Size-Based Regulations for Digital Markets: India Risks Repeating Past Mistakes

By Shuheb Khan and M. M. Ramish

In its 2024 report, the Committee on Digital Competition Law (CDCL) recommended an ex-ante regulatory framework for digital markets in India, in addition to the existing ex-post framework.1 It proposed the Draft Digital Competition Bill, 2024 (“Draft Bill”), which would subject digital companies to dual regulatory obligations, while other firms would remain governed only by the Competition Act, 2002.

Under the Draft Bill, digital companies offering a ‘Core Digital Service’ and crossing specified financial and user-based thresholds would be designated as Systemically Significant Digital Enterprises (SSDEs) and prohibited certain conduct, while non-SSDE firms could continue such conduct.

Now, based on feedback received by stakeholders, the Government has opted for an “evidence-based and adaptive approach,”2 tasking the Management Development Institute (MDI) with conducting a market study to review the criteria for designating SSDEs and assess the impact of the proposed legislation on start-ups and MSMEs. While the Draft Bill suffers from several infirmities, the real point of concern lies in the Government’s push for size-based regulation – regulations based on the size of a firm. India’s economic history offers lessons on how even well-intentioned size-based laws have produced results detrimental to the country’s economy.

The now-repealed Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 remains the most prominent example of ex-ante sized-based regulation in India’s economy. Widely regarded as a key factor in India’s poor industrial growth during the period, the MRTP Act required companies crossing specified size thresholds to obtain government permission for expansion, entry into new lines of production, and mergers and acquisitions. The MRTP Act was not an isolated instance: the Economic Survey 2018-19 noted the prevalence of “dwarf” firms – small firms that never grow – in India’s economy, pointing to a number of size-based policies across India’s economy that put a ceiling on the growth of small firms by creating incentives for firms to remain small and unproductive to avoid crossing regulatory thresholds.3 It was also common for firms to create separate entities to avoid breaching thresholds, preventing them from benefiting fully from economies of scale. The adoption of a size-based ex-ante approach for the digital sector carries similar risks.

One of the primary objectives of the MDI market study is to revise the thresholds for SSDE classification.

Here too, India can draw from prior experience. During a debate on the MRTP Bill, 1967 in the Rajya Sabha, the then Minister for Company Affairs was asked whether the MRTP Bill’s asset threshold could be lowered from ₹20 crore to ₹5 crore. The Minister responded that grievances existed against only 25 companies, and therefore a ₹20 crore threshold would be sufficient.4 Over time, however, the number of firms covered under this threshold grew to 1,321 by 1983,5 illustrating how a threshold calibrated to capture a small, specific set of entities can expand to cover a far broader base than originally envisaged.

In seeking to remedy the Draft Bill by revising SSDE thresholds, India risks falling into the same trap again. In time, as the MRTP Act became a significant hindrance to India’s industrial growth, the High-Level Committee on Competition Policy and Law, chaired by S.V.S. Raghavan (“Raghavan Committee”), was constituted to examine the MRTP Act and propose a new competition law suited to India’s changed economic milieu.

The Raghavan Committee made several observations that remain highly relevant today. First, competition policy should focus on abuse of dominance rather than dominance itself. Second, the relevant market is key in determining dominance – the perceived dominance of a firm hinges on the size of the market it is deemed to compete within. Third, pre-set quantitative criteria for assessing dominance are unsuitable in a dynamic economy. Based on the recommendations of the Raghavan Committee, the MRTP Act was repealed and replaced by the Competition Act.6

Despite these historical lessons, the Draft Bill seeks to regulate competition in a manner that the Raghavan Committee had cautioned against. First, by placing ex-ante obligations on companies as soon as thresholds are reached, it regulates dominance itself rather than the abuse of dominance. Second, like the MRTP Act, it applies uniform quantitative financial and user thresholds across core digital services to designate firms as SSDEs, overlooking the differences that exist across markets. For instance, ₹4,000 crore in turnover may be insignificant in a sector with a ₹5 lakh crore market, but substantial in a sector with a market size of only ₹10,000 crore.

Interestingly, the CDCL had acknowledged this problem in its report but chose to proceed with arbitrary uniform thresholds regardless citing difficulties in obtaining reliable sector-specific data. The market study had an opportunity to address this gap by identifying the size and structure of individual digital markets. Yet assessing market size across sectors does not appear to be part of the MDI study, leaving the central flaw in the proposed framework unresolved.

Competition law should remain focussed on tackling the abuse of dominance, not dominance itself. Introducing a separate size-based competition regime for the digital sector risks putting a ceiling on growth and reviving the very distortions India spent decades trying to correct.

The authors are policy professionals at the Internet and Mobile Association of India (IAMAI). Views expressed are personal, and do not represent the views of IAMAI.