Assessing the 25 billion digital payments target, Mint, 23 Sept

http://www.livemint.com/Opinion/oVmliGKF3SmBomORsxDDzK/Assessing-the-25-billion-digital-payments-target.html

The government of Prime Minister Narendra Modi has made two big bets on digital payments. Some weeks after demonetisation, government representatives began to extol the virtues of digital payments as a means to increasing economic transparency, formalizing the economy, and widening the tax base. As outcomes have shown, this was a sober recalibration of the objectives of demonetization. And earlier this year, the government announced the “DigiDhan Mission” to achieve a 25 billion digital transactions target, outlined in the Union budget for this fiscal. This programme aims to establish a robust digital payments ecosystem in a potentially transformative attempt to drain the swamp of illicit monetary transactions. As we approach the completion of the second quarter of this fiscal, it is important to take stock of achievements against this target.

Click here for enlarge

The National Payments Corporation of India (NPCI), an umbrella organization which anchors digital retail payments in the country, has aligned itself with the government target. It has estimated that it will contribute around 11 billion transactions to the government target of 25 billion, through its own bouquet of products and services. By implication, it expects the other 14 billion transactions to come from the Reserve Bank of India’s payments systems as well as private card networks. There are three curious data points which relate to NPCI’s target, that are worth investigating.

First, the NPCI runs the Immediate Payments System (IMPS)—a 24x7 electronic fund transfer service, on which a significant share of interbank transactions are made digitally. In the last fiscal, the IMPS logged just over 500 million transactions. The NPCI estimates that IMPS-based transactions will cross the one billion mark this fiscal, growing at around 100%. With IMPS transactions stabilizing at a monthly rate of 6.5 million in the first quarter, this target will not be met.

Second, NPCI also runs the Aadhaar Enabled Payment System (AEPS), of which the much touted Bharat Interface for Money (BHIM) application is a part; and it has projected 1000% annual growth to achieve 3.3 billion AEPS transactions this fiscal. However, over 95% of AEPS transactions in the last fiscal related to authentication services—that is, authentications by the Unique Identification Authority of India over micro ATMs. The NPCI should be circumspect about including non-financial transactions in its 11 billion target. At the very least, a clear caveat is warranted.

Third, NPCI aims for over 650% growth in RuPay-based transactions to account for around three billion transactions in this fiscal. If first quarter statistics are any indication, the NPCI will achieve less than a fourth of its annual target for RuPay.

The central question therefore is: Why is the NPCI, a non-government body, compelled to set unachievable targets to match unfettered government ambition? One can only hope that this is not a bait and switch measure, especially as accountability may not come easily to the NPCI. The Committee for Digital Payments set up by the ministry of finance under the chairmanship of Ratan Watal, is unequivocal about the fact that “the present ownership structure of NPCI might be conflicted with its pivotal role in the digital payments ecosystem”, in its December 2016 report. And now there are clear indications of this conflict playing out.

The NPCI-owned BHIM application, which facilitates fund transfers using mobile phones, is availing of Rs4.5 billion allocated this fiscal by the government for its aggressive promotion through cash-back and referral bonus incentives. Through a fresh notification on 14 August, the government has further extended these schemes till 31 March next year. Subsidization of NPCI’s gimmicky marketing, to achieve a government target, is reminiscent of the way public sector utilities function. Why are Indian taxpayers investing in the growth of NPCI’s products and services?

The crux of the matter is that the NPCI has shunned an ecosystem approach by disallowing non-bank payment service providers (PSPs) from using its network and interface. For banks, PSPs are a necessary evil. Necessary because consumers now demand the ability to make digital transactions through disparate means. And evil because digitization reduces dependence on traditional banking services, and increases the velocity of transactions—whereas banks would want their deposits to be as inert as possible (to maximize interest earned on the “float”).

Consequently, even though many NPCI owners are private businesses, which are themselves products of fair and open competition, they will not complain about receiving preferential treatment from government. It is the government’s job to recognize that creating markets without economic incentives or depth is meaningless. In fact, NPCI, by being the only company which owns and runs retail payments infrastructure as well as its own products and services, and by setting standards that determine who can and cannot participate on its captive turf, is beginning to look like a combination of a regulator and a natural monopoly. It has done little to dispel such notions, even if they seem exaggerated from within.

Frankly, swadeshi start-ups find it as difficult to prosper in this market as foreign incumbents. And while many remain bullish about India, the country’s narrative cannot forever remain confined to that of immense potential. With slowing growth of gross domestic product, an inflection point is upon us.

The government must show that all of its economic and programmatic targets are serious. In this case, it can begin by holding the NPCI to account and by embracing suggestions from its own committee. These include the diversification of NPCI’s ownership, and a road map for setting up new companies that can own and operate critical payments infrastructure like the NPCI does.

Vivan Sharan is a partner at Koan Advisory Group, Delhi.

Legacy Challenges for Online Video, with Yash Bajaj, for the Pioneer, 22 August

http://www.dailypioneer.com/columnists/oped/legacy-challenges-for-online-video.html

As Indian consumers find themselves in a technologically converged digital world, it is clear that legacy content will not satiate the growing appetite for niche and differentiated content

On January, Netflix reportedly streamed more than 250 million hours of content to its subscribers across the world on a single day. To put things in perspective, that is about 29,000 years of content delivered in just 24 hours. Video on demand on the Internet has rapidly ushered in a new paradigm in the way content is being consumed.

Video on demand providers can amass audiences wherever there is broadband and can carry a wide range of content catering to niche and plural viewing tastes. Illustratively, Breaking Bad, an American television series, missed the linear broadcast twice in the UK   but was such a big success when delivered on Netflix that it bagged the British Academy Film Awards award the following year.

With Internet usage via mobile phones set to double in the next five years, and mobile video traffic to grow nearly 12 times over the same period in India, video on demand is set to penetrate further into the daily lives of citizens, opening up new avenues for monetisation of video content. By 2018, video is expected to drive 72 per cent of all Internet traffic in India, up from 45 per cent in 2013.

The central question, however, is: Can Indian content creators monetise their works using the video on demand model and compete with global companies in this space? With the digital medium now seen as a potential core revenue generator, traditional media and entertainment organisations, particularly broadcasters, are all busy investing in some aspect of this new market. However, the Indian market poses four fundamental challenges.

First, from empirical evidence, India has a very low free-to-paid conversion rate. According to a report by an internationally recognised market research and consulting company, Parks Associates, 32 per cent of those who experiment with free over-the-top (OTT) video trials, such as on Netflix, Amazon Prime or Hulu, subsequently sign up for paid subscriptions in the US. In stark contrast, in 2016, there were about 66 million uniquely connected video viewers in India, but only 1.3 million were paid monthly subscribers.

With the emergence of Reliance Jio’s data services, one can reasonably expect the numbers of free viewers to have expanded exponentially and for the conversion rate to have fallen to less than one per cent.

The challenge for Indian video on demand platforms, therefore, is to create a compelling content proposition at an attractive price point and at a reasonably good quality of service.

But in an ecosystem where a negligible user-base pays for content, underwriting and investing in high-quality content and technology is likely to be financially unviable without subsidisation in some form — either through venture capital or through content deals with traditional broadcasters.

The second challenge is temporal and relates to the evolving patterns of consumer behaviour. Juggernaut Books, a curated online bookshop, converts around eight to 10 per cent of its total users into paid subscribers every month, according to its promoter who spoke at the Create 4 India forum, in New Delhi recently.

Juggernaut’s conversion success is partly attributable to the fact that consumers of literary works are used to paying for books, stories on devices like Kindle and so on.

Even though online written content is ubiquitous and often free, well-curated libraries are not. However, in the context of video content, wherein consumers can access around 700 free-to-air channels on television, getting around to paying substantive amounts for video on demand may take longer.

Moreover, with limitation of television subscription market, by extant economic regulations in the broadcasting industry, inflection point, at which audiences will be encouraged to value good content, is elusive. This impacts the timelines in the digital world.

The third challenge is of sustainability of an advertising-led video on demand market. While revenues earned through digital advertising grew by over 28 per cent from 2015 to 2016, digital advertising accounted for only around 15 per cent of the total advertising pie for the Indian Media and Entertainment industry in 2016. Additionally, a large share of these revenues are going to a handful of large technology platforms that act as primary markets for digital advertising, with their large, captive consumer bases.

Video on demand platforms on the other hand can only charge a fraction of the rates that television channels can charge for placing advertisements. Therefore, the dependence of video on demand  platforms on their brick and mortar cousins (the broadcasters), for cross-subsiding content costs, is still very high.

The fourth challenge is one of perceptions and it relates to Government scepticism of the subscription model. Officials often wonder whether in an unfettered television market, broadcasters will exploit consumers or actually invest in better content. However, investments into content in the global video on demand market should be a leading indicator to go by.

The reason why Netflix had to set aside a production budget of six billion dollars for 2016, and Apple has announced a one billion dollars, annual-spend on content this week, is that they have gauged the demand for quality content among audiences globally.

Investing into better content is not optional in a competitive global market. And global quality content comes at a price. A 50-minute episode of the latest season of Game of Thrones is produced at a budget of $10 million. Until Government recognises these basic dynamics of content markets, the Indian video on demand market will remain indirectly throttled and uncompetitive.

As Indian consumers find themselves in a technologically converged digital world, where video is available on multiple devices and not just television, it is clear that legacy content will not satiate the growing appetite for niche and differentiated content.

There are only so many saas bahu re-runs that the Indian consumer can be expected to watch. The challenge for indigenous video on demand platforms is to effectively tap a growing domestic market, and compete with global peers. And their success is critically dependent on a wider recognition of the legacy of sectoral and regulatory challenges in the brick and mortar world, and their applicability to the digital world.

(Vivan Sharan is Partner, and Yash Bajaj is Programme Associate, Koan Advisory Group, New Delhi)

Bargaining for better content, Mint, 10 August 2017

http://www.livemint.com/Opinion/ZjHkAGZzHh3DEMq7SRrHRO/Bargaining-for-better-content.html

A decade and a half since its liberalization, it seems that consolidation in the telecom industry is now imminent. Reliance Jio Infocomm Ltd’s emergence has created 100 million new broadband consumers and the consequent growth in internet penetration is without precedent. India has nearly 300 million broadband consumers, and consumption of online content has driven a large share of this growth. Illustratively, a Cisco report suggests that video traffic will contribute to around 65% of all internet traffic in India by the next year. Around 70 billion minutes of video content will be viewed across the country per month. The critical question, therefore, is whether India’s content creators and owners—including empowered youth with easy access to high-quality imaging devices and broadcasters with access to a unified mode of distribution through broadband networks—will benefit from the disintermediation of legacy distribution networks.

Two aspects must be considered.

First, content industries may have to adjust to the unique demands of the Indian market even as their own distribution channels evolve. Other industries have also had to do this in the past—and only those who adapt, survive. A well-known example from the fast-moving consumer goods industry is that of Chik India Co., a small business which began supplying one rupee “CavinKare” sachets to rural areas in the early 1980s—and completely changed all assumptions about the shampoo business. Big brands had to follow suit, to replicate CavinKare’s success. The telecom industry has also adjusted to Indian realities by offering prepaid packs for as little as Rs10. As a result, the aspirational broadband consumer has taken to browsing the internet on her smartphone and watching videos on small value prepaid packs. This “sachetization” of content places its own set of pressures on the content ecosystem.

Second, the dynamism of consumer preferences is nearly impossible to pre-empt. For instance, when Parliament mandated the digitization of cable TV, many thought that the cost of procuring set-top boxes would lead to attrition in the TV market. Not so. A city-based survey by Jamia Millia Islamia showed that even households at the bottom of the income pyramid decided to “reduce their expenditure on other media, like newspapers, in order to afford the increase in cable rents following the digital switchover”. Consumers will ultimately decide if they want to pay for curated content without ad breaks.

Rapid digitalization has led to much exuberance in the online video market on the industry side—with nearly all large upstream broadcasters investing in online video platforms and betting on dynamic consumer preferences. However, digital advertising accounts for only around 15% of the total advertising pie and the high-end subscription market is yet to achieve scale. Indian content creators and owners will have to find the risk appetite to invest in high-quality, differentiated content to survive in an advertising-led market that has been captured by large technology companies.

To survive the technology-led disruptions that are shaping their markets, content creators and owners will have to strike two bargains. The first should be with telecom networks that “carry” content to the consumer. Jio has upset the profitability metrics of the telecom industry. The industry’s ability to recover to sustainable levels of average revenue per user is a matter of conjecture, but what is certain is that telecom businesses need content businesses to enhance their value proposition. And conversely, content businesses will need to increasingly rely on network innovations, particularly at the last mile, to bring content closer to the consumer (diluting the need for sachetization). The telecom industry should encourage the localization of the content ecosystem through content delivery networks, both to solve congestion issues for their own networks as well as to help monetize content.

The second bargain will not be as easy. The telecom regulator, which has also been regulating “broadcasting services” since 2004, indulges in economic regulation through which it circumscribes the commercial interaction between content owners and “carriage” operators that take broadcast signals to households. All international jurisdictions with advanced copyright frameworks akin to India’s, distinguish between “content” and “carriage”. Content which is sourced from an open market must not be priced by government. India’s exceptional and non-nuanced treatment of content and carriage dilutes the basic rights of content creators and owners. It also harms the consumer in doing so by throttling the ability of established content industries to invest in high-quality programming or into new over-the-top services, due to straight-jacketed revenue.

Content creators and owners must demand their right to price content as per market forces and through the extant copyright framework, which provides a complete code to do so. With a hyper-competitive TV market (nearly 1,000 channels available pan India), and stiff competition from large technology companies online, they currently have little room to manoeuvre.

So, the real bargain should now be struck between different content owners, who must unite against an idiosyncratic regulatory framework which limits this country’s creative potential, pre-empts consumer choice, and poses an existential threat to the business of creativity.

Vivan Sharan is a partner at Koan Advisory Group, New Delhi.

"Imperatives for Job Creation in India", The Pioneer, 30 May 2017

http://www.dailypioneer.com/columnists/oped/imperatives-for-job-creation-in-india.html

Recent lay-offs of workers in India's cost-arbitrage driven Information Technology (IT) sector, and the Prime Minister Office's renewed emphasis on job creation have resulted in a much-needed public debate on the future of work. Automation threatens most jobs in India, according to the World Bank, which also maintains that the more widespread the use of technology, the more the impact on jobs. This argument can be challenged in the context of India's large informal workforce. Here, technological dispersion has created jobs through efficiency gains. Notably, in the case of the logistics sector, the use of tracking and communication tools (such as GPS-enabled mobile phones) has helped in the formalisation of supply chains, in unlocking value and in creating jobs. Indeed, very few deterministic assumptions are appropriate in India where 100 million broadband consumers were added in a short period between August 2016 and this February — denoting technological dispersion without precedent.

To grapple with technological complexities, policy-makers must look at the job discourse from a holistic vantage point. For instance, it may be tempting for them to pick winners when faced with technological uncertainties. Energy policy is an example of this — several international Governments have pre-empted technological choices of industries and consumers,with policies aimed at incentivising one technology over another. Empirical evidence, including from advanced industrial economies such as Germany, shows that this approach skews market incentives and yields suboptimal employment. For India, with limited technical resources and capacity of Government, a rigid approach is even more problematic. Our policy-makers must strive to be technology-agnostic while also continuously engaging with the private sector to address difficulties that limit value creation.

Instead of responding to new economic paradigms through knee-jerk protectionism, the Government should rapidly implement the many small, yet powerful interventions that can help the private sector survive technological disruptions. Generation of value and surplus — to invest into technology, upskilling and jobs is central to surviving disruptions across industries.

Inherently, resilient industries such as those within the ‘creative economy', which spans the entire media and entertainment sector, offers a good illustrative template for this. The creative economy has propelled multi-billion dollar brands, enhanced India's soft power projection, engaged thousands of entrepreneurs, provided platforms for timely dissemination of vital information and news and contributed significantly to service sector growth. Although its impact is felt globally and it employs over 6.5 lakh workers, the relative contribution of India's creative economy to the GDP (0.9 per cent), is much less than what is seen in most emerging market counterparts; such as Indonesia (over 1.5 per cent), South Africa (over three per cent) and Brazil (nearly 3.5 per cent). Advanced economies of course are in a different league altogether. Illustratively, Bollywood's annual revenues add up to less than a tenth of the size of the Harry Potter franchise.

The anatomy of low value addition in the Indian creative economy illustrates several elements of the job creation conundrum. The television market has been disrupted by technological change globally — online video, Direct To Home and other technologies have disintermediated downstream distributors and helped spread video on demand. At the same time upstream broadcasters in India, who underwrite most content on television and account for about half the economic size of the creative economy, face onerous price regulations. Successive Governments have chosen to protect distributors under the banner of consumer protection instead of letting an industry with proven job creation ability operate on market terms. In a competitive television market with nearly 1,000 channels and no dominance by any one stakeholder or channel, there is no economic case to be made for price regulation. The Government's own attempts at justifying otherwise have never relied on any economic rationale.

Owing to an inability to monetise high value content, little surplus is available in the industry for requisite technology and infrastructure investments required for seamless distribution of video on congested Indian wireless networks. Moreover, because of the current regime, most of the creative content on TV is aimed at garnering maximum eyeballs to keep advertisers happy. This limits the versatility of Indian content and if data remains cheap, discerning consumers will eventually be left with no option but to cut their cords. At the imminent inflection point where mainstream Indian content creators and distributors are forced to compete with global peers, the creative engine will struggle to keep going. It will find itself hopelessly short of funds, infrastructure, and workers with the wherewithal to augment their output to match global standards.

Such a vicious cycle can play out in most industries that depend on technology in some form. The Government should begin thinking of the future of jobs in terms of a virtuous cycle. That is progressive policies and regulations can potentially create the much-desired cycles of investments, innovation and consumption, which can in turn generate new jobs and secure existing ones through upskilling. Creation of economic value should be the mission statement of Government and towards this, it must not pre-empt technological change.

(The writer is a partner at Koan Advisory Group, New Delhi)

"Putting a floor price on technology regulations", for the Deccan Herald, 28 April 2017

http://m.deccanherald.com/articles.php?name=http%3A%2F%2Fwww.deccanherald.com%2Fcontent%2F608601%2Fputting-floor-price-technology-regulations.html

India is a study in contradictions. On one hand, there is a wide recognition that technology investments are a prerequisite to achieving the goals of flagship programmes such as Start-up India and Digital India, and on the other, states like Karnataka have repeatedly tried to invoke protectionist economic measures to ringfence local political interests in technology-driven markets. 

Previously, Karnataka was the epicentre of a tussle between e-commerce marketplaces and policymakers. The local administration was determined to hold such firms liable for payment of Value Added Taxes, despite many other states maintaining that tax administration is not the responsibility of online marketplaces. And more recently, the same government has been considering putting a floor price on taxi rides that are booked online through taxi aggregators like Uber and Ola. It has already put a ceiling price of Rs19.50 per km on such taxi rides. 

There are many reasons why this reflects a deep-rooted dissonance between a coherent vision of a market economy and the political impulses that drive decision making. 

First, India is unambiguously service sector dependent - the sector accounts for over two-thirds of the growth in gross value added to the economy. Much of the country's development agenda also depends on the proliferation of services, and the democratisation of its benefits in society. Within the sector, there are both essential services such as health and education, and non-essential services such as e-commerce and taxi services. 

And broadly, within both these categories, there are competitive markets wherein plenty of companies compete for a finite market share, there are missing markets wherein government enterprise is sometimes necessary, and there are monopolistic markets that may require price intervention. Therefore, even though it would be easy to regulate while pretending that there is no heterogeneity in the service sector, its growth is premised on a nuanced approach to policymaking, based on clarity of economic principles. 

Second, price interventions should be resorted to in case of a market failure. There is no prima facie evidence of market failure in this instance and there is also no attempt to collect supporting evidence to justify any failure. While market failures come in many hues, the state's Commissioner for Transport and Road Safety has been quoted stating that "unfair trade practices" are causing drivers to "lose out." 

To paraphrase, drivers are no longer getting as much money as they were when they started. This does not exemplify a market failure - it however raises questions of the responsibility of large businesses towards their stakeholders. Embedded in this notion of stakeholder responsibility is the fact that companies must use technology not just to create market efficiency, but also to enhance the welfare of all their stakeholders as part of their core business proposition.

To be clear, companies like Uber maintain that their drivers are not employees. Let us hypothesise that they were employees, in that case, would the Karnataka government intervene if they were being paid above minimum wage and still decided to work? If the answer is yes, clearly, government enterprise is the only sacrosanct business model, and the state government should begin running all sorts of non-essential services with this belief. And if the answer is no, why intervene in this way? Why not instead work with large technology businesses to offer innovative digital solutions that cater to stakeholders at the bottom of the economic pyramid? In this case, solutions could be insurance or credit products for drivers - who would in turn be able to manage the risk of owing a depreciating capital asset (the taxi) better. 

Third, no government should be concerned with calculating break-even costs for businesses unless they are running them. The state government is currently undertaking precisely this exercise for taxi aggregators. It's not clear how the government would estimate establishment or innovation costs that shape the business models of such companies. Indeed, Karnataka may have borrowed a page from the Centre in this context, which is pre-empting break-even costs for digital payments companies. 

At least the Union government recognises that removal of economic incentives (by lowering Merchant Discount Rates) from the payments ecosystem means that it must now successfully run its own payments networks and solutions. Is the state government ready to promise round the clock, point to point transport for its citizens? 

Young workforce

Fourth, the challenges associated with creating productive jobs, without any sign of a Make in India-led industrial revolution are daunting. Conversely, by 2030, when most countries will have middle-aged or elderly population, India will still be young. According to government data, a third of the country's total population is 17 years or younger, and most employment is still informal. This young and informal workforce can potentially be mobilised through technology, into more formal and productive economic activity. Female participation in the workforce can also be improved - much in the same way as it was in the US when consumer electronics liberated women from household chores. Both e-commerce platforms and taxi aggregators offer to do just this - by providing digital platforms for entrepreneurs to access global markets and by enhancing mobility to work. 

It is incumbent on all policymakers to think deeply about the future of work. While it is inevitable that technological change will lead to continuous regulatory anxiety in the future too, competitive federalism may help navigate such anxieties by throwing up examples of states which embrace change, and prepare their workforce for it. Conversely myopic regulation in states can also become a race to the bottom. Indeed, it would be very ironic that a state like Karnataka, which has reaped the dividends of globalisation, now seems to be turning its back on market principles, if there were no glimpses of this worrying trend in more advanced parts of the global economy. 

(The writer is Partner, Koan Advisory Group, New Delhi)

"The Future of the Indian Workforce", co-authored chapter for "Beyond Shifting Wealth: Perspectives on Development Risks and Opportunities from the Global South: Risks and opportunities for inclusive societies in developing and emerging countries", OECD, April 2017

The informal economy is growing in India, and that may be a good thing. Even as policymakers around the world attempt to grapple with challenges linked to labour productivity and ageing, India’s circumstances are unique. By 2030, when most major countries will have middle aged or elderly workforces, India’s will still be young. Around 36 per cent of the Indian population in 2011-12 was 17 years or younger and around 13 per cent was between 18 and 24 years (Table 1). And the informal economy accounted for nearly half of the employment for those between 18 and 24. Therefore, the discussion on the future of India’s informal workforce must be brought to the forefront when discussing growth, employment, sustainability and poverty eradication efforts...

To read more, click here

Five Ideas That Should Guide a Net Neutrality Regime in India, The Wire, 13 February 2017

https://thewire.in/108062/contextualising-net-neutrality-five-ideas/

Five Ideas That Should Guide a Net Neutrality Regime in India

BY VIVAN SHARAN AND PRACHI ARYA ON 13/02/2017 • LEAVE A COMMENT

A GOLDEN MEDIAN BETWEEN AN EX-ANTE AND EX-POST APPROACH IS POSSIBLE TO ACHIEVE, IF FLEXIBILITY IS AT THE CORE OF TRAI’S REGULATORY ETHOS.

The Telecom Regulatory Authority of India (TRAI) expects to conclude public consultations on ‘net neutrality’ this month, culminating a process that began last year, with the regulator prohibiting “discriminatory tariffs for data services on the basis of content”. While considered a victory for neutrality evangelists, who want the internet to be free of monopolistic interests, it left several questions unanswered.

The central question is: under what circumstances can a network operator discriminate against applications or content available on the internet (a network of networks)? TRAI has the motivation to resolve this and other related questions, and the power to issue quality of service (QOS) regulations for telecom services (that run most Internet networks in India), as well as wider policy prescriptions that the Department of Telecommunications (DOT) may subsequently actualise.

In the latest round of consultations, it has emerged that TRAI is keen on contextualising its prescriptions, to fit India’s realities – which is a good sign. To this end, we propose that there are at least five fundamental realties that the regulator should consider (a) the prospects of consolidation in the telecom sector which may lead to long overdue rationalisation of revenue streams, (b) the absence of competition at the last mile of the distribution chain, (c) the imperative to connect the millions of unconnected Indians to the Internet, (d) the preponderance on wireless connectivity which requires greater traffic management (QOS) than wired connectivity, owing to limited spectrum and (e) technological ‘convergence’ of content delivery platforms. The following five ideas derive from these five realities, not necessarily in sequence.

First, innovations in network technology must be allowed to keep pace with consumer demand trends. Today, a large proportion of demand for data is linked to seamless access to video content, which accounted for 65% of total Internet traffic in Asia in 2015. And India’s inherent advantage in producing video content, with a vibrant media and entertainment industry, is clear. Technology has enabled entrepreneurs to develop content without investing heavily in production equipment. With low entry barriers, video content can become ubiquitous, and creative industries can potentially flourish with convergence of delivery platforms if requisite policy support is forthcoming. Therefore, even as the network will evolve over time, network regulations must be light touch and demand-led.

Second, a golden median between an ex-ante and ex-post approach is possible to achieve, if flexibility is at the core of regulatory ethos. Traditionally, internet service providers (ISPs) have favoured the ex-post approach as it makes strategic sense for large regulated companies: it gives them greater room to manoeuvre in terms of QOS, and large companies have the capacity to pursue resource-intensive litigation. Content providers on the other hand, have more to gain with a stronger ex-ante approach as it provides market certainty and predictability. Specifically, such an approach can help content providers avoid expropriation by ISPs (downstream monopolies beset the broadcasting supply chain for instance, a fact acknowledged in previous TRAI consultations), while ensuring some transparency in otherwise opaque traffic management operations.

Regulations need not reflect this binary. In fact, it is undesirable to emphasise one approach over the other. This would make little sense considering the pace of change in technology and economic incentives versus the inherent rigidities associated with regulatory precedents set in courts. TRAI must recognise that old norms may not fit next-generation innovations and that courts are not the best place to decide technological pathways. Any ex-post-facto approach should rely on technical expertise, extensive peer review and investigation. At the same time, a rigid ex-ante approach defies the very virtue sought to be protected by proponents of a free Internet – unfettered innovation.

India should adopt bright lines for ex-ante regulation, that should in turn be malleable and reflect the needs of a future population. That is, at the heart of the regime should be a recognition of the need for QOS, subject to regular review. This would ensure that broadband demand is not artificially suppressed owing to inadequate infrastructure; at the same time, norms should not encourage de-facto reliance on QOS, over improvements in network infrastructure. Net neutrality principles should instead help test whether a purported discriminatory practice is a deliberate attempt to reduce the quality or availability of a service, and responses to each principle should be verifiable.

Third, in lieu of verifying whether a practice is deliberate or not, TRAI must collaborate with independent actors for big data analysis. Statistical tests can be applied to samples of data received from ISPs as well as users, to ascertain the reasonability of traffic management practices. For instance, a practice may be reasonable, if data proves it to be exceptional and temporary. There is little doubt that such a measurement is not easy and will necessarily involve monitoring agencies and end users – but at least the scarcity of data is not a binding constraint, as operators maintain meticulous QOS logs. Although difficult to envision today, it is expedient to explore a co-regulatory model wherein end users – individuals or institutions – can empirically verify the claims of ISPs. Without such recourse, any transparency and disclosure requirements for checking adherence of networks to ex-ante principles will be unverifiable and, therefore, redundant.

Fourth, an effective network neutrality framework must centre on efficiency, which is where engineering and economics converge. For instance, large content providers are increasingly reliant on content distribution networks (CDNs) which are clusters of servers that bring content geographically closer to consumers, and concomitantly provide better QOS. There is a concern that CDNs can lead to de-facto prioritisation of data flows. There are two ways of looking at this: the first is that CDNs allow larger content providers which have deep pockets to invest in delivery infrastructure, to capture markets. The second, more palatable answer is, that while all data of a similar class should flow equally in a network, data that is closer to consumers, should naturally reach faster. Enhanced efficiency should not be penalised. Only economies that embrace Schumpeterian disruptions, that help deliver goods and services to consumers cheaper and faster, both online and offline, can remain globally competitive.

Fifth, following from the CDN example, it may also be inferred that a general principle could be developed wherein organic prioritisation of data flows is acceptable whereas forced prioritisation (based on modification of traffic protocols) is not. That is network engineers should not unreasonably discriminate between data flowing from point A to point B. If a third point C is physically closer to point B, the data from point C should be treated the same as data from point A, and it should organically reach the consumer faster. Such a framework may foster much needed last mile competition by lowering transit costs incurred by smaller ISPs on core networks.
The global discourse on net neutrality is by no means settled. Even as India makes its first holistic attempt to create a suitable regime, there are apprehensions that the US, under a new administration, may undo its extant framework which had set a benchmark. Nonetheless, perceived positions of other countries should not be a deterrent as our appetite for data is growing exponentially and a nuanced regime balanced by Indian realities can spur access and innovation.

Vivan Sharan is a Partner, and Prachi Arya is Head of Legal, at Koan Advisory Group, New Delhi.

Moving Towards a Secure Digital Economy, Mint, 26 January

http://www.livemint.com/Opinion/YUSILwlMQ2GXqcB8NF86kK/Moving-towards-a-secure-digital-economy.html

Moving towards a secure digital economy

The velocity of digitisation and technology adoption must necessitate a response different from what was the norm in the ‘public sector era’

Samir Saran and Vivan Sharan

Even as incessant political bickering is polarizing opinion on demonetisation, India is making a significant transition to a digital payments ecosystem. This project endeavours to breach the urban-rural divide, geographical exclusions of the real world, and income criteria that privileged only a few with access to certain private and public services. This new digital payments ecosystem is brutal in its attempt to alter the way India transacts, trades and is taxed.

A wider adoption of digital payments will invariably change the dimensions of risks, crime and security as well. If pickpockets were a common menace some decades ago, cybercriminals may dominate conversations in the days ahead as they eye digital and online transactions. While the “pickpocket” had to select a relatively “fat target” to make the effort and risk worthwhile, the cyber thief will have a low-risk environment (lack of forensic capabilities, human capacities and attribution challenges) and an expansive reach of technology that will make even “petty pickings” attractive. And although cybercrime will affect us all, it will harm the poor disproportionately. It could ravage the small savings of many, deprive them of their meagre means and, most importantly, result in erosion of trust in the financial ecosystem currently being built. It is, therefore, important that the government pay heed to small fraud.

An early warning of this was provided by the frisson of panic that followed the cautionary message from the newly launched Bharat Interface for Money application (BHIM app) on 4 January 2017: “Users please beware: Decline all unknown payment requests you may get! We will work on an update, which will allow you to report spam.” This response is inefficient and leaves the ecosystem vulnerable to malicious intent.

Governments around the world and here in India must respond to this new dimension, where “petty cash is big money” and digital pickpockets pose a range of threats to individuals, institutions and economic stability itself. Most governments have left themselves with little time to create the requisite mitigation capabilities. The velocity of digitization and technology adoption must necessitate a response from policymakers different from what was the norm in the “public sector era”, where Centrally controlled banks and enterprises offered a modicum of stability, privacy, and security (with less efficiency). To achieve this, a comprehensive approach for securing the digital ecosystem must be devised and some actions must be taken immediately.

First, there are a multiplicity of stakeholders operating networks and tools that pose varying degrees of risk. This, in turn, demands differentiated security responses. These include the Reserve Bank of India (RBI)-run National Electronic Funds Transfer (Neft) and Real Time Gross Settlement (RTGS), the National Payment Corporation of India’s (NPCI’s) Immediate Payment Service (IMPS) on which the Unified Payments Interface (UPI) currently operates, traditional card networks, mobile payments solutions, various banking apps. In a report released in December 2016, the Union ministry of finance’s committee on digital payments suggested a hierarchical approach based on the level of “systemic risk” posed by different tools and networks. This must form the design basis going forward.

Second, while industry is consulted by expert committees such as the one referenced above, an inclusive multi-stakeholder consultative process must become the norm for policymaking itself, to avoid arbitrariness. This can be done by instituting multi-stakeholder consultations that are transparent and inclusive. This is the model India has agreed is best suited to govern the Internet internationally, and it’s time to adopt consonant processes at home.

Third, while the “mobile” is being hailed as a replacement for physical wallets as well as a proof of identity through its widespread use in second-factor authentication of digital payments, government and users should be circumspect about the risks involved. For instance, there is evidence to suggest that distributed denial-of-service (DDoS) attacks—in which a multitude of compromised systems attack a single target, causing denial of service for users of the targeted system—are increasingly targeting the applications layer rather than the network layer of the Internet. In layman terms this means a sophisticated mode of cybercrime is being unleashed on unsuspecting users of mobile applications and popular software.

Mature hardware-based solutions, such as tamper-proof Universal Integrated Circuit Cards and Embedded Secure Elements, are being tested against the latest forms of cyberattack. Software-based solutions such as Host Card Emulation are also relatively secure but require upgrades through the cloud, placing large data demands on the user and testing the service capabilities of the issuer.

Globally payment solutions that have been able to integrate hardware- and software-based security exist, but domestic mobile payments providers are relying largely on software-based security solutions. And while the Indian government’s Computer Emergency Response Team, RBI and NPCI are undertaking security audits of payment solutions, it is important that users be given standardized information to make informed choices, particularly when the digital adoption drive is at its height.

Lastly, it may be useful for the government to think of the digital payments ecosystem, now anchored by the NPCI, as analogous to the Internet. And much like the Internet, the National Financial Switch (the infrastructure backbone of all Indian ATMs, operated by the NPCI) must acquire robust redundancies offered by private-sector partnerships in order not to be a vulnerable single point of failure—which can potentially be compromised by self-styled “legions” of hackers. The NPCI should be managed through multi-stakeholder groups that can help with standard-setting, and can ensure that the payments ecosystem serves the common citizen, making even a small transaction online.

Samir Saran and Vivan Sharan are, respectively, vice-president at the Observer Research Foundation and founding partner at the Koan Advisory Group.

"Narendra Modi must ensure demonetisation is not seen as increasing government’s role in citizens’ lives", Economic Times, 27 November

http://blogs.economictimes.indiatimes.com/et-commentary/government-must-ensure-that-demonetisation-is-not-seen-as-its-increasing-role-in-lives-of-citizens/

Narendra Modi must ensure demonetisation is not seen as increasing government’s role in citizens’ lives

By Samir Saran & Vivan Sharan

By the demonetisation move, Prime Minister Narendra Modi has enacted a strong policy that has removed nearly all currency from circulation, without an immediate recourse to its replenishment.

This move again positions him as a disrupter of the status quo, an attribute increasingly being endorsed by voters across the globe. If he has to carry this disruption to its logical political outcome, significant support will need to come from the ‘JAM ecosystem’ (Jan Dhan, Aadhaar and Mobile).

This political gambit puts into sharp relief the importance of what the government does next. Its job has just begun and uncertainty about long-term outcomes will persist until complementary steps are taken. Since the central proposition put on the table is that business as usual is no longer acceptable, the important question is: what next? To answer this, it is useful to first benchmark India’s cash economy against ‘emerging market’ peers.

In terms of ‘narrow money’, which includes coins and notes in circulation and other currency equivalents easily convertible to cash, India has a higher cash-to-GDP ratio (11.77%) than all its Brics counterparts. There are also extreme benchmarks set by advanced countries such as Sweden, which aims to go completely cashless (something that may be neither desirable nor doable in India’s case), and has a cash-to-GDP ratio of close to 2%.

Within Brics, South Africa is a standout performer with a cash-to-GDP ratio of under 5%. Like India, South Africa has well-developed telecom networks, large and rising number of internet users and a thriving innovation culture in digital payments. The additional South African ingredient that seems to be missing in India is a supportive institutional environment. Modi’s litmus test will be whether he can overcome legacy issues that plague India’s institutional ecosystem that inhibit the evolution to a cash-light economy.

One such issue is the over-reliance and unhealthy prioritisation of the government-run digital payments solution to the detriment of private service providers. Modi’s promise of ‘less government, more governance’ should certainly not include the perpetuation of a digital payments ecosystem dominated by government-backed entities. Instead, it must focus on building partnerships that leverage entrepreneurial energies outside of the government. Digital payments currently constitute only around 5% of all consumer transactions and need a dramatic and exponential ramp-up.

While the RBI has adopted a digitalfocused ‘Payments and Settlement Systems Vision’ in June, there is no mentionof any competition issues that should ordinarily be considered when safety, efficiency and universal access are stated goals of this vision. Further, there exists a conflict when the government-sponsored digital infrastructure backbone, the National Payments Corporation of India (NPCI), also establishes the terms of engagement of the emergent digital payments ecosystem. The NPCI promotes the RuPay card, which has been pushed out to most citizens who have opened Jan Dhan accounts.

After demonetisation, the NPCI has waived switching fees paid for all RuPay issuing and acquiring member banks for points of sale and e-commerce transactions (till the year-end), ostensibly to promote its own product. Here, the licenser, regulator and the business entity are one, and are perversely gaming politics and policy. This is not avirtue for any market seeking to promote itself as business-friendly.

But it’s more than just the ‘ease of doing business’ that is at stake. It would be clear to incumbent card networks that they may have lost the opportunity to service the 800 million who make up the bottom of the economic pyramid to the supply-led RuPay proposition. But the government must also recognise that an army of stakeholders will be required to increase both the volume and value of digital transactions. For instance, there is negligible payment acceptance infrastructure in rural areas, despite RuPay’s dominant presence over the last few years.

The immense task of ensuring ubiquitous acceptance infrastructure is not something government can achieve alone. RuPay will need to work with its counterparts. Risks that come from having created a single point of infrastructural failure through the NPCI are immense and real. One such threat materialised when cyber attacks were witnessed over the last few months that affected 3.2 million debit cards.

GoI must ensure that demonetisation is not seen as a time for increasing the role of government in the lives of citizens, rather as a moment to rationalise it. The government has the responsibility to balance security, access and competition as the digital economy evolves. This has to be done through sensible policies and regulations, not through predatory business interventions.

(Saran is vice-president, Observer Research Foundation, and Sharan is founding partner, Koan Advisory Group)

DISCLAIMER : Views expressed above are the author’s own

DISCLAIMER : Views expressed above are the author's own.