Wealth Issue 2018: Essay

Where Are You, Genius?

Devangshu Datta, a journalist based in Delhi, writes on markets and technology
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A pause in India’s information revolution

What do you need to start up a digital business? You need some degree of tech competency—at least enough to know what’s technically possible, given the current state of the art and the likely future. You need some imagination, and some market intelligence, to conceive and develop an idea that is practical enough to work, and creative enough to attract funding. You need a pool of potential customers.

The list of necessities goes on. There has to be decent infrastructure that assures you, and your clients, of good internet connectivity, at acceptable speeds. Access to capital is a must, to start up and to grow. You need competent people to take your vision forward.

There’s more. You need adequate laws to protect digital privacy and enforce contracts. You need a clean policy environment without over-complex regulations, where you can get requisite permissions quickly and focus on running the business. You need a tax regime that’s simple and easy to comply with.

How much of this is available to a wannabe Indian entrepreneur who’s looking for an entry to the digital space? The tech competency is certainly there. So is the imagination. As to the rest…

India’s digital infrastructure is iffy, to say the least. Dropped calls are endemic. There are very few places in the country where you get decent speeds net-surfing. India has one of the slowest data environments in the world. The average 4G speed in India is one-third of the global average. In many places, there is no data network to speak of.

To add to net-surfing problems, the law and order machinery frequently shuts down mobile internet access as a kneejerk response to anything deemed a threat to public order. India has a very high rate of internet shutdowns—there is a shutdown somewhere in India, affecting millions of people, every four days or so.

No single telecom service provider offers individuals seamless mobile internet connectivity at acceptable speeds across the entire country. I travel regularly through West Bengal, Assam and Uttarakhand, and I’ve lived in Goa and Delhi in the recent past. I need three different mobile service providers to assure basic connectivity across that geographical footprint.

The lack of connectivity means that credit and debit cards often don’t work. That’s a major barrier to digital commerce. ATMs are frequently out of cash or simply non-functional in semi-rural environments, where there are often power problems as well. Fintech service providers—the PayTMs, PhonePEs and MobiKwiks—have to rely on data services being up and running, which means that they are also often non- or semi-functional for no fault of their own. Ditto for digital businesses like Uber, Zomato, Swiggy, etcetera. So making payments can be a big problem. Cash-on-delivery systems are expensive to run for digital businesses. They create tax compliance problems down the line as well.

So much for infrastructure. There are problems with finding competent people to work for Indian businesses as well. India scores very poorly on the Human Capital Index. At No 158, it is ranked behind basket cases like Sudan, according to a new World Bank Index. Low human capital means that the productivity of Indian workers is low. This can be traced back to a poor primary education system, and an uneven higher education system. Finding competent workers is a problem at every level, starting with delivery boys who can use GPS maps.

Large infotech companies confess that they put new recruits— who typically have a BTech degree and 16 years of formal education—through six months of internal training before they can be trusted to do their jobs. Even construction companies have to train labour for months. A big corporation can afford to spend that kind of time and money developing worker skill sets. A small startup cannot.

Given the poor infrastructure, it’s a miracle that India’s data consumption is so high. In fact, it’s the highest in the world, which helps clog up inadequate networks. We desis love our movie videos, our cricket matches, and our porn. (India is No 3 globally when it comes to watching porn; 81 million Indians hit the aggregator on a daily basis). That willingness to consume data—and to generate it—represents an opportunity for sure.

Online shopping is also a big thing. Analysts claim that online sales during this Navratri crossed the $2.6 billion mark (or Rs 19,000 crore), which is a huge year-on-year rise over $1.4 billion during the same nine-day period of 2017. Tier II and Tier III towns love e-commerce—going online is the only way to access many high-end brands if you live in a small town. Small-town India reportedly contributes 82 per cent of Amazon India’s new customers. Flipkart also claims that over 50 per cent of new customers come from small towns.

Complex doesn’t even begin to describe the hoops an Indian entrepreneur has to jump through to start a business. The policy environment is defined by peculiar leaps of logic as well

So there is a large pool of potential customers open to doing things online. A young smartphone-enabled population may not have too much money, but it doesn’t possess mental barriers against digital commerce either. That base is also growing as more people start using smartphones. Moreover, the infrastructure may improve. Access to capital is not easy. Be it angel investors, Private Equity or Venture Capital, you need to be connected to the ecosystem to get funds. Any digital business will burn cash in the first couple of years. Most will lose money for the first five years, or even longer, going by the local and global experience.

Few Indian investors have the deep pockets or patience to wait through that burn period. It’s not an accident that a huge chunk of the capital that has funded digital entrepreneurship in India has come from abroad. Raising more capital by going public, once you hit a certain scale, is also pretty tough. Among other things, you have to have a three-year track record with a net worth that has not been eroded. Few digital businesses meet Indian IPO criteria easily.

Then there is the question of laws needed to protect digital privacy and enforce contracts. India has no such laws. It was only recently that the Supreme Court said that privacy was a fundamental right. Legislation for digital data privacy is still a work-in-progress and the proposed legislation based on the Srikrishna Committee Recommendations is likely to have gaps and quite possibly be out of date before it is even placed before Parliament.

So any digital business operates in a partial vacuum. That can cut both ways. It could mean huge compliance costs later on, once laws are put in place. It also allows Indian companies to do things with monetising data that would be illegal elsewhere.

There are massive endemic data leaks across the Indian digital environment. There have been too many breaches to even bother mentioning them. Moreover, a new insistence on data localisation (meaning all payment records have to kept only in Indian servers, and only processed in India ) will be difficult, expensive to implement, given the infra constraints, and also open the way for further breaches. Surveillance, meaning government agencies eavesdropping on everything digital, is also an endemic issue. Sooner or later, when laws do come in, there will be huge liabilities for digital businesses to cope with on this front.

You need a clean digital policy environment without over-complex regulations, where you can get the requisite permissions out of the way and start running your business quickly. In India, it takes an average of 30 days (29.8 days in Delhi and Mumbai) to simply incorporate a business, get all the permissions needed (and there are all sorts), and so on. It takes 45 days just to get a power connection.

Complex doesn’t even begin to describe the hoops an Indian entrepreneur has to jump through to start a business. The policy environment is defined by peculiar leaps of logic as well. A startup has to prove that the investments it has received are not simply income, to be taxed as such. The revenue officer who makes this judgement call has a fair amount of discretion. ‘Discretion’ in the Indian context means that the officer in question usually has to be convinced by arguments backed by ‘considerations’ other than the strictly logical.

A startup (or any other business) could also run afoul of anti-profiteering rules (post-GST) that require a business to prove that it isn’t charging too much. There’s also talk of ‘sunset clauses’ that prevent online businesses offering discounts in the draft policy for e-commerce that is currently under debate. So, there’s to be no overcharging and no discounts either, and there are oodles of discretionary power for government functionaries who decide if a business is overcharging or offering unacceptable discounts.

In addition to the policy framework, you need a tax regime that’s simple and easy to navigate and comply with if the growth of digital—or indeed any—businesses is to be encouraged. Anybody who has to file taxes in India will laugh hysterically at the thought of an easy compliance regime.

The GST is perhaps the most complex tax mechanism in the world; it certainly has the largest number of GST rates. It has high compliance barriers with three filings per month being demanded across each of 40-odd regions. The e-commerce sector is exempt from some of this horror. But not all digital businesses are e-commerce. If you do web design, write code, build apps, or export any sort of service or goods, you will have to go through that 3x12 filing routine, in whatever regions you derive your income from, if your income is above a certain threshold. Plus, you’ll have to file Income Tax returns anyhow and an Indian IT Return is no bed of roses either.

Note that I am not speaking about the actual payment of taxes here in terms of rates: those are actually quite moderate. I am talking about the time, trouble and costs incurred in hiring chartered accountants to fill and file endless, complicated forms. It takes 214 man-hours to file taxes for an average business in India (No 119 out of 190 nations surveyed by the World Bank).

To put the Indian digital business environment in clearer perspective, Flipkart has been around for 11 years. It has lost money through that period. Amazon, founded in 1994 in the US, went public in 1997 and made losses until 2001. Facebook made losses for the first eight years of its existence, while Twitter is still losing money five years after it went public. None of these digital giants could have easily got finance in India or met Indian IPO standards.

The digital business environment has improved in the past few years if you go by the Ease of Doing Business Reports released by the World Bank. The country’s rank has risen to No 100 in 2018 from No 130 in 2017, though the World Bank only surveys Delhi and Mumbai, so its depth of coverage is open to debate. That’s still a poor score. It is especially poor in areas like legal enforcement of contracts (No 164 and an average of 1,445 days if there’s a dispute).

When there are this many barriers to growth, it is a wonder that there is any digital entrepreneurship in India at all. Of course, there are plenty of Indian entrepreneurs operating across various digital spaces. Offhand, I can think of Zomato, PayTM (and dozens of other fintech solution providers), health service Practo, InMobi, Ola, Urban Ladder and Swiggy, among others.

There are common factors for all these. Each has Indian founders with an interesting idea. Each has managed to tap overseas capital. None of these companies seems to have made profits yet. None has gone public. Every one of them has found creative ways to deal with the Indian policy environment.

If all the energy that goes into navigating policy bottlenecks, coping with poor infrastructure, training under-skilled workforces, and complying with tax-related matters were freed up, India would be a far more prosperous country.

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The Wealth Issue 2018: Complete list of Essays and Profiles