Abstract: Startups and innovations in Businesses, by definition challenge the boundaries of current regulatory frameworks. However, nations that have been flexible from a regulatory perspective, have had larger number high impact startups. India needs to have a clear, centralised mechanism for regulatory changes. In addition, there is an urgent need to ward off the tendency of the judiciary to create regulatory frameworks, without the institutional capabilities.
Uber was illegal in most countries when it started off. And it would have been a dead-on-arrival idea, had it not been for the US states to start creating enabling regulatory spaces that gave Uber the toehold in its home country. This gave Uber the ability to change the regulatory spaces in other countries and emerge as a multi-billion-dollar global phenomena.
India too has its share of startups that are getting throttled because of existing regulatory frameworks, that were created for a different technological ecosystem. An excellent example is that of the entire drone startup ecosystem, that was on the grey zone between legal and illegal, till the government stepped in to clear the air and come out with well deliberated enabling policies and regulations on drones. In the absence of such policies, even suppliers of drones to the military were engaging in unlawful actions, every time they would fly a drone for testing purposes.
In fact, our home-grown commercial vehicle aggregators face pushback when they try to do something as simple as trying to get an auto-rickshaw to deliver a package. Such an activity of enabling an auto-rickshaw to deliver a package would lead to increase in the income of the auto-rickshaw driver and would increase the asset utilization in the economy, as well as increase efficiency in the economy. However, as per regulations it is illegal for auto-rickshaws to carry goods instead of passengers. In the era of aggregating everything via apps, it is seriously debilitating to not being able to use auto-rickshaws to deliver goods. It does not help startups that are trying to change the status quo and have to create new markets, deal with attracting funds, attracting talent, aligning with the compliances in the country and then also engage in public policy discussions to change regulations that are limiting the ability of the modest auto-rickshaw drivers from earning more, thereby also reducing tax collections of the government.
Case of e-education
During the Wuhan Covid pandemic, e-education saved more than a year for millions of students in this country. Given the experience in being able to deliver e-education at scale, there is a clear need for frameworks and policies that enable e-education to be delivered for K-12 and for higher education in courses where physical labs and physical meeting is not required. This would enable not just delivery of education where it is not being delivered, but also improving the quality of education where it is currently being delivered.
The Union Budget 2023 declared the setting up of a Digital University, under the aegis of the government. However, it would be worthwhile to also promote strong entities from the private sector to also bolster the Digital Universities infrastructure and capabilities, thus being able to export education digitally to the world, earning precious foreign exchange. If India needs to upgrade the educational qualification of its workforce and increase their productivity at scale, digital universities are perhaps one of the most potent ways to do so in a short period of time. However, India does not even have a regulatory framework for Digital Universities. A non-governmental body cannot even apply to become a Digital University as such a concept is non-existent.
Case of other Innovations
Indian vehicles get certification at ARAI for scooters, cars, busses and other existing vehicle types. However, if someone comes out with a vehicle that does not fit the above definitions, then they cannot get the certification required to sell their vehicles in India. So, if a startup creates a trike, which is a three-wheeler bike with two wheels in the front and one in the back, there is no category of such a vehicle and hence the startup will not be able to get their product to see the light of the day. In comparison, we already see a patent war in Europe where the Italian scooter manufacturer Piaggio has stopped the french manufacturer, Peugot Motorcycles, from manufacturing similar trikes (2 wheels in front and one in the back) as Piaggio claimed it had a patent on it. It is also interesting to note that Piaggio exercised its patent right only after Peugot Motorcycles moved under the ownership of Mahindra & Mahindra. However, the point to note is that the Indian ecosystem would not have even allowed such a vehicle type of trike to be created in India due to regulatory constraints. Of course, we will eventually accept such a vehicle type when foreign players start looking at India for such a vehicle type, with mature foreign technology, while India did not give the regulatory space for such vehicle types to come up within India.
It is pertinent to bring up the case of our regulatory frameworks that drove one of our finest scientist to die by suicide. The then governments and regulatory frameworks prevented Dr. Subhash Mukhopadhay, who had independently invented in vitro fertilisation (IVF), to share his innovation with those who needed it in India. Moral and ethical issues were quoted to even give a very real threat of arrest to Dr. Mukhopadhay. He died by suicide. Eventually IVF was allowed in India, only when foreign entities brought the concept to India.
In recent times, in 1997, a Dr. Baruah, a doctor from Assam was lampooned in the media and in the policy circles and arrested for attempting to implant a pig’s heart into a human. Instead of providing more funding for continued research, the doctor had been hounded out of practice. Dr. Baruah was clearly not a quack, being a Fellow of the Royal College of Surgeons and Physicians in the UK. The same has now been done by doctors in Europe and subsequently in US. Our inability to provide a safe regulatory space for such innovations and scientific breakthroughs to happen and to flourish, will continue to impede India from being a technological and economic powerhouse. With not being able to take this breakthrough forward, India has lost out in a future multi-billion-dollar xenotransplantation industry.
In fact, Indian regulatory framework is preventing simple income-enhancing changes such as letting an auto-rickshaw carry a package or setting up of Digital Universities. As one has perennially rued, India will allow such innovations only if it has been done elsewhere and hence only if a foreign company brings it to India.
Regulatory frameworks as an independent source of generating value in the economy
Taking the example of Bike taxis, which is a concept that is already prevalent in many southeast asian countries, we analyse how regulations can generate value. In India, where we have overloaded three wheelers of all sizes carrying commuters who would like to commute at the cheapest cost possible, it is but obvious that a bike taxi would be of immense demand for commuters. However, bike taxis are actually not yet legal in most states of the country. Making bike taxis legal would lead to millions getting a livelihood while providing a cheaper and more convenient mode of transportation to many millions in our crowded cities. Needless to say, it would also lead to more tax collection and an increase in the size of the economy.
While there is no central legislation regulating bike taxis, the Central Government has recommended that bike taxis be allowed for commercial use and had also directed the State Governments to consider allowing private bikes to be converted into taxis so as to be used for commercial purposes and the regulations around the same. The matter of whether or not bike taxis are permissible, now lies in the hands of individual State Governments. Till then, we continue to lose the ability to increase efficiency of commuting in our cities.
Let us consider the case of Digital maps. Up until 2021, Digital Maps in India were illegal. Indian laws required Indian firms to seek licenses and additional approvals to create and publish topographical data. Such a regulation not only deprived the nation of an extremely useful asset, but also led to handicapping local digital map players while providing foreign players an iron grip over the Indian market. Although this regulation was changed in early 2021 and it has led to significant economic activities, it had already done the damage of blocking the growth of robust Indian digital mapping companies. In fact, no less than the Prime Minister of country noted that the “deregulation” step will help the country become more self-reliant and help reach its US $5 trillion GDP goal.
India also has unicorn startups running online gaming industries where the founders wake up every morning to check if they have been banned yet. State governments after state governments have been seriously considering the idea with total bans and partial bans on online gaming. Even though the government understands that one cannot stop the march of technology, we still have a situation that entire industries and the millions of people working in it, are perpetually on tenterhooks if their industry will continue to operate the next day.
That brings us to the case of cryptos. Much has already been analysed on cryptos. It has significant economic and geopolitical implications. But what would be difficult to do would be to impose a blanket ban on cryptos. Hence, however difficult it may be, creating a regulatory framework would be essential.
We also had the case of industries being declared out-of-bounds for the private sector, because public sector enterprises were operating in those sectors. Hence, startups providing bus services were illegal as they competed with the state’s bus services. Or providing food on train was illegal as it competed with Indian Railway Catering and Tourism Corporation (IRCTC). Even voice over IP (what many of us commonly use on a daily basis over messaging apps such as WhatsApp and Telegram) was illegal in India as it competed with VSNL (a telecom company that was then under the government) and BSNL.
In fact, even delivering medicines to consumers was illegal, and so is delivering alcohol to consumers, thus inhibiting aggregator startups that were into online pharmacies and inhibiting aggregators that can enable alcohol delivery (which is a major source of revenues for most state governments).
Regulatory Destruction of Economic Value: Case of banning vehicles based on age
The previous sections captured on how regulations can, and are leading to considerable value creation in the economy. However, there are also regulations that destroy very significant economic value. These are not necessarily regulations by the executive, but regulations that have come out due to the judiciary.
Judicial intervention leading to banning vehicles based on their age is unprecedented globally and would lead to enormous value destruction. If the aim is to reduce pollution, then emissions should be the criteria. Wanton destruction of private property is not judicious.
Specifically, if one looks at the Supreme Court order on October 29, 2018, that prohibited the plying of 15-year-old petrol and 10-year-old diesel vehicles in the national capital region and directed the transport department to announce such vehicles to be impounded if found plying, it is leading to a humungous destruction of property and economic value. It is especially of concern since the central government had subsequently come out with a new voluntary vehicle scrapping policy, which looks at the vehicle’s fitness as the criteria for scrapping and not its age.
Evaluating the impact of the regulatory change brought in by judicial intervention, approximately 3 lakh two wheelers will get scrapped annually and about 1 lakh four wheelers will get scrapped annually. Taking a conservative residual value of two wheelers to be Rs 10,000 on average, and residual value of four wheelers to be Rs 2 lakhs on an average, that is a value destruction of a whopping Rs 2,300 crore annually. What are we getting in return? We are supposed to get (a) cleaner air, (b) more demand for vehicles and hence more jobs, (c) creation of a vibrant scrappage industry and hence more jobs and (d) creation of an electric vehicles retrofitting industry. Are these really the benefits that we will get? Let us look at each one of them more closely.
Looking at the first supposed benefit of cleaner air, if this was really the objective of NGT and the courts, then the order would be have been to have stricter norms for pollution check. The criteria for scrapping vehicles would have been their fitness check and pollution emission checks and not the age of the car. This is exactly the regulation that the central government has brought in, which focusses on the fitness of the vehicle rather than merely the age. The orders to scrap vehicles based on age appears to be more driven towards creating a market. The cost is being borne by the middle class who did not know at the time of purchasing their vehicle that the life of their property will in future be curtailed by judicial orders. It needs to be debated if the courts have the right to snatch away property from people based on specious arguments of pollution being linked to age of a personal vehicle. Such arguments may hold for commercial vehicles but not for personal vehicles. One needs to ask what is a pensioner expected to do when she bought what she thought was the last vehicle that would be hers for the rest of her life, now that that vehicle is being taken away from her. We need to consider where is she expected to get the money to buy another vehicle. When she had bought the vehicle, the “contract” with the government was that she can drive the vehicle till it is fit to drive. It was not based on the age of the vehicle. Why are the courts and the state government now suddenly taking away that vehicle by citing pollution when clearly one can have emissions as a norm for scrapping cars and not age. Such regulations push people into poverty with respect to their current standard of living.
If at all a regulation is to be brought in which scraps vehicles based on age, then that rule should have been declared at the time of buying the vehicle, and not midway through the life of the vehicle. Such an action would be tantamount to cheating the people of their property. Such regulation may be prospective but never retrospective.
In fact, around the world, age has rarely ever been used as a criteria to scrap vehicles. Most vehicle scrappage policies are driven by incentives and not by fiat. By forcing the scrappage of vehicles by age, the courts are taking away property from citizens.
In fact, the Constitution originally provided for the right to property under Articles 19 and 31. Article 19 guaranteed to all citizens the right to acquire, hold and dispose of property. Article 31 provides that “no person shall be deprived of his property save by authority of law.” It was also provided that compensation would be paid to a person whose property has been taken for public purposes, and that is how the USA had designed its own vehicle scrappage policy.
Unfortunately, the provisions relating to the right to property were changed. The 44th Amendment of 1978 removed the right to property from the list of fundamental rights. A new provision, Article 300-A, was added to the Constitution, which provided that “no person shall be deprived of his property save by authority of law”. Subsequent liberalisation of the economy and the government’s initiative to set up special economic zones led to many protests by farmers and led to calls for the reinstatement of the fundamental right to private property. In fact, the Supreme Court itself had sent notice to the government questioning why the right to property should not be brought back. And now we see the Apex Court itself taking away property from citizens in a manner that begs to have more rationale. However, none of this should imply that in a democratic setup, properties will be taken away by changing the regulatory frameworks.
If age was a criteria for taking away property, we should look at the thought experiment of the courts deciding that all houses that are over 30 years of age should now be demolished and rebuilt as it has been found that a few houses above the age of 30 years have collapsed. It would obviously lead to a massive demolition industry, lead to new buildings being created, and many jobs getting created. But is that the right thing to do? At whose cost would these industries and jobs get created? Such actions may happen in countries like China. However, in a democratic country like India, regulations should not be used in such draconian manner, leading to destruction of economic value. It appears that pollution was an excuse for this massive value destruction.
In fact, vehicle owners cannot even get their vehicles converted to electric vehicles as the norms are not ready and the homologation rules are too complex to make electric retro-fitment economically viable. Moreover, we have not even considered the possibility of creating an industry to refurbish the vehicles and export them to other countries, the way Japan does.
Let us look at the second projected benefit of more demand for vehicles and hence more jobs. We need to do an in-depth study on whether people really have that kind of disposable money to be able to buy new vehicles. With rising expenses and rising cost of medical care, buying new vehicles will really not be top priority. We also need to consider if it is morally right to take away someone’s vehicle so that that the person is then forced to buy another vehicle. This then bring us to the hypothetical but equivalent case on the need to pass a regulation to demolish all houses above the age of 30 years as people would then buy new houses and grow the economy. The argument is obviously not an acceptable argument.
Similarly, if we look at the third and fourth benefits of creating a scrappage industry and creation of electric retrofitting industry, both arguments are unacceptable as we are creating these industries by taking away someone’s hard earned property. To add to the woes, there is no clarity on how the electric vehicle retrofitting will work as retro-fitment kit for each model of a vehicle would require homologation which is extremely expensive and time consuming. Again, one only needs to compare it with the hypothetical order of demolishing all houses that are above the age of 30 years, to see the unethical nature of this order.
One has not witnessed such large-scale destruction of economic value through regulations in the recent past. Unfortunately, since the orders supposedly lead to a larger market for the automobile giants, it is a losing battle for the weak middle-class to be able to challenge the order. The middle-class cannot do dharnas and choke arterial roads and highways. They have to get up in the morning and go for their jobs and keep the economic engine running and mutely submit themselves to the regulatory burdens. And thus, yet again, it is the middle class that will be at the receiving end of a regulatory intervention that helps large companies rather than protecting the vulnerable.
Regulations distorting the economy
The government has been charging a tax on digital payments while promoting digital payments. It is tantamount to a tax on a tax paid purchase and inhibits the growth of digital payments. Since it is obvious from economics that an indirect tax distorts the economy, an indirect tax on the indirect tax, further distorts the economy.
When one makes a digital payment to a merchant, using a card, the merchant usually incurs a facilitation charge which is a small portion of the value of the transaction. So, if one is paying by say credit card for buying medicines, the chemist needs to pay a small amount of the transaction value to the credit card network, in order to receive the payment. This amount actually is not just the cost of facilitating the payment, but is also the interest cost of the payment as the payer then gets around 45 days of credit to pay back that amount. Thus, it also becomes an important tool for providing access to small credit to the common people.
These charges are legitimate charges for a legitimate service being provided. However, one needs to pay 18% as GST on the digital payment charges. So, in effect, to make a payment digitally, one needs to pay separately to the government also. This is unacceptable as one is already paying taxes on the goods or service being purchased, and on top of it, one has to also pay an additional tax to the government if one is making the payment digitally. And this is especially convoluted in the context that the government is promoting digital payment.
To be fair to the government, the government does give a waiver of taxes on digital payments of values less than Rs 2,000. However, as seen in recent cases in the industry, the indirect taxes arm of the government (CBIC) believes that such waiver is only for banks and not for fintechs. Hence fintechs who did not charge a GST on transactions below Rs 2,000, were presented with show cause notices and humungous tax demands. It seems to be a classic case of left arm not knowing what the right arm is doing.
Even if this issue of taxing the transactions facilitated by fintechs is resolved, and payment transactions below Rs 2,000 are not taxed, the fundamental issue stays – is it right to levy an additional tax on the payments when the payer is already paying a tax on the goods or services purchased? Should we treat payments as a service? Consider the case that someone pays their taxes using a credit card. The person has to then make an additional tax payment on the tax payments since they are using digital payments to make that payment. This is indeed convoluted. And as is the impact of any convolution, it has a deep impact on ease of doing business. Consider small businesses trying to keep track of GST on each of their digital payments so that they are able to claim an input tax credit on all these payments. It is a challenging situation.
How big is the impact of the GST on payments? Typically, credit cards charge around 2% as the transaction facilitation charges (also called as MDR which stands for Merchant Discount Rate). This 2% is then shared across multiple players who orchestrate the transaction in the backend, each player getting small fraction of this 2% charge, and the share goes down to as small as 0.05%. After GST, the total cost of making digital payment bumps up to 2.36%. So, the government ends up getting 0.36% which becomes one of the largest chunks for facilitating the payments. What also needs to be noted is that the government does not have any direct role in facilitating the payments, and yet gets a lion’s share of the total transaction charges that a citizen incurs for getting small credit and for making a payment digitally.
The government has also been working hard along with the card networks to reduce their charges. However, if the government itself stops levying a tax on payments, the charges would reduce by a whopping 18%.
The Challenges of Regulating Crypto
Cryptos pose a significant challenge to the regulatory framework. It would be difficult to ban cryptos and it is challenging to construct a regulatory framework that protects the people and the financial institutions from cryptos. Hence it is important to consider cryptos separately, in order to understand the dimensions of creating regulatory frameworks for economic growth through new technologies.
Much has been debated over the cryptocurrencies that has posed a significant regulatory challenge to policymakers. In its worst, the argument of cryptocurrency backers is the threat of the nuisance value of crypto i.e., many people have already invested into cryptos and hence any regulatory framework that leads to reduction in the value of the cryptos will hurt the considerable number of people who have invested into cryptos. This is not a tenable argument since the government must ensure that there is no further harm to the rest of the public.
In fact, to begin with, cryptocurrency itself is a misnomer as its legal existence in most countries is that of a commodity and not a currency. What it implies is that most countries globally do not accept cryptos as legal tender. As free people of free nations, one is free to buy anything that they want with their tax-paid money, and hence people are free to buy cryptos. But the cryptos cannot be uses as a currency. They can buy it only as a commodity and trade in it, pretty much like the way children trade in cricket cards (or baseball cards in US). So perhaps, we should refer to cryptos as crypto-commodities or perhaps as crypto-assets for those who believe cryptos to be assets.
However, what is more critical is that cryptos do not have any inherent value per se. There are other currencies also that do not have any inherent value. In fact, most modern currencies, starting with the US dollar, do not have any inherent value. In 1971, the US dollar delinked itself from gold and rescinded from its commitment to pay one ounce of gold for every USD 35. This made the US dollar the first “crypto” from the perspective that it had absolutely no underlying value any more. And hence, the US government could print as much of US dollars as it wanted, to fund its own growth, while being within certain economic and monetary policy constraints.
The rest of the world gave credence to such a currency and accepted the US dollar to be the benchmark currency and the de facto currency for most international trade. This was driven by the fact that the US dollar was backed by the strength of the US economy. The powerful US economy was one of the largest exporter as well as importer of goods and services and hence it commanded the currency for trade, which obviously was the US dollar. In addition, the US government and military ensured that all energy trade in the world happens through US dollar. Whenever there was a threat of such trade happening through other currencies such as the Euro, Rouble or the hypothetical African Union Currency, such trade structures and regimes were violently displaced. And thus, a currency with no underlying value, became the strongest currency in the world.
With this argument, the question that arises is, why cannot a crypto, with absolutely no underlying value, become a strong currency. Actually, it can, as cryptos such as Bitcoin, are actually backed by a large economy, which is largely black in nature. Bitcoin gained popularity as trade on the “Silkroute” increased. “Silkroute” is not the trade route of the past but is a place in the darknet where drugs, guns and other illegal commodities are traded on the internet. Therefore, need for anonymity while dealing with such illegal commodities becomes paramount. One cannot pay for drugs online using their bank account or credit card as the buyers can be traced and caught. This is where bitcoin comes in. It enables the payment for such illegal commodities being traded in the darknet. Fiat currencies just cannot be used as it would leave trace of the buyer and lead the person to be identified and caught. Hence Bitcoin was the perfect currency for this darknet trade and therefore, Bitcoin is backed by this dark economy, just as US dollar was backed by the US economy. This is primarily where the Bitcoin derived its early value from. Bitcoin is not controlled by any one person or government. It provides perfect anonymity.
Till June of 2021, it was widely believed that cryptos provide the anonymity described above. However, in May this year, there was a ransomware attack in the US on the pipeline system by the name Colonial Pipeline, which is the largest oil pipeline system in the US. A very large sum of ransom was paid to the attackers and this money was paid in Bitcoins. The attackers conveniently thought that no one would be able to catch them, once they have the Bitcoins, as Bitcoins is anonymous and not traceable. But, within weeks, the US government was able to trace the Bitcoins and recover them. This is possible since the Bitcoins actually have a public ledger where one can see which email address is owning them. With the resources at the disposal of the US government, it was possible for the US government to trace out the IP addresses and the ownership of the Bitcoins and recover the same. The same cannot be easily done by other governments. For other jurisdictions, such as India, cryptos remain de facto anonymous.
The question that then arises is why would anyone prefer to use cryptos for payments over say a centralised construct such as UPI. Why would people move to an energy-guzzling, high carbon footprint crypto such as Bitcoin over an easy-to-use, low carbon footprint solution like UPI? The answer is the same as for the use of Bitcoin for Silkroute – anonymity. For long, it was theoretical that cryptos can be used for money laundering and for terror financing. Towards the end of 2021, it turned out that the Enforcement Directorate of India had identified that using cryptos, Rs 4,000 crore has been laundered out of India in the last one year. In addition, the global body on terror financing, FATF (Financial Action Task Force) updated its Guidance for a Risk-Based Approach to Virtual Assets (cryptos) and Virtual Asset Service Providers (VASPs). The FATF standards now require countries to assess and mitigate their risks associated with crypto transactions and subject them to supervision or monitoring by competent national authorities. This guidance is supposed to help countries and VASPs understand their anti-money laundering and counter-terrorist financing obligations, and effectively implement the FATF’s requirements as they apply to this sector. Ones needs to understand that the implication of not aligning with FATF is severe. As an example, FATF has put Pakistan on the grey list and has threatened to put them on the black list, which will severely limit the ability of Pakistan to raise funds and to do transactions.
With so many challenges, regulating cryptos becomes a tough job. On the other hand, it is also difficult to ban the march of technology. But how does one regulate something, which transcends the jurisdiction of one’s own country? One can perhaps put KYC (Know Your Customer that banks use to ensure they know whose account they are opening up in order to remove anonymity) on crypto exchanges operating in India. But what about crypto exchanges that are operating outside of India and are accessible from India, just like any other Internet based service? Such exchanges will not follow the laws of the Indian government. What if money laundering is done through the fungibility of the exchanges per se? How can one enforce any regulation brought in by the government?
It appears to be a situation where the government needs to do a tightrope walking on the issue and cannot rush into creating a regulation. It will be a challenging situation for governments across the world to regulate cryptos within the FATF framework and to manage the diminishing control of central banks on their monetary policies due to cryptos replacing their fiat currencies in a creeping manner.
In the brave new India, where a plethora of changes are being brought in by the government, by the society and by the industry, it is only right to have a channel where startups can reach out to and enable regulatory frameworks to change quickly for enabling startups to bring innovation and prosper, and in the process, enable the nation to also prosper. The government has already done it in the case of drones. We need to have a structured process wherein we can quickly create supporting regulatory structures that can propel India into leadership in many future multi-billion-dollar industries.
Quick, appropriate regulatory frameworks that respond to technological changes and innovations are in themselves a significant source of value creation in an economy. One can be reminded of the Sarai Act of the late 19th century. The act mandated that all sarais (hotels and inns) would need to mandatorily keep an earthen pot of water outside for all visitors and passers-by and provide a place to tie the horses. That law carried on till the 21st century till the government finally abrogated the law. We need to make such changes much more rapidly. Perhaps, looking at the Better Regulation Office of the UK Government as an example of an institutional structure that is dedicated to overhaul older laws and enable increased efficiency in the economy would be a good starting point.
Author Brief Bio: Dr Jaijit Bhattacharya is a noted expert in technology policies and technology-led societal transformation. A recipient of the prestigious APJ Abdul Kalam Award for innovation in Governance, he is currently President of Centre for Digital Economy Policy Research. He is also CEO of Zerone Microsystems Pvt Ltd, a deep-tech startup in the fintech sector.