Why digital protectionism will not work for India (Live Mint Summary- 14th March 2018)

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Why digital protectionism will not work for India

Live mint

Context:

  • Article is about digital protectionism for India, says why it’s not working out.

Issues behind:

  • Slows innovation and productivity growth, leads to inefficient capital allocation, limits consumers’ options and promotes crony capitalism, among its many sins.
  • But the digital sector is a different kind of beast. Its linkages and value flows are unique.
  • Then there are issues of user privacy and taxation commensurate with value added in India.

Steps taken:

  • In 2000, China’s ministry of public security laid the foundations of protectionist regime with the Golden Shield Project for blocking politically sensitive information.

It has evolved considerably since then:

  • Web censorship.
  • Keeping companies like Face book and Twitter out of the country entirely.
  • Forcing foreign firms to form joint ventures with Chinese partners and transfer IP.
  • Government support for Chinese firms making strategic acquisitions abroad.
  • China’s tech giants, Tencent, Alibaba and Baidu, have grown large enough in this walled garden to now compete internationally with Silicon Valley’s champions.
  • They have also created the domestic digital infrastructure for the “little dragons”—the next generation of Chinese tech firms.

Reasons why it’s not working out?

  • India is not China.
  • China’s unique political and economic models make its policies inimitable.
  • Its economic heft has incentivised foreign companies to grin and bear it.
  • The digital economy has yet to mature.
  • The medium- to long-term effects of protectionist policies on innovation and growth may far outstrip any short-term benefits.
  • For one, data is increasingly critical in a host of conventional industries, from manufacturing to drilling.
  • Onerous data regulations and compliance burdens could cause damage there.
  • Even in the case of China, analysts at the European Centre for International Political Economy have calculated a 1.1 percentage point hit to gross domestic product.
  • Multiple studies have shown the importance of innovation clusters. Foreign competition that brings innovation capital helps build those clusters.

Way forward:

  • India must adopt a nuanced approach while the US and China slug it out.
  • Concerns such as user privacy should be addressed, but collateral damage must be avoided.
  • Taxonomy of data would be useful, with commercial and industrial data treated differently from private data.
  • Public sector research and development, meanwhile, has been a catalyst for private sector innovation from the US to Israel.
  • At both the Central and state levels in India, governments could do much more in this respect.
  • Creating the appropriate ecosystems for innovation will have a far larger pay-off than withdrawing into the protectionism the Narendra Modi government has shown in other sectors of late.
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