is fully current account convertible; it is sometimes claimed that India has achieved current account convertibility in 1993 and is now inching towards convertibility on the capital account. This is an inaccurate depiction of where India is. There are explicit prohibitions, restrictions or tarriff barriers. There are procedural barriers that drive up the cost of cross-border transactions. There are threats of ad hoc enforcement or disparity across payment instruments or payment service providers.

At first blush, UPI-PayNow connectivity is a sweet and logical idea, there is the possibility of obtaining a quantum leap in reducing transactions costs for cross-border payments. However, it requires the invisible infrastructure of current account convertibility, which is at present lacking in India. The project of building UPI-PayNow connectivity is a great opportunity to re-open these questions and remove all the frictions, whether on paper or in practice, described above. Our objective should be to make India-Singapore payments on the current account as frictionless as (say) payments between the UK and the US.

This situation is not unique to the UPI-PayNow connection. The `fintech revolution' is limited by infirmities of financial regulation in numerous dimensions. Many ideas that first appear eminently sensible tend to break down when placed into the Indian policy environment [example: regulatory sandbox].

Ajay Shah is a researcher at xKDR Forum and Jindal Global University. Bhargavi Zaveri-Shah is a doctoral candidate at the National University of Singapore.

Disclosures in privacy policies: Does 'notice and consent' work?

by Rishab Bailey, Smriti Parsheera, Faiza Rahman and Renuka Sane.

In a recent paper, Disclosures in privacy policies: Does notice and consent work? we evaluate the quality of privacy policies of five popular online services in India -- Google, Flipkart, Paytm, WhatsApp and Uber. Our goal is to question whether the present notice and consent regime is broken because of the way in which privacy policies are designed?

We analyse the identified privacy policies from the perspective of access -- how easy are they to find, how easy are they to read, and on issues of substantive content -- how well do they conform to well recognised principles of a model data protection law? In doing so, we evaluate whether the policies have specific, unambiguous and clear provisions that lend themselves to easy comprehension. It is pertinent to highlight that the versions of the privacy policies that were accessed for this study were dated as of March, 2018 i.e. before the European General Data Protection Regulations (GDPR) was enforced.

We try to evaluate how much do users typically understand of what they are signing up for, and if this can inform us on whether consent is an effective tool to enable individual control over personal data in the online environment. We conduct surveys in five universities in and around New Delhi, and randomly assign one of the five privacy policies to students in the classroom along with a questionnaire. The questions are classified into three categories -- 'easy', 'intermediate', and 'difficult'. The easy questions have a simple and direct answer in the policy. The intermediate questions require a closer reading of the policy making it slightly harder to figure the correct response. The difficult questions require careful reading and some inference. We evaluate the level of understanding of the policies based on the number of questions answered correctly.

Setting the context: Why is this question important?

The 'notice and consent' framework has been the basis for much of the thinking in modern data protection and privacy laws. It relies on the ability of providers to collect and process personal data conditional on providing adequate information to, and obtaining the consent of, the data subject. Its intuitive appeal lies in the normative value of individual autonomy that is the cornerstone of modern liberal democracies. Seeking consent is said to ensure an individual's autonomy and control over her personal information, enabling 'privacy self-management' (Solove, 2013).

There is, however, a growing concern around the inability of this model to provide individuals with meaningful control over their data in light of evolving technologies and data practices (Mathan, 2017). Concerns in this regard arise due to numerous reasons, including the fact that most people do not read the policies, do not opt out or change the default privacy settings (CPRC, 2018; ISOC, 2012), are not able to understand the policies, face consent fatigue and are therefore unable to make rational choices about the costs and benefits of consenting to the collection, use, and disclosure of their personal data (McDonald, 2008; Solove, 2013). Many privacy harms flow from an aggregation of pieces of data over a period of time through interconnected databases of different entities, or from the use of complex machine learning algorithms to make automated decisions. It is, therefore, unrealistic to expect people to assess the impact of permitting the downstream use and transfer of their data (Solove, 2013). Moreover, privacy policies are often binary in nature where people either have to fully opt-in or completely opt-out of using the services (Cate, 2013).

A large body of literature has therefore evolved that demonstrates that consent is broken, and yet, accepts the necessity of finding ways to make the notice and consent regime work better. These points about the evolving nature of consent have also been acknowledged in policy and legal debates. For example, in Europe, the recently enforced GDPR has continued (and in fact attempted to strengthen) the consent model implemented under the Data Protection Directive of 1996, while also setting out several duties of data controllers. In August 2017, the Supreme Court of India recognised the fundamental right to privacy (Puttaswamy, 2017). Around the same time the Government of India constituted a committee under the chairpersonship of Justice B. N. Srikrishna (Srikrishna Committee) to draft a data protection law. The Srikrishna Committee's report and the draft Personal Data Protection Bill, 2018 submitted by them to the Government have affirmed the central role of an effective notice and consent regime, making consent one of the grounds for processing of data.

As per the Srikrishna Committee's recommendations, for consent to be valid, it should be 'free, informed, specific, clear and capable of being withdrawn'. In case of 'sensitive personal data', the draft Personal Data Protection Bill, 2018 proposes a higher standard of 'explicit consent' with additional requirements on what would amount to informed, clear and specific consent with respect to such data. Given the critical role of consent in the draft law, it becomes important to question whether, and how, consent based frameworks can be made to work better?

Results: Accessibility

We first analyse accessibility of the selected privacy policies (Google, Flipkart, Paytm, WhatsApp and Uber) based on a series of measures including how embedded a policy is within a particular website, the length of the privacy policies, and the languages they are made available in. We find that the policies can generally be accessed through 1-3 clicks (from the main web page). However, the links to the privacy policies are usually positioned at the bottom of the main web page, and in relatively small font size. This does not lend itself to easy discoverability, particularly as links to the privacy policies are usually not highlighted.

As far as length of the policies is concerned, the privacy policies of the Indian companies we studied are significantly shorter than the studied multinational companies ('MNCs'). This is largely due to the greater number of issues touched upon as well as more detailed explanations of rights and obligations by the MNCs. Some of this may be due to the fact that the MNCs' policies may be following some of the obligations under data protection laws of foreign countries that contain more onerous requirements than India's Information Technology Act, 2000 (and the rules under it).

Interestingly, Google is the only company amongst those studied that provides a copy of its privacy policy in languages other than English. Despite some of the other websites being made available in Indian languages (for instance, Uber's website can be accessed in Hindi), the privacy policy continues to be accessible only in English. This clearly illustrates a problem in a country where English speakers number roughly only 10-15 percent of the population.

Results: Readability

While measuring readability is not an exact science, tools such as the Flesch-Kincaid reading ease and grade level tests have been used for decades to analyse metrics such as word and sentence length and their impact on readability. It should be noted that the model does not actually analyse the meaning of words used, whether they could have multiple or ambiguous meanings, whether words used in the text are commonly used, etc. It is therefore possible for a completely un-understandable text (consisting of short but rarely used, complex or ambiguous words) comprising short sentences with short words to have a high readability score. Having said this, the scores do provide a useful comparative matrix to evaluate the readability of the privacy policies.

Applying the Flesh-Kincaid test to each of the privacy policies under study, we find that the policies are rated as either 'very difficult' (Uber, Google, Paytm) or 'difficult' (Flipkart, WhatsApp). The reading ease score of the policies ranged from 16.44 (Uber) to 41.03 (Flipkart) -- a higher score indicates better readability. To put these scores in context, Reader's Digest has a readability score of about 65; Harry Potter books are in range of 80s; and Harvard Law in the low 30s (Lively, 2015; Flesch, 1979).

The results therefore indicate that all the privacy policies under study are complicated documents and require a firm grasp of English and reasonably advanced comprehension abilities to be understood. Given that the target audience for many of these online services ranges from adolescents upwards, it appears that the privacy policies will prima facie be too complicated for many users to comprehend.

 

Results: Visual presentation

Another way in which reading a privacy policy can be made easier, both in terms of readability and comprehension, is through the use of highlights, marginal notes and by properly segregating and identifying overarching topics. We find some evidence of this in the studied policies.

Uber's privacy policy is divided into multiple sections with each sub-heading in bold font. The policy also contains marginal notes that summarise each section, thereby making the policy easier to understand at a glance. Notably, Uber also provides an easy-to-read summary of their privacy policies in a separate "overview" page. Google's privacy policy also contains segregated sections, and a table of contents which permits easy access to different portions of the policy. Interestingly, the policy also frequently uses layered information or pop-ups where additional information is presented pertaining to certain terms and activities when a user moves the cursor over highlighted words. While WhatsApp also provides segregated sections, it does not generally provide additional information in a layered manner or highlight particularly important information (though, certain highlighted terms do allow click-throughs, for instance "Facebook family of companies" and "cookies").

The two Indian companies -- Flipkart and Paytm -- do not provide layered information or any further click-throughs in their privacy policies. Flipkart demarcates sections using a bold font (in the same font size as the rest of the document), while Paytm utilises a larger font size, in bold, for section headings. The effects of some of these presentation strategies, like click-throughs and pop-ups, are however not reflected in our survey results as the survey was conducted using printed copies of the privacy policies.

Results: Terminology

We focus next on the kind of terminology used in the privacy policies. Our focus here remains on the text of the policies, without getting into the the manner in which the policies may be implemented in actual practice. We note that the use of legal and technical terminology in a privacy policy can lead to a decrease in comprehensibility for the user. Unless specifically defined, a user may not be aware of the true import of a particular word, particularly if technical in nature.
For instance, WhatsApp's privacy policy says:

we do not retain your messages in the ordinary course of providing our Services to you

This does not define what the phrase "ordinary course" implies or explain what the exceptions are. A user may, on a thorough reading of the policy come to understand that an exception may apply to situations where for instance, law enforcement is involved. However, there is no clarity on this. Similarly, the use of words and phrases such as "third party", "affiliate", "profiling", etc., may also lead to confusion in the minds of users given the absence of any specific definitions.

Connected to the problem of lack of adequate information within a privacy policy, is the issue of whether the information being provided is trustworthy and reliable. While it is outside the scope of the present paper to examine the issue of trust in online services, it must be kept in mind that online businesses frequently appear to treat user privacy rights with less than due respect (not least due to the lack of bargaining power and information asymmetry between the parties).

Results: Substantive analysis

For the substantive analysis of the policies, we analyse the policies based on how they conform to well recognised principles of a model data protection law -- i.e. whether they detail the methods and manner of collection of data; the permitted uses of data; information sharing practices with a third party, including with affiliated entities, and law enforcement; whether users are informed of data breaches; whether users are given rights pertaining to access, deletion and export of data; and whether users can seek clarifications or information about the uses of their data or the privacy policy itself. We also evaluate whether these policies have specific, unambiguous and clear provisions that lend themselves to easy comprehension.

The table below provides a snapshot of whether policies have specific provisions on the ten issues identified as a basis for analysis of policies (Y indicating that the issue is addressed in the policy, N indicating it is not, and NS indicating the issue is not specified.)

Our analysis indicates that many parts of the policies are poorly drafted, often containing language that seems intended to insulate the company from liability rather than genuinely informing the user. In several cases, the policies do not include rights that would be considered essential in a modern privacy framework (for instance clauses covering data breach notification, or data retention periods). Sometimes, the policies also seem to assume that the user has knowledge of legal terms and is up-to-date with statutory and other regulatory requirements in their jurisdiction (for instance, the policies studied frequently use terms such as 'to the extent permitted by law', 'as permitted by law', etc.).

Overall, we find that privacy policies are fairly widely drafted to permit service providers broad powers to collect and process information in pursuance of their business interests. Users currently have little to no leeway in amending the contracts entered into by them and must usually sign up for the entire contract if they wish to access the service (though certain services such as Google and WhatsApp do include some granularity in their privacy policies).

Results: Survey

Survey respondents do not obtain very high scores on the privacy policy quiz. The average score of the sample (155 students) is about 5.3 on 10, i.e. on an average respondents were able to correctly answer 5 out of the 10 questions. The policy-wise scores varied between 4.6 (WhatsApp) to 5.9 (Uber).

Respondents fared the worst on policies that had the most unspecified terms, and on policies that were long. They also seemed unable to understand terms such as 'third-party', 'affiliate' and 'business-partner', that are often used in the context of data sharing arrangements.

Not surprisingly, we find that a greater percentage of respondents got the easier questions (as classified by us) correct. For example, almost 76% of the respondents got the correct answer to Q1 on collection of data; about 68% got the correct answer to Q5 on data sharing with the Government, as this information was explicitly provided in most of the policies. The more difficult questions, classified based on factors such as the use of complex legal terms or ambiguity about specific provisions, saw poorer results.

We believe that the complexity of the language and inadequacy of specific details in the policies are reflected in the low understanding of respondents. What is interesting about the responses to the survey is that when provisions are clearly drafted, or when users can be expected to find the answers in the policy, they are more likely to evaluate the questions correctly. However, when terms whose meaning is not precisely defined are used (such as 'third-party' and 'affiliate', for example), respondents make more mistakes. This suggests that in an environment where respondents actually do read the policy, and when the policy is unambiguously drafted, respondents are able to make better sense of what is being offered to them. Better design and drafting of privacy policies is therefore a prerequisite for notice and consent to work better.

Conclusion

While surveys of a similar nature have been conducted in other jurisdictions, we are not aware of any similar study (to understand how users interact with privacy policies) involving Indian participants. The peculiarities of the Indian context throw up new challenges of diversity in language, literacy, modes of Internet access and other variations among the over 500 million Internet users in India. All of these factors will play a role in determining the appropriate design of disclosures and consent frameworks for Indian users.

Our study makes a modest start in that direction by questioning how well do educated, English-speaking users fare in terms of understanding privacy policies. Making the same privacy policies accessible to the larger set of Indian users, many of whom are first time adopters of technology, is undoubtedly going to be a much larger challenge. The study therefore raises further questions on what drives understanding of privacy policies -- whether factors such as age, education, intelligence quotient, comfort with English, urbanisation, familiarity with Internet-based services, all play a role in how an individual evaluates what is on offer? It also raises questions on how privacy policies should be designed so that users are able to understand them better.

Ultimately, the goal of privacy policies should be to make it possible for individuals to evaluate trade-offs between privacy and service, and make choices that suit their preferences, which might themselves change over time. Finding ways to make the notice and consent framework more meaningful is an essential part of this process.

References

Solove, 2013: Daniel Solove, Privacy self-management and the consent dilemma, 126 Harvard Law Review 1880 (2013).

Mathan, 2017: Rahul Mathan, Beyond consent: A new paradigm for data protection, Takshashila Discussion Document 2017-03, 2017.

CPRC, 2018: Consumer Policy Research Centre, Australian consumers soft targets in big data economy, 2018.

Flesch, 1979: Rudolph Flesch, How to write plain english: A book for lawyers and consumers, 1979.

ISOC, 2012: Internet Society, Global Internet user survey, 2012.

McDonald, 2008: A McDonald and LF Cranor, The cost of reading privacy policies, I/S: A journal of law and policy for the information society, 4(3), 543-568, 2008.

Puttaswamy, 2017: Justice K.S. Puttaswamy v. Union of India, WP (Civil) No. 494 of 2012, Supreme Court of India.

Cate, 2013: F Cate and V Mayer-Schonberger, Notice and consent in a world of big data, International Data Privacy Law, 3, No. 2, 67-73, 2013.

Lively, 2015: Gerald Lively, Readability, Book Notes Plus, April, 2015.
&nbsp


The authors are researchers at National Institute of Public Finance and Policy. They would like to thank Omidyar Network for supporting this research.

CCI's order against Google: infant steps or a coming-of-age moment?

by Smriti Parsheera.

The Competition Commission of India (CCI) recently concluded its six year long investigation into allegations of abuse of dominance by Google in India. It found that Google had utilised its dominance in general web search services to limit user choice (specifically in the context of Google flight search) and impose restrictions on its search syndication partners. It also noted a third violation relating to Google's historic practice of setting fixed positions for a particular category of search results (referred to as "universal results") that were sourced from its other verticals like images, videos and maps. A few months ago, the European Commission had also levied a penalty of Euro 2.42 billion on Google for offering preferential treatment to its comparison shopping service and demoting rival services in its search results.

The consequences for Google in India? CCI has directed Google to (i) desist from assigning fixed positions to universal results; (ii) add a disclaimer while presenting its commercial flight results; (iii) not enforce unreasonable restrictions on syndication partners; and (iv) pay a penalty of Rs. 1.36 billion (USD 21.1 million) for its anti-competitive conduct. To put this in perspective, the penalty translates to less than 0.02% of USD 110.9 billion, Google's worldwide revenues in 2017.

Are these the uncertain first steps of an infant CCI venturing into technology-ville or the coming-of-age moment of a regulator that has learnt to balance innovation and competition in the digital era? This post attempts to answer this question by tracing CCI's analysis on issues of universal results, Google flights and restrictive agreements, highlighting some concerns and summarising the takeaways from this decision.

Allegations against Google

CCI's order arises from two separate cases filed by online matchmaking portal Matrimony.com and Consumer Unity & Trust Society against Google Inc. and Google India Private Limited. In the course of the investigation, Google Ireland Limited, a key contracting entity for Google's advertising agreements, was also added as a party.

The informants alleged an abuse of dominance by Google in the general web search and search advertising markets in India, with the following specific claims.

• Search bias: Google was using its dominance in the search engine business to promote its own results like videos (YouTube), news (Google News) and maps (Google Maps) in its search results.
• Unfair advertising terms: Google has the largest number of search users which makes it an unavoidable partner for all advertisers who want to target their ads at those users. The informants alleged that Google was using this position to impose unfair and discriminatory conditions on its AdWords customers (advertisers who bid on keywords for ads to be displayed in Google's search results).
• Denial of access: Google was using its dominance in the search and search advertising markets to impose unfair conditions that restricted its partners from contracting with other competing search engines. As a result, it was denying access to the market to competing businesses.

As per the scheme of the Competition Act, 2002 (Act), the complaints were first examined by the CCI to assess their prima facie merit. Finding a prima facie case of abuse of dominance by Google, CCI referred the matter to its investigative arm, the office of Director General (DG), for detailed investigation. The DG's office took about three years to complete its assessment and submitted an investigation report to CCI in March, 2015. It found Google to be guilty on all the counts raised by the informants in addition to a few others that were discovered by it in the investigation process.

CCI's reasoning and verdict

An abuse of dominance case under Section 4 of the Act requires CCI to establish that the entity in question held a dominant position in a defined relevant market and had abused that dominance through activities like imposing unfair or discriminatory conditions on others, limiting the supply of goods or services in the market, or using its dominance in one market to protect its position in another.

Relevant market analysis

CCI agreed with the findings of the DG that Google was operating in the following relevant markets: (a) market for online general web search services in India and (b) market for online search advertising services in India.

Google contested both these market definitions, arguing instead for a broader relevant market -- the wider the market the lesser the chances of Google being found to be dominant in it. Regarding general web search, Google claimed that it competes with all possible sources of information that can answer a user's specific query (about people, places, recipes, etc.) and there is no separate market for "general web search". This however ignores the fact that there are billions of webpages on the Internet, a majority of which are not known to users. Users therefore commonly rely on search engines to identify new sources of information and even access relatively well known ones. For instance, Alexa's web traffic analytics shows that 66.6 percent of the traffic to Wikipedia, the fifth most popular website in the world, comes through search engines.

Curiously, Google is also reported to have argued that "[b]ecause search is free, Google has no trading relationship with the users of its search service, and so the basis for establishing dominance is absent". CCI rejected this argument, noting that "it is not only flawed but altogether ignores the role of big data in the digital economy". In the multi-sided platform operated by Google, users offer their "eyeballs" and data in exchange for Google's "free" services, which are in turn monetised by Google through advertising revenues. To claim that only services that are directly paid for by users can constitute a relevant market would render large parts of the digital ecosystem outside the purview of competition laws, an outcome that is neither legally tenable nor socially desirable.

Assessing Google's dominance

The determination of dominant position depends on a number of factors, market share being one of them. CCI's order notes that Google has maintained a high market share in both the relevant markets but does not disclose the exact figures (these are blacked out as confidential information). Publicly available information from statcounter, however, clearly shows that in the period since 2010, Google has consistently held over 96 percent of the market share among search engines in India.

CCI also looks at other factors beyond market share. On the search side, it refers to Google's head start in crawling and indexing the web and resulting scale advantages. As explained by Matt Turck, Google benefits from significant "data network effects" -- "the more people search, the more data they provide, enabling Google to constantly refine and improve its core performance, as well as personalize the user experience". As we discuss in this paper on Competition Issues in India's Online Economy, multi-sided platforms like Google are also characterised by strong indirect network effects. CCI uses a similar logic to observe that Google's stronghold in general web search supplements its dominant position in the market for online search advertising, resulting in situation were advertisers are left with little countervailing powers over Google. In summary, CCI notes that this leads to a situation where "[t]he structure of the market is both indicative of and conducive to Google's dominance".

Abuse of dominance

Next, CCI turned to examine the specific allegations relating to the abuse of its dominant position by Google. This is also the point where the Commission significantly digresses from the findings made by its investigation unit. Unlike the DG's report, which found Google to be in violation of the Act on almost all the grounds examined by it, CCI limits its findings to the following three grounds.

1. Fixed positions for universal results:
   

   Findings: Google's search results pages often contain certain "universal results" that are sourced from its other search verticals (See Figure 1 for an example). As per Google, these universal results compete with other generic blue links for the most favourable position on the results page based on their relevance. However, it also admitted that when the service was initially introduced, the display of universal results was limited to certain fixed (1st, 4th or 10th) positions as its systems were not advanced enough to determine the relevant position for such results. CCI dismisses this argument to hold that Google's historic practice of adopting a fixed position for such results was unfair and misleading to its customers who were led to believe that the responses were being ranked solely on the basis of their relevance.

   Consequences: Since Google has already discontinued this practice, CCI limits itself to issuing a desist order directing Google not to resort to such position fixing in the future.



Figure 1: Universal image results in response to search term "Kullu"






2. Commercial unit for flight results
   

   Findings: Google also places various "commercial units" in its search results. This refers to a demarcated ad space for displaying sponsored results relating to shopping, hotels and flights. CCI focused in particular on Google's flight unit (See Figure 2 for an example). It noted that Google provides a prominent placement to its flights unit in general search results with a link that takes the user to Google's own specialised flight search service. It found that this practice results in either pushing down or pushing out other competing vertical search services with the result of misleading users and denying them the opportunity to access the other websites.

   Consequences: CCI directed Google to display a disclaimer in the commercial flight unit box indicating clearly that clicking on the relevant link would lead to Google's flights page and not the results of any other third party service provider.
   



Figure 2: Google Flight Unit in response to search term "Delhi to Kullu flights"






3. Restrictions in syndication agreements
   

   Findings: In addition to the search and advertising services offered on Google's own website, it also enters into syndication agreements with other websites to offer its search and advertising services to them. These agreements can either the take the form of standard online contacts or directly negotiated agreements. CCI found that Google imposes certain unreasonable restrictions on its negotiated search intermediation partners -- websites that enter into negotiated agreements to use Google's services on their websites are restricted from implementing any search technologies that are "same or substantially similar" to those of Google. CCI found that this restricts Google's partners from using the services of competing search engines. It thus "creates conditions for extending and preserving Google's dominance in search intermediation".

   Consequences: CCI directed Google not to enforce the restrictive clauses in its negotiated direct search intermediation agreements with Indian partners.

As noted above, the DG's investigation had found Google to be guilty on many other counts. This included questions about Google's conduct in relation to its AdWords customers; its practice of allowing bidding on trademarks owned by competitors; and its arrangements with distributors like Apple and Mozilla to make Google the default search engine in their products. CCI, however, disagreed with the DG's findings on all these other counts.

Some questions and concerns

CCI's decision raises many important issues regarding Google's conduct in the search and search advertising markets. The design of ranking algorithms to provide preferential positions to certain types of results (without sufficient disclosures) and the imposition of unfair restrictions in commercial contracts are certainly critical issues that can have far reaching implications for online competition in India. Yet, despite agreeing with the principles behind these ends, it is hard to ignore some issues with the means adopted by CCI to reach them. This section focuses on the lack of sufficient evidence-based analysis, selective focus on flight search and CCI's own uncertainty about calculation of the penalty, all of which are factors that could expose the order to subsequent scrutiny.

Absence of robust data and evidence

The first issue, which has also been emphasised at length by the two dissenting members of CCI, relates to the absence of robust data and evidence to support the findings against Google. While the discussions in the order are sufficient to develop a strong intuition about Google's anti-competitive conduct, this intuition should ideally have been followed through with supporting data to build a water tight case. Specifically in the context of flight search, the dissenting members point to the absence of actual data about the traffic flows to the Google flight unit or to competing websites, the positions on what these websites actually appear on Google's results page and the impact that it has on consumer behaviour.

We can contrast this with the European Commission's approach in its similar case against Google. In a press release issued in June, 2017, the Commission announced that its order against Google was supported by evidence from various sources, including "(i) significant quantities of real-world data including 5.2 Terabytes of actual search results from Google (around 1.7 billion search queries); and (ii) experiments and surveys, analysing in particular the impact of visibility in search results on consumer behaviour and click-through rates". Based on this evidence, it was able to gauge the precise effects of Google's prominent placement of its comparison shopping service.

• The traffic to Google's comparison shopping service increased 45-fold in the United Kingdom, 35-fold in Germany, 19-fold in France, 29-fold in the Netherlands, 17-fold in Spain and 14-fold in Italy.
• There was a sudden drop of traffic to certain rival websites, to the tune of 85% in the United Kingdom, up to 92% in Germany and 80% in France.
  

In the present case, it is clear that the dissenting members are not disagreeing with the merits of the case against Google but the absence of sufficient data to make those claims. That being the case, the logical course for the Commission would have been to direct further investigation by the DG on these specific grounds or pursue an inquiry on its own. Both these courses were open to the Commission under Section 26(7) of the Act but their adoption would of course have meant a further delay in an already long pending decision.

Questions about the flight search analysis

The next set of issues revolves around CCI's focus on Google flight search and its prominent display on the search results page as a ground for abuse of dominance. The order examines the impact of the prominent real estate given to Google's flight unit vis-a-vis third-party travel sites like MakeMyTrip.com or Yatra.com and its misleading impact on users. However, as noted here, Google's flight service (at least at present) only offers users the option of comparing flight prices and not of directly making the bookings through Google. Therefore, the market in question is that of flight fare comparison websites and it would accordingly have been relevant to consider the impact on competing fare aggregation sites like "skyscanner" and "farecompare" instead of only those that provide flight booking services. Such an analysis would have also enabled CCI to examine a potential violation of Section 4(2)(e) of the Act, which relates to the use of dominant position in one market to protect its position in another.

Further, the order does not clarify as to why the flight search functionality is more problematic than similar commercial units displayed by Google in response to shopping or hotel related searches in India. In case of shopping results, the Commission makes a passing remark that "Google's display of Shopping Unit may not per se affect the ranking of free search results". In case of hotels, the order states that Google does not offer this feature in India even though a search for hotels on Google's India site does display a commercial unit, which has similar features to its flight search function -- it leads to another Google page that contains advertisements from hotels and hotel booking websites.

Penalty imposed by CCI

Relying on the Supreme Court's decision in the Excel Crop Care case, CCI decided to limit its penalty to Google's "relevant turnover" from India. For this purpose CCI sought information from Google regarding its revenues from different segments of its India operations, which the Commission notes was provided in an unsatisfactory manner. For instance, it is unclear from the order whether the information supplied by Google under the head "Relevant Turnover from Direct Sales in India" was based on (i) the income earned by all Google entities from end-users based in India; (ii) the income earned by Google India Private Limited from advertisers in India; or also (iii) the income earned by Google Ireland, Singapore and others from Indian advertisers.

Unfortunately, CCI acknowledges these infirmities and still goes on to determine the final penalty amount based on the unclear information furnished by Google. Given the criticality of this point, it would have been appropriate for CCI to seek more specific information from Google and, if required, provide further time for the same. It could also have used its statutory powers to elicit this information.

Conclusion

The Google case is an important development in India's competition jurisprudence on abuse of dominance in multi-sided technology markets. CCI's order acknowledges at the outset that "intervention in technology markets has to be carefully crafted lest it stifles innovation". It also highlights CCI's intent to refrain from interfering in specific product design elements unless the conduct in question is particularly egregious and an intervention becomes necessary to correct certain distortions.

Despite its well intentioned attempts to balance the interests of innovation, competition and consumer welfare, the decision falls short on some counts. Firstly, in an industry centered around click-through-rates, analytics and ranking measurements, the order primarily relies on qualitative and descriptive accounts to establish Google's violations. Secondly, CCI chooses to intervene in certain product design elements (universal results, commercial units) but not in others (like the AdWords ranking mechanism and trademarks bidding policy). While doing so, it fails to offer any broader guidance on the basis for demarcating general product design elements (that could also negatively impact competition) from particularly egregious conduct that merits competition intervention.

Yet, irrespective of the fate of this particular decision, actions such as these serve an important function in taming the conduct of big tech -- the threat of external regulation creates an impetus for better "self" regulation. In the past, Google amended its AdWords terms to make it easier for advertisers to simultaneously manage advertising campaigns on competing ad platforms. This was done through voluntary commitments offered by Google in relation to an inquiry by the Federal Trade Commission. Similarly, a press release by the European Commission notes that in the context of its anti-trust proceedings, Google had modified its direct AdSense contracts (with websites who use Google's services to display ads on their pages) to give its partners more freedom to display competing search ads. Recent moves by Facebook and others to control fake news on their platforms are also grounded in similar concerns.

Finally, the case lays important ground work for subsequent cases against Google and other dominant players in India's online ecosystem. As CCI's orders get challenged before the appellate tribunal and eventually the Supreme Court, we will see new jurisprudence around issues of competition in the digital economy. This will hopefully create a feedback loop for increased rigour and evidence-based analysis in future cases in this sector.

 

Smriti Parsheera is a technology policy researcher at the National Institute of Public Finance & Policy. She has previously worked as a researcher with the Competition Commission of India, including on the Google case. The views are personal.

Building blocks of Jio's predatory pricing analysis

by Smriti Parsheera.

In a recent post on predatory pricing and the telecom sector Ajay Shah questions whether the subsidised user base of Reliance Jio can set off a network effect. The post makes two claims. The explicit claim is that the combined effect of interconnection regulation; mobile number portability and open standards of TCP/IP ensures that there are no real network effects in the telecom sector. The underlying implicit claim is that the existence of network effects is central to a predatory pricing analysis in this context. This piece takes a closer look at both these claims and the other factors that should inform the Competition Commission of India (CCI)'s analysis in the complaint filed by Airtel against Jio's pricing practices.

Network effects in telecom

Modern day tariff plans, including that of Jio, comprise of three main components - voice, data and access to content - all bundled into one product. A competition law analysis of Jio's pricing strategy must focus on each of these segments individually, and then their collective effect.

Voice services: Telecommunication services are known to generate strong network effects - the value of having a phone number is linked to the number of people who can be called using it. This creates a classic case for concentration of market power in the hands of the incumbent. Telecom regulators have overcome this issue by mandating operators to link their networks with the networks of other operators, allowing users to communicate across networks. Research on telecom networks, however, finds that despite interoperability, users tend to display a preference for being on a larger network, particularly when operators offer lower tariffs for calls made within their networks (on-net/off-net price differentiation). Others suggest that the network effects in telecom are more 'local' in nature - the preference to be on the same network as one's family and friends leads to the formation of calling clubs. This is not necessarily dependent on the overall size of the network.

In summary, even with mandated interconnection norms, traditional telecom services display a certain level of network effects. Arguably, the relevance of being "on the same network" would have gone down with the convergence of voice and data services and availability of various over-the-top calling apps. This requires a deeper study of consumer behaviour and preferences in the post-data world.

Internet services: Network effects on the Internet are not about the provision of Internet access services (i.e. the data services offered by ISPs) but rather about the direct and indirect network effects that define the business models of many Internet-based platforms and businesses.

Telecom service providers are increasingly stepping into the role of Internet platforms by bundling access to online music, TV, movies and news along with their communication services. In Jio's case, every new SIM comes bundled with a bouquet of Jio-branded apps, making it one of the fastest growing content aggregators in the country. Its free offer period from September to March has helped Jio build a massive user base, which in turn helps in attracting other complementary users to its platform. For instance, Uber's recent decision to partner with Jio Money reflects the value that it sees in being able to access Jio's users. The same holds true for other merchants and suppliers, like providers of music, video and news content, who are attracted to platforms with a large number of users.

Integration of data services and content

The vertical integration of data services and content offers Jio many advantages. One, convenient access to free content along with free/discounted data services has helped Jio in promoting higher consumption patterns. The aggressive data usage on Jio's network, particularly of video content, will gradually translate into higher revenues. The company claims that its users "consume nearly as much mobile data as the entire United States of America...and nearly 50% more mobile data than all of China." It would be interesting to see what percentage of this data is being consumed within the Jio ecosystem and the change in consumption patterns after Jio starting charging for its data services.

Two, it promotes faster adoption of in-house services. To take an example, the AT&T/FaceTime case study in the United States found that less than 10 percent of iPhone users downloaded Skype while all of them had automatic access to Apple's FaceTime. Adoption of Jio Money versus rival payment apps (among Jio subscribers) is likely to show similar results. Reports about the launch of Jio's 4G feature phone with built-in Jio apps suggest the possibility of further entrenchment of new users in the Jio universe.

Can Jio's pricing strategy in telecom enable it to indulge in monopolistic behaviour in related markets like mobile payments? Unlike telecom services, the payments sector continues to suffer from the lack of interoperability among providers, leading to significant network effects. Safaricom's M-Pesa service in Kenya offers an example of how the company was able to leverage massive network effects in the mobile-money space to establish its dominance in calls and text messages. The situation in India is certainly different - we have higher levels of competition, both in telecom as well as online payments. Yet, the Kenyan example is a helpful reminder of the extent to which cross-linkages between bundled products can influence their adoption and usage, to the exclusion of other competitors.

Jio's dual role as a telecom provider and platform offering access to online content makes it difficult to outright dismiss the role of any network effects. Moreover, any subsequent recoupment of the losses suffered by Jio in its early days need not necessarily be through a significant markup in data tariffs. Increase in volume of data consumption, future monetisation of Jio apps and opportunities for utilisation of data collected from users, are all factors that must be considered.

The tests of predatory pricing

The law and jurisprudence on predatory pricing defines it as below cost pricing by a dominant firm, with a view to exclude competitors. Sustained discounting practices in a market with strong network effects certainly raises a red flag due to the tendency of a single network to dominate the market. In such a scenario, there is a strong likelihood of recoupment after other competitors have left the market and structural barriers deter the entry of new players. The determination of predatory pricing, however, does not hinge on the existence of these network effects.

When Jio first launched its services in September, 2016 it was a fresh entrant in a market with several established players. Its price point of zero was certainly below cost but there was no question of it being a "dominant player". Any regulatory intervention to stop the pricing plans at that stage, whether by the sectoral regulator TRAI or the CCI, would have been premature.

This position has come to change over the last few months. Jio has managed to acquire a sizable presence in the market for high-speed data services - it holds about one-third of the country's broadband subscriber base and about 85 percent of the market in terms of mobile data traffic. Its share in the overall market for telecom services (voice plus data) still remains small since telecom subscribers continue to outnumber Internet users by a wide margin. The manner in which CCI delienates the "relevant market" will therefore form the crux of its analysis in this case.

Accordingly, the first step for CCI would be to determine whether there is a market for data services that is distinct from the broader cellular services market? This will hinge on a factual analysis of whether users regard voice, data and high-speed data services as being interchangeable in terms of their end-use and characteristics, based on a number of factors. One, voice calls can be made using the Internet but the reverse is not true - this indicates a one-way substitutability between the services. Two, there are some differences in the utility of 2G and 4G networks based on the applications that they are able to support. Three, CCI will need to collect data on Jio's usage patterns, that of its competitors and the switching behaviour of consumers. Four, supply-side constraints (like spectrum holdings) that can make it difficult for providers to switch from one type of service to another will also need to be considered.

In the second stage, CCI will need to examine whether Jio can be regarded as being dominant player in the identified market. Besides looking at its market share, in terms of subscriber base and usage volumes, this analysis must also consider the various other factors that have been given under the Competition Act, 2002. These include:

1. Size and resources of Jio and its competitors - Telecom being a capital-intensive industry has many big players. Each of them has access to significant capital resources, although there may be differences in the extent to which these firms have been leveraged.
   
2. Vertical integration of the enterprise - As discussed above, the bundling of voice, data and content offers Jio certain clear advantages. Other players are also offering similar bundles but not necessarily at the same scale. In many cases, the prices and bundles offered by other players have come about as a response to Jio's entry strategy.
   
3. Entry barriers - Telecom is a heavily regulated sector and there are entry barriers, both in terms of licensing requirements and the availability and price of spectrum.
   
4. Relative advantage through contribution to economic development - The arrival of Jio's 4G LTE network, with its aggressive pricing strategy, could also have some pro-competitive effects. Arguably, it has nudged the telecom market towards greater price competition, resulting in lower tariffs. Over time, this could also push other operators towards faster upgradation of technology.

Assuming that CCI's analysis leads it to delineate a separate broadband market (and Jio is found to be dominant in it), the third challenge would be to assess whether its current prices are in fact "below cost". This again will require data on the costs incurred by Jio for delivering its voice and data services and the free apps that are on offer. Finally, CCI will have to determine whether Jio's current pricing continues to be in the nature of a genuine "promotional strategy" by a new entrant or is it a deliberate attempt to reduce competition in the market.

Many have linked the consolidation that we are seeing in the market today with Jio's entry strategy. One one hand, consolidation reduces the number of players, hence reducing competition. On the other, it might be a sign of the sector's movement towards a more mature market with fewer players who are able to focus better on infrastructure expansion and quality of services. CCI will need to weigh in all these factors while examining the impact of Jio's prices on consumer interests, competition in the market and overall economic development.

These are all complex questions, with no obvious answers. The solution lies in a multi-stage, data-driven analysis of predation that should be rooted in an understanding of competition policy and telecom economics. Co-operation and knowledge-sharing between CCI and TRAI is key to finding these solutions.

 

Smriti Parsheera is a researcher at the National Institute of Public Finance & Policy. The author would like to thank Amba Kak, Kaushik Krishnan and Faiza Rahman for useful discussions.

Competition issues in India's online economy

Smriti Parsheera, Ajay Shah and Avirup Bose.

The world of high technology companies is seen as a dynamic area with a rapid pace of creative destruction. There is, however, a class of industries where there are strong network effects, where the market tends to collapse into a narrow set of players. After one burst of innovation where a new online business is born, there is the possibility of entrenched market power with the extraction of consumer surplus.

Many firms, global and Indian, have resorted to the strategy of making large losses by subsidising users, as a way to obtain those network effects. This has created a new class of concerns about predatory pricing, with unprecedented negative profit margins on a sustained basis, being supported by equity capital infusions. In the short run, discounts are popular, but recoupment is inevitable and market power will adversely affect consumers in the future.

In a recent Paper, we argue that the existing competition law regime in India needs to be fine tuned, for technology-enabled markets with significant network effects, to address the possibility of new kinds of abusive conduct. We offer a series of tangible proposals through which the Competition Commission of India can better handle these emerging situations. We also look into the role and responsibilities of the investors who back these online businesses and the impact of their conduct on competition in the underlying markets.

Entry barriers in the new economy

Innovation is the foundation of economic progress. While we normally revere technology companies for their disruptive innovations and the efficiencies that they create, we must recognise that some technology-driven businesses are susceptible to the acquisition and abuse of market power. The Indian competition regime is an evolving one, and has only recently started facing some of these concerns. Our paper brings new evidence and arguments to the table, on these questions.

Internet-based businesses, along with several other high-technology sectors, form part of the 'new economy', characterised by high rates of innovation; low marginal cost; increasing returns of scale; and, in many cases, network effects. Direct `network effects' arise where a user's benefit from a product or service increases with the number of other users on that network. The benefit of being on Facebook or WhatsApp, for instance, corresponds with the number of friends and family who use that service. Contrast this with the benefit of having an email address, where the benefits are not limited to closed proprietary networks. This became possible due to the early adoption of interoperability standards in email protocols.

Network effects are particularly important in two-sided markets where users on each side of the market derive a positive effect from the expansion of users on the other side. Commuters who use taxi aggregation platforms like Ola and Uber will logically be attracted to a service that has a large number of drivers on its network, which yields a lower waiting time. The same is true for the drivers working with these platforms. Similarly, in case of payments wallets, in the absence of interoperability regulation, merchants and customers will both prefer a service that has the most addressable users.

With the use of modern technology, the cost of running the marketplace itself has dropped to near zero levels. As an example, the online classifieds site Craigslist reports that it has about 40 employees who manage a network that sees over 80 million classified ads per month. The marginal cost of a transaction has gone to near-zero levels. This gives a unique class of problems where technological innovation that yields cost reductions cannot be a mechanism to take on an incumbent.

Brain versus brawn

How can market power be established, in this new world? One mechanism through which one player can obtain a competitive advantage is to attract users through technological innovation, and thus get a network effect started. This is an attractive strategy for firms which have deep human capital. Another mechanism is by using financial capital to pay subsidies that entice users. This is an attractive strategy for firms which have superior access to financial capital. Many online businesses have resorted to practices like deep discounting, cash-back offers and other schemes designed to attract new users and establish the network effect. Sometimes, heavy losses have been sustained for years on end.

As an example, the global taxi company 'Uber' made worldwide losses in the first half of 2016 of US\$1.27 billion (approximately Rs.86.5 billion). Uber's behaviour impacts upon the Indian economy as it has applied the strategy of using financial capital as a competitive lever in India also. On a similar note, the Indian taxi company 'Ola' reported a net loss of Rs.7.96 billion in March, 2015. The company's financial records for the periods after that are not yet available although it is reasonable to expect that the losses will be significantly higher due to the higher driver incentives. In the last two years, it is estimated that the two taxi companies, Uber and Ola, burned cash adding up to about Rs. 130 billion in India.

Such behaviour is found in other industries also. In the field of payments, where regulations have blocked interoperability and thus created the opportunity to kick off a network effect, the firm One97 Communications, which owns 'PayTM', reported a loss of Rs.15.49 billion in March, 2016.

The scale of these discounting practices, and the sustained periods for which they are continued, has created new barriers to competition. It is difficult to rationalise these sustained losses as being an introductory offer by a new player. Rather, these practices appear to be a systematic competitive strategy. Capital has become a competitive weapon. This gives rise to concerns that the market may eventually tip in favour of the player that may not necessarily have the most innovative product or service, but one that succeeds in obtaining more capital and enticing more users in the early days, using subsidies. While seeming beneficial for consumers in the short run, such practices raise concerns about competition on account of the creation of market power, and elevated prices for consumers in the following years when losses are recouped.

The FDI guidelines issued by the government in March, 2016 turned the spotlight on pricing practices of e-commerce firms. It clarified that the automatic route of foreign investment would be available only to those e-commerce marketplaces that avoided such subsidies.

These issues have also come to the attention of the CCI in a few recent cases. In April 2015, the CCI passed a prima facie order recommending a detailed investigation into the allegation that, armed with substantial funding received from various investors, Ola had indulged in abusive market practices to garner greater market power in the city of Bengaluru. More recently, the COMPAT directed the Director General of the CCI to initiate a similar investigation to assess Uber's dominance in the market for radio taxi services in the National Capital Region (NCR) of Delhi after the CCI had refused such an investigation. Uber has now challenged this decision before the Supreme Court, citing a 'jurisdictional flaw' in the Tribunal's ability to order such an investigation. Alongside these developments, CCI is also reported to have set up an in-house panel to understand the cash-back incentives being offered by various online companies from the perspective of predatory pricing provisions under the Act.

Our paper explores the recent developments in India in this area, in the light of foundations of economics and competition law. It argues that there are grounds for concern about the harm to competitive dynamics from these new business strategies. At the same time, it is important to avoid intrusive interventions that bring the State into excessive involvement in the world of business.

New economy requires new thinking

There is a need to take into account the distinct economic features of certain high-technology businesses when looking into allegations of anti-competitive conduct by them. Practices like deep discounting and cash back offers may be aimed at building sufficient scale in today's market to ensure that the business is able to fully capture tomorrow's market, to the exclusion of other competitors. A robust economic analysis of the impact of increasing returns to scale, and network effects, is required for understanding the present and future impact of these practices on competition and consumer interests. A novel dimension, which is addressed in the paper, concerns collaboration between the investors in the multiple firms that they invest in.

Transient gains to consumers

We examine the question about gains to consumers from discounting. We suggest that the gains in the short term need to be seen in a larger context. The recoupment test examines the extent to which market power can be achieved in the future, after which prices can be raised. If the CCI were to adopt this test in investigations relating to predatory pricing by online firms it would see that in certain areas, there are network effects, and once a small cartel of firms has acquired market power, it would be difficult for entrants to compete with them in the future. In that future scenario, it would be possible for incumbents to raise prices, and recoup earlier losses.

Interoperability as a tool for competition policy

In some situations, the CCI could rely on the essential facilities doctrine to mandate interoperability between a dominant player that is found to be indulging in the abuse of its position and other operators in the market. For instance, imposing interoperability requirements on a dominant payments network can help extend the network effects of digital payments to the economy as a whole, rather than being limited
to a closed network. The imposition of any such requirements will, however, need to be balanced against factors such as the payment of fair and reasonable access fees, the complexity of institutional arrangements required to monitor such arrangements and assessment of the impact on future innovation. More generally, open standards are an important element of interoperability, and various arms of the regulatory State need to push in favour of competitive markets through interoperable open standards.

Acting within Internet time

Given the fast-changing nature of online businesses, there are concerns about the elapsed time between a full-fledged investigation and the determination of a violation. We suggest a two-pronged approach to address this issue. On one hand, the CCI needs to work towards adopting stricter time frames for the disposal of cases, particularly those relating to new economy firms. On the other, we propose a voluntary settlement process that will allow a business that is under investigation to voluntarily alter its market behaviour, with the concurrence of the authority but without the need for a conclusive finding of violation by the CCI.

Conclusion

In India, technology companies are generally revered as the source of technological progress. However, the problems of competition policy are universal and cut across all industries. The basic principles do not change. The purpose of competition policy is to stave off situations where a narrow set of firms have market power, and new players are not able to enter. Society gains when firms obtain profits and valuation through innovation, not through the crafty use of financial capital to kick off network effects.

These issues were not faced in thinking about Indian competition policy as recently as five years ago. They are, however, likely to become increasingly important in the future. We argue that this calls for fresh think about the legal framework also. There is a case for competition authorities to look into the unilateral abusive conduct of a firm, which, although not dominant at the given point of time, is engaging in anti-competitive practices that create a strong and imminent possibility of its dominance. We highlight some pros and cons of this approach and leave this question open for further research.

Smriti Parsheera and Ajay Shah are researchers at NIPFP, and Avirup Bose is a researcher at Jindal Global Law School.