Don’t ban first, ask questions later

New or emerging technologies are rarely simple to handle from a regulator’s perspective. They are almost always mixed blessings: they upset the status quo and have untested potential, including to cause unforeseen harm. At the same time, they are essential for the health of any economy. Cab-aggregators and e-commerce companies are great examples of technologies which threw up several challenges over the last decade and required significant regulatory redrafting. Equally, their positive impact on the economy and quality of life, particularly in urban centres, has been immense.

The regulator can either establish mechanisms that allow for the examination of new technologies in a defined and transparent manner, yielding balanced regulation, or issue knee-jerk diktats to neutralize perceived threats. It is a matter of concern that, in India the lack of formal processes has led to the practice of the government banning new technologies as a first step; with the unintended consequence of stifling domestic business and innovation.

Take, for example, the manner in which the Indian government has dealt with electronic cigarettes, or e-cigarettes. Though e-cigarettes are by no means harmless, and some manufacturers have been accused of irresponsibly permitting sales to minors, they represent a lower risk choice for cigarette smokers (95% less harmful as per a study). Approximately 90 countries have permitted their use in some form. Canada and the United Kingdom, two nations with well established public healthcare systems, permit e-cigarettes, in part, due to the colossal economic cost of diseases related to cigarette smoking. What is crucially different is the policy-making process followed by these countries, which includes publicly accessible stakeholder testimony, examination of available scientific data and empirical testing, and intense debate on regulatory guardrails to prevent abuse.

India, on the other hand, after an initial period of apathy where e-cigarettes were unregulated, chose to first ban the product as an unapproved drug. When courts found fault with that approach, the government hastily penned a vaguely worded blanket ban, and pushed it through as an ordinance, i.e. without even the benefit of token parliamentary debate. Now that it is a legislation, systemic lethargy will ensure that e-cigarettes will not see the light of day in India for a long time, even as scientific data is mounting in their favour. Canada and the United Kingdom, instead opt to constantly monitor scientific, public health and usage data, and choose to tweak policy in response to it. Instead of a ban carrying criminal penalties, the Indian government could have considered a mechanism that called for regular analysis of the category and granted licences for, and imposed taxes on, the sale of those products that passed prescribed criteria. Ironically, cigarettes and other low-quality tobacco products continue to be freely sold.

The treatment meted out to block-chain based, or ‘crypto’, currencies has been equally brutal and ill-conceived. While challenges are pending before the apex court, the government, through the Reserve Bank of India (RBI), has all but crushed the nascent industry. The RBI, in April this year, issued a terse notification prohibiting any bank or financial institution from dealing with virtual currencies in any manner. This has limited trade in such currencies to peer transactions outside formal channels. The notification was so sudden and wide that, according to reports, even the Pune city police department was unable to access Rs. 8.42 crore converted from cryptocurrency it had seized.

Admittedly, cryptocurrency exchanges had been mushrooming across the country, and some had reportedly been used to dupe unsuspecting buyers lured in by the meteoric appreciation in value of the currencies in previous years. Also, the currencies have been unable to shed their historic association with drugs and other illicit activities. However, cryptocurrencies represent a radical way to increase privacy, lower the cost of transactions, and foster greater social inclusion, as virtual wallets can substitute bank accounts. Instead, the bill proposed by a high-level inter-ministerial committee, as part of its report, while carving out block-chain based technologies, contains a sweeping ban on all virtual currencies.

The outcomes in the case of e-cigarettes and cryptocurrencies, as two examples, may have been exactly the same had a scientific and methodical policy formation process been followed. However, the opacity and haste with which the Indian government has chosen to act in these cases locks out private stakeholders, resulting in diminishing incentives to invest and a chilling effect on innovation and growth domestically. Further, given the challenges of enforcement in India, bans are more likely to result in grey markets for e-cigarettes, allowing them to get by without any quality checks, and surreptitious trades on the dark web for crypto.

Regardless of the policy stances taken, the Indian government must create formal and transparent processes and institutions that assure stakeholders of a seat at the table, incentivize investment, and do away with backroom lobbying as the sole means of influencing policy. Another need of the hour is the regulatory sandbox, i.e. a controlled environment with regulatory relaxations for testing. Typical in the fintech industry, it needs to be made available across industries. Given India’s demographics and federal structure, it would be easy for the central government to work with state or local authorities to offer test areas or pilot cases, where most appropriate. The Karnataka government has very recently taken a step in this direction by announcing the Karnataka Innovation Authority, with its stated goal being enabling pan-sectoral regulatory sandboxes. Its actual implementation remains to be seen.

Increasingly, emerging technologies such as autonomous vehicles, data analytics and artificial intelligence-based products and services, and bio-engineered foods and medical treatments, are threatening the ‘normal’. India can either continue to take a risk-averse approach, like the proverbial ostrich with its head in the sand, or, instead, it can begin to engage. There is an imminent and urgent need to make India a hub of innovation, rather than just a processor of ‘digital manual labour’, for the sake of its economic future.

Upendra Nath Sharma (L) and Rishabh Gupta are partners, J Sagar Associates

Views are personal. The authors act as external counsel for stakeholders in the e-cigarettes and fintech industries, among others.