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Indian PM Narendra Modi’s reelection spells more frustration for US tech giants

The re-election of Modi will in many ways chart the path of India’s burgeoning startup ecosystem, the local play of Silicon Valley companies, and future of India’s internet

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Amazon and Walmart’s problems in India look set to continue after Narendra Modi, the biggest force to embrace the country’s politics in decades, led his Hindu nationalist Bharatiya Janata Party to a historic landslide re-election on Thursday, reaffirming his popularity in the eyes of the world’s largest democracy.

The re-election, which gives Modi’s government another five years in power, will in many ways chart the path of India’s burgeoning startup ecosystem, as well as the local play of Silicon Valley companies that have grown increasingly wary of recent policy changes.

At stake is also the future of India’s internet, the second largest in the world. With more than 550 million internet users, the nation has emerged as one of the last great growth markets for Silicon Valley companies. Google, Facebook, and Amazon count India as one of their largest and fastest growing markets. And until late 2016, they enjoyed great dynamics with the Indian government.

But in recent years, New Delhi has ordered more internet shutdowns than ever before and puzzled many over crackdowns on sometimes legitimate websites. To top that, the government recently proposed a law that would require any intermediary — telecom operators, messaging apps, and social media services among others — with more than 5 million users to introduce a number of changes to how they operate in the nation. More on this shortly.

Growing tension

In the last year, India has overhauled its e-commerce policies in a way that significantly impacts Amazon and Walmart, which acquired India-based company Flipkart in a $16 billion deal, and pushed international firms to move at least some data of Indian citizens to servers in the nation.

Executives at Facebook, Google and other Silicon Valley companies have maintained a dialogue with the Indian government to participate in the making of these policies, but they have been frustrated and blindsided by abrupt moves from the Indian government and the outcomes of the policies.

Executives have also expressed deep disappointment at the efforts of lobbying groups that represent them, such as Nasscom and IAMAI, bringing into question whether they should maintain relationships, multiple sources familiar with the matter told TechCrunch. On the record, as one would expect, the international companies have largely insisted that they continue to have healthy discussions with various stakeholders.

But, unofficially, still reeling from the recent policy changes, key figures have expressed hope in recent months that India would elect the alternative political party, UPA, a coalition of Congress and its allies. That’s a group that, before losing to NDA, a coalition of BJP and its allies, maintained a better relationship with foreign companies.

Executives, speaking on the condition of anonymity, have also expressed optimism that the Indian government may relax its abrasive policies around foreign entities. Some believe the Indian government was growing strict in order to appease its nationalist voters, and, so far, there is no indication of the state backing down.

In a letter published this month, more than 10 industry bodies, including representatives of Silicon Valley companies, urged the government to increase transparency around decision-making. They suggested that the Department for Promotion of Industry and Internal Trade, a government body, should publish all comments that it receives from all stakeholders in order to encourage a more informed public debate.

“Prior public consultations conducted by other government bodies such as the Telecom Regulatory Authority of India and the Ministry of Electronics and Information Technology have maintained a higher level of transparency by publishing the comments received,” the letter obtained by local media outlet Business Standard said.

The report added that international firms including Amazon, Google, Facebook and China’s ByteDance — which had its popular app TikTok banned in India for days last month — have frozen planned investment strategies in India ahead of the election result announcement this week.

In recent months, Indian ministers have also said to have promised startups that there will be policy changes in favor of local firms. Even today, many local entrepreneurs congratulated Narendra Modi on his win, well aware that their positions remain on thin ice.

Despite Indian startups raising a record $10.5 billion in funding last year, early-stage startups are struggling to attract VC attention, according to analytics firm Tracxn. At the core of that challenge is something called “angel tax,” a 30 percent cut that is levied when a privately held company raises funds at a rate higher than its fair market value. Earlier this year, the government relaxed angel tax, but it only benefits upcoming startups and not the existing ones. In its manifesto (PDF), Congress had promised to eliminate angel tax entirely if it came into power.

Shape of things to come

Among Silicon Valley giants, Facebook has faced the most wrath from the Indian government over the past year. Politicians remain adamant that the U.S. firm must bring more “traceability” to WhatsApp in India, which is the messaging app’s largest market with more than 300 million monthly active users.

Indian Prime Minister Narendra Modi (L) and Facebook CEO Mark Zuckerberg shake hands after a Townhall meeting, at Facebook headquarters in Menlo Park, California, on September 27, 2015. (SUSANA BATES/AFP/Getty Images)

WhatsApp remains a closed and encrypted platform, and bringing any “traceability” would mean breaking encryption, company representatives have said. So far, neither of the sides have backed down, even as the Indian government has warned of legal actions against WhatsApp.

In the meantime, the Indian government has explored broader control over services such as WhatsApp. The Intermediary Guidelines (PDF) it proposed in December requires any service with over 5 million users to enable government or law enforcement agencies to trace the “originator of [certain questionable] information on its platform.”

The proposed law, which could be implemented any day, also requires companies to “deploy technology based automated tools” to “proactively identify and remove or disable public access to unlawful information or content.” On platforms such as WhatsApp such actions are currently technically impossible.

The law would also hold companies liable for day to day usage of their services, deviating from the safe harbor laws that these tech companies enjoy elsewhere. Safe harbor laws free tech companies from being held liable for actions on their platforms as long as they work in good faith to improve their services.

Internet Freedom Foundation, a nonprofit a digital rights group, today cautioned that its challenges may increase in the coming future. “With the election results coming in there are celebrations but also anxiety as to the strength of a mandate that can pose a challenge to individual liberties — freedoms which increasingly interact and are determined by digital tools and technologies,” the foundation said in a statement. “We congratulate the results of this festival of democracy, which by no means was perfect but requires to be respected.”

Strange coincidence

The biggest supporter of India’s recent policy changes is Reliance Jio, a subsidiary of the nation’s largest company Reliance Industries. It is run by Mukesh Ambani, India’s richest man, who happens to be an ally of Modi.

Reliance Jio, which upended the telecom industry in India by offering free voice calls and texts and unlimited LTE data at little to no cost, today operates a number of businesses including a music streaming service, a movies and TV shows app and a chat app. It stands to benefit from any changes that impact services like Spotify, Apple Music and WhatsApp.

Additionally, Mukesh Ambani is working on expanding Reliance Retail, the largest retailer in India to e-commerce business. At an event in January, Ambani said the e-commerce business will leverage Reliance Jio’s humongous 300 million user base. The recent changes in e-commerce policy will hugely benefit this venture.

In his speech, Ambani lashed out at foreign firms. He likened the “data colonization” by Silicon Valley companies to political colonization by Britishers that Mahatma Gandhi and others fought against.

“India’s data must be controlled and owned by Indian people — and not by corporates, especially global corporations … we will have to migrate the control and ownership of Indian data back to India,” he said.

Narendra Modi was in attendance.

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