Balancing Innovation and Regulation: A Critical Look at India’s Digital Competition Bill 2024

- by Abha Singhal and Arnav Srivastava, IVth year students at Rajiv Gandhi National University of Law, Punjab

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Introduction

Over time, India’s landscape in the digital area has been booming at a tremendous pace. From social media platforms to e-commerce, technology is consistently transforming the way all individuals live and work. However, with development come concerns about the dominance of a few big tech corporations, which tend to disrupt the healthy competition in the market.

The recently rolled out Digital Competition Bill, 2024 (“Bill”)  aims to address these very concerns by introducing regulations for ‘Systemically Significant Digital Enterprises (“SSDE”) - the big tech players in the market, classified based on both quantitative and qualitative criteria. The authors, while appreciating the intentions of the Bill, which are to promote free and fair competition and to protect user interest, delve into key aspects of this Bill that are, in fact, contrary to the intention of this Bill. In this blog, the author will examine the bill's potential downfalls, such as stifling innovation and harming small businesses. By analysing the bill, this blog aims to spark a well-informed discussion on whether this bill is required to achieve the intended objectives, delve into the question of whether this bill is the answer to India’s digital competition dilemma, or could lead to unintended consequences for the consumers of the country.

Background

The current regulatory framework governing the Indian market structure works on an ex-post intervention model, where regulations are sought after market failure happens. The Competition Commission of India ("CCI"), which is the torchbearer of the Competition Act 2002, (“Act”) works on this approach, whereby the investigation begins after the damage is done. However, as per this bill, with the fast-paced nature of digital markets, the ex-post approach often falls behind to prevent the market from getting distorted. To ensure fair competition persists in digital markets, the draft of the Bill along with the Report of the Committee on Digital Competition Law (CDCL) set up by the Ministry of Corporate Affairs, was released on March 12, 2024, proposing an ex-ante regulatory framework for digital markets.

The north star of the digital market is the data of the customers that, according to the CDCL report, the big players collect, store, and utilize to gain an unfair competitive advantage over their rivals in the form of targeted advertisements and studying consumer purchase behaviour. The CDCL believed that this hoarding of data, coupled with factors like network effects and economies of scale, tilts the market in the favor of big digital players, which needs to be curbed with the enactment of an ex-ante regulatory framework. The Bill lays down several provisions to ensure fair competition, and providing small players with opportunities to flourish in digital markets is one promising avenue. However, in the coming section, it will be discussed how over-regulation of these big giants can inadvertently impact the small players that rely on these big players for resources and networks. 

Critique of the Digital Competition Bill, 2024

The Bill has been the subject of great scrutiny and criticism for its impact on the growth and development of the Indian market. India, being an emerging economy with a large population base, is dependent on the market of Micro Small, and Medium Enterprises (“MSMEs”) and startups, which are subsequently dependent on big tech, and one of the provisions of the bill is directly impacting the market of MSMEs and startups by laying down excessive regulations on big tech giants such as restrictive data usage, tying and bundling of services, and hefty penalties. As per the bill, the provisions for data usage can be overly restrictive, as these small industries rely on these big players for market access, advertising, social media networks, and online e-commerce. For instance, with the data usage restriction, the MSME sector will now have to recalibrate its approach and divert its limited resources towards advertising and market access that would otherwise have been used for value creation. Additionally, as per the study by Esya Centre, MSMEs also benefit from a single-login system wherein the customers can gain access to their websites by logging in via Google, Amazon, or Facebook, which helps them access the large user bases of these digital platforms as their potential future customers. As far as bundling is concerned, Section 15 of the bill prohibits SSDEs from requiring users to use one or more of the SSDE’s products and services, which essentially means that, say, the bundle of products that Google has, such as Google sign-in, Google Play Store, and Google Cloud, will be illegal under this act, and a large number of small players are dependent on the bundled services for cost-saving purposes. If now they are forced to purchase services from different players, their operational costs would increase significantly, which is only detrimental to their growth in the economy. Additionally, bundled services provide these industries with better access to technology, which they are not able to have owing to a lack of funds and capacity. This prohibition could limit their access, putting them at a disadvantage.  

Secondly, one of the major fallouts of ex-ante regulations is the criteria for assessing an enterprise as SSDE takes the CCI back to the Monopolistic and Restrictive Trade Practices Act (“MRTP Act”). The MRTP Act, which is the predecessor of the Competition Act was condemned for multiple reasons but mostly for considering mere dominance as per se anti-competitive. According to the said act, as long as an enterprise is considered to be dominant in the market, it is considered anti-competitive irrespective of whether the market is abused or not. A presumption that dominance is bad was the bedrock of the MRTP Act, which received heavy criticism for impeding growth and development. The criteria for determining dominance under the Act was purely economic based on factors like market capitalization and revenue shares. 

The Bill, on similar lines, by imposing ex-ante regulations on market players identified as SSDE based on limited economic factors like revenue shares, market strength, and user base, seems to revive the provisions of the MRTP Act. To curb the ‘winners take it all’, the bill would foul the very principles of modern competition law. It is also to be noted that ex-ante provision is premature for the Indian Market. Ex-ante regulations may impact the growth and innovation of the Indian market as the market is still at the evolving stage where it needs greater flexibility and selective regulations for maturity. Small industries account for around 96% of industrial units in the country and contribute over 30% to the GDP of India. This proves how essential it is to give these industries the much-needed leeway toward growth and the provisions mentioned in the bill do not support this motion. 

The provisions of the bill have been taken from the EU’s Digital Markets Act (“DMA”) under the belief that both the countries are common law countries, but what the ministry failed to take into consideration is the digital market of the EU is much more evolved with established market players and has different market dynamics than India. Moreover, the EU’s digital market is much more developed, which supports the implementation of comprehensive regulations like the DMA, but India is still at a nascent stage, and these proposed regulations will only act as a burden that would stifle development. 

As regards data privacy, the EU has stringent data protection laws such as the General Data Protection Regulation (“GDPR”), which is in line with the DMA, but India is still developing its data protection framework which would not be able to align itself with the stringent provisions of DMA designed specifically for their market. Another point of differentiation is the fact that the EU’s population relatively consists of high-income citizens with better standards of living, consequentially, the economy of the EU is not majorly dependent on small-scale industries as is India which has a major population of middle-class people relying more on easy accessibility and affordability of products and services.

As discussed above, the need for regulations cannot be debated since these regulations act as a yardstick to control market distortion in a flowing market structure. The timing of regulatory intervention determines whether it is an ex-ante (before market failure) investigation or an ex-post investigation. Data suggests that since ex-ante regulations impose obligations merely on the presumption of future market distortion, it substantially leads to unnecessary regulatory costs and impedes investment incentives for market investors. Additionally, the 2016 report by Business Europe suggests that ex-ante intervention paralyzes innovation, increases regulatory costs, and slows down the entry of innovation into the market. The report suggests the inadvisable impact on medical nutrition innovation due to prior regulations on market players. 

Henceforth, since a lack of evidence to prove market failure always exists in an ex-ante investigation, it becomes difficult to directly connect the market failure with the act of the market player. This false alarm of market failure coupled with a lack of manpower in the Indian antitrust authority makes ex-ante regulations to create market deterrence a bad marriage.

Conclusion

From the above discussion, the authors conclude that an ex-ante regulatory approach for a developing country like India, where startups and MSMEs are emerging as a new face of the economy, prescribing peremptory norms on well-established market players will send a wrong message that big is bad. Moreover, it’s unclear what market failures are going to be addressed by ex-ante norms and how these failures are immensely impacting an immature growing economy like India. While regulating digital market players is important, the onus lies on the shoulders of regulators to ensure a balance between ensuring fair competition and fostering innovation. This will demand careful consideration from stakeholders, market experts, and consumers for the better development of the Indian digital market.