Government overreach in digital economy could end up with no commensurate benefit and serious distortions

The digital economy is dominated by a few big foreign players, but government entry is not the solution

History, it seems, tends to move in full circles. “Be Indian, Buy Indian”, a popular slogan from the bygone era has changed to “Vocal for Local”. Deliberate incursions by the government into the market, especially into the digital economy, are reminiscent of old Nehruvian socialist objectives despite all the blame Nehru gets for India’s economic problems.

The government’s intervention into payment via the Unified Payments Interface (or UPI) was justified on the grounds that it is a public good (it isn’t) and that lowering transaction costs can benefit everybody (it can). But the justifications grow thinner when we consider other government run or backed enterprises in the digital economy, such as the Government e-Marketplace (GeM) (facilitate government procurement), mSeva app store (indigenous mobile app store), and the Open Network for Digital Commerce (ONDC) among others.

ONDC is a government-backed, network-centric, technology infrastructure where buyers and sellers can interact with each other irrespective of which platform they are using.

Is Government Intervention Justified? 

Since every government intervention in markets has costs attached to it and can create deep distortions, it requires irrefutable justification. In economics, the only acceptable justification for government intervention is the correction of market failure (public goods, externalities, information asymmetry, and concentration of market power). So, what is the market failure in app stores and e-commerce?

These products are generally projected as solutions to the problem of concentration of market power, i.e., the digital economy is dominated by a few big foreign players, and we therefore need an Indian player in the mix. This line of reasoning, while attractive at first glance, is fallacious.

True, the digital economy, whether app stores, cab aggregators or e-commerce, tends to have some concentration of market power due to the existence of network effects. In competition law, however, just having a large market share and being dominant doesn’t necessarily mean that it’s harmful.

There is scant evidence of harm towards consumers. Further, there was evidence that new players are entering into the e-commerce space (Reliance and Tatas) and competing against the likes of Amazon and Flipkart.

The harm that occurs is usually for sellers on the platform. Google Play Store is accused of charging exorbitant commissions to app developers. Amazon has been accused of self-preferencing, copying products from other sellers and selling it through its in-house brand (Basics) and leveraging buyer and seller data to distort competition.

While these are valid and legitimate concerns, the government has a range of options before going down the do-it-yourself path. Instead of rushing to develop your own app store or a protocol for facilitating e-commerce, the better option would be to invest and strengthen the Competition Commission of India (CCI), an institution that exists precisely for the purpose of solving for harm caused by concentration of market power.

Consequences Aplenty

These interventions are/can be ineffective, costly, distortive, and unaccountable. With ONDC, it may be too early to talk about its effectiveness, but mSeva and the GeM have been inefficient, at best. A CAG audit report is particularly scathing towards the GeM calling it uneconomical, opaque, inefficient and slow, unreasonably priced and underutilised.

The mSeva app store has a paltry 1,250 apps, most of which are for government (union and state) services and since it has opened up for private players, only two notable apps have been onboarded – Koo and PayTM. Since inception, there have been 88.5 million app downloads, which dwarfs in comparison to about 27 billion app downloads from Google in 2021 alone.

Next, these come at a cost to the exchequer. mSeva has promised that they will not charge the app developers a fee for hosting the apps, which seems noble. But someone must pay for the maintenance and upkeep of the app store and build a robust security mechanism. This is subsidised from the government purse directly or indirectly.

Delivery of food on ONDC is turning out to be cheaper than Zomato or Swiggy. This was because ONDC was providing discounts to end users, subsidising the entire delivery amount and no charge of convenience fee.

The expectation is that these are initial discounts to attract both sellers and consumers and these will eventually go away. Remember, however, that UPI was also meant to be free at first and when NPCI tried to levy a transaction fee, there was an uproar. Now, the union government has to subsidise banks for the upkeep of UPI.

In all these cases, if the government intends on keeping the cost low to beat the competition, it has to either fund it through the public purse or compromise on security and upkeep of the infrastructure. Sadly, you can’t have all of it, as this article illustrates.

No Level Playing Field

When a government plays umpire, player and technology infrastructure, it does not always create a level playing field. The company ONDC and the government backing it enjoy enormous gatekeeping powers, which has the potential for misuse. The Union commerce minister had made comments to the effect that they will remove platforms from ONDC that do not contribute to the growth of the network.

This is arbitrary and indiscriminate use of the gatekeeping privilege. Given this, can we be absolutely certain that this gatekeeping function will not be politicised – help Indian companies or apps, while keeping “anti-national” and foreign companies out.

Remember that NPCI made an arbitrary decision in placing caps on the market share of PhonePe and Google Pay. Also, the RBI has not allowed for competition in the UPI space, denying a New Umbrella Entity licence to a consortium including Google, Facebook and Amazon.

With the government being a big player in the system, it potentially crowds out private investment and business. The space for other domestic innovations in the app store, payments or e-commerce space, which could potentially compete against the likes of Google, Amazon and Flipkart, has been occupied by government backed players.

ONDC is also facing a paradox in that it is trying to build an open e-commerce network to help small retailers, whose success depends on onboarding the very giants it is trying to slay.

Finally, since ONDC and NPCI are Section 8 companies and not a public authority, they are outside the ambit of the RTI Act. Moreover, as the Internet Freedom Foundation points out, aggrieved citizens or sellers won’t be able to “file a writ petition under Article 32 and 226 in case of violation of their rights”.

There are further issues of privacy of user data and liability in case of harm (if an order goes wrong, who will do the grievance redressal – ONDC or the e-commerce platforms or delivery platforms?). Even with UPI, around 18 percent of UPI users had some form of grievance with the system (fraud or mistaken payment), but only 30 percent of these complaints have been resolved.

When it comes to public policy problems, Do-it-Yourself should be the last resort of the government, even if it is an open protocol. Instead, it should have considered strengthening institutions such as CCI to ensure fair market conditions.

Anupam Manur is a Professor of Economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal, and do not represent the stand of this publication.