Inflation is a PIG!

What is PIG? In non-capital letters, of course we can define the animal – whether quadruped or human. But nowadays a new set of inflation measures are also known as PIG - Pure Inflation Gauges, as explained by Indian economists Dr Krishna Durba and & Dr Urjit Patel. Most of India's financial newspapers seem to believe that interest rates and inflation are inversely linked, and that you can slay the inflation dragon with the interest rate sword. I am not too sure. Over the period 2010-2013, the Reserve Bank of India effected over 13 policy rate hikes, but the Wholesale Price Index today is still rising at 6 per cent; the Consumer Price Index is in double digits; and food inflation at 18 per cent. And mind you, rupee twerking in a manner not seen even by Miley Cyrus (10 per cent movement either way in just a few days!). Clearly something is out of sync. Maybe inflation is no more just a monetary phenomenon, any more than monsoons are a rain event. And interest rate and inflation best share a correlation between the two, but that should not be confused for causation. There are three issues which need attention: What to target? a) Inflation (CPI, WPI, Core, etc); b) GDP; or c) external economy (rupee, current account deficit). Which policy instruments and methods to tag each target with? And what should these targets be? While the Reserve Bank has been looking at WPI, it is actually CPI which impacts the public. That is the inflation index it should target. If one goes by the PIG theory that food and energy does not contribute to inflation, then choosing between headline or core inflation is meaningless. Whatever is the appropriate target is par for the course. What inflation does is hose the feedback loop on negative sentiments. Businesses and firms are holding off on investments and projects, consumers are looking to alternate non productive assets. Credit offtake is low, and with little or no impact on output, prices and employment and the economy is in a tailspin of its own making. So while inflation targeting is necessary, focus on it solely as a panacea for economic ills is misshapen. Let me put it this way. India is an economy which is 50 per cent underground, where proper estimates of money supply and impacts of tightening and loosening is not known or measurable (think System D in France). India is still a 96 per cent cash economy with 12 trillion crores of M0 circulating in the economy, and just 50 per cent of all non-cash measurable split evenly between cheque and electronic channels. This formal economy cannot be a good approximate of the informal one. And therein lies the problem. A case in point is that even with a good monsoon and good agricultural output, prices of agricultural products are high, and imports are being resorted to. It would seem demand and supply forces are not working themselves through the system, and information is asymmetric on account of supply chain inefficiencies and distributional distortions. Growth is the critical factor – without it, we are seeing high inflation and unemployment. Better to have growth with inflation and employment. The rupee should be allowed to find its own level as it is a barometer of how the world economy views the strength of the Indian economy. Intervention by the RBI should be swift and determined if the rupee is under speculative stress. Not dictating the rate, but preventing volatility. Not by resorting to textbook tools but beating the speculators whether they be dealers, brokers, traders, arbitragers from within an institutional system or working within the dark anonymous shifting shoals of international finance. The problems of the rupee are not fundamental but on account of shorting and profit-taking by the gnomes of Zurich. The trade deficit or CAD is more addressable, and gold imports should be controlled rather than cutting off external remittances. On parallel, increasing the supply of dollars is important through foreign direct investment (FDI), share purchase by parent companies, exports, invisibles and de-risking on pure FII inflow is paramount. There are schools of thought where some are of the view that you need one policy instrument for one objective. Central banks have a toolkit for each policy instrument - for example, the repo rate, MSC, CRR, SLR, reverse Repo, etc. Sometimes, one signals a course of action with one instrument only to send the opposite signal with the other tools at ones disposal. Even if you don't use more than one instrument to tackle one goal – one must have congruence. A more critical issue is inflation targets - whether inflation should be 200 basis points behind growth, and growth set at 7.5- 8.5 per cent. This is what some economist call as NGDP targeting. In the USA the trilemma is a three way drift between inflation, GDP and unemployment – and in trying to find the sweat spot. In India it is just two - inflation and growth. Of course the third could be the fiscal deficit or even CAD. But just to keep things simple I have take these as the two main macroeconomic objectives on a merit order basis. Currently, with growth down, it is important to bake a larger cake. Inflation may be a concomitant. But it cannot be the determinant. Therefore some amount of inflation has to be tolerated and perhaps even encouraged for risk: return perceptions to play a role in freeing up animal spirits of enterprise and industry.

Indian Navy - Future Ready

The ‘sea blindedness’ and ‘continental’ mindset of Indian political class and bureaucracy have hobbled us. The fact that colonial powers like Britain, Spain, Portugal, Dutch, and French conquered and commercially exploited us by sea is lost on them. These countries, if taken in totality, have less than half the coast line we have (7516 Kms). Yet we have been colonized more from the sea than from land! So, instead of becoming a sea faring nation and outward in outlook. India has remained inward looking and insular in nature. It is to the credit of naval planners that they have built true blue water navy inspite of this mindset in 60 odd years. All this with patience and perseverance, and mostly without the benefit of any higher political direction (no White Papers, or Defence Reviews; not even approval of the recommendations of committees convened by the GoI)One could argue that this perhaps has been a blessingin disguise! Of late there has been some soul searching on whether the recent submarine accident could have been avoided, or has there been any setback to the blue water vision by spreading oneself too thin - embarking on ambitious carrier, nuclear propulsion program and 30 sub plans. It would seem that the diversion of (scarce) men, money and material can either do one or the other well. But not all. Hence ‘overreaching strategic ambitions’. Not so. All professional and blue water navies have had to cope with (or rather learn to cope with) rapid growth during its ‘scaling up’ stage - from coastal/littoral and sea defense navy to a blue water one. Recruitment at entry levels have to scale up. Training, induction and infrastructure also has to keep pace to ‘feed’ and constantly update the various arms of the navy whether it be pilots, divers, electrical/system engineers, artificers, long course specialist officers, cooks, etc. During this phase different parts of the Navy tend to grow at different rates – some faster, some over decades. That is natural. For e.g. (1) the nuclear submarine propulsion programme was conceptualized in 1967 with a feasibility plan prepared by the Navy & BARC, and went thru several fits and starts till 1980. It was only in 1984 that the program got its due budget, focus and political mandate. And now has come to its logical fruition. (2) On the other hand the aviation wing came off the starting block faster than any other arm with the original INS Vikrant (1961) coming in very early in the navy’s evolution (this is Naval aviations 60th anniversary), and the vision for subsequently embarking upon a 2/3 carrier navy being in the pipeline from the late 80’s (3) The 30-sub plan also has also been in the making from the late 90’s. But delays in decision making have dogged this plan from coming in on time. At the end they have all come together rather nicely. Therefore In isolation and in totality, naval planners seem to have cut their cloth according to their long term vision – not too much, or too little. For a country which is still a developing one with numerous resource constraints, a noisy and often time’s fractious democracy with several competing forces for scarce means. This is creditable. Naval Vision 3.0 My view, and I have held this for some time now, that the Indian Navy needs ideally 3 Battle Groups (BG’s). Two being CBG’s. One for the Arabian, ME & Mediterranean regions HQ’d in Mumbai/Karwar (lets call this command as CinC,AMEN) . One for the Indian Ocean and Littoral States (CinC,IOR) HQ’d at Cochin/Karwar, and one for the South Asia & Far East (CinC,SAFE) region HQ’d at Vizag and Port Blair. I know the 2+1 is the carrier tasking policy, but there will be times when all three carriers will be in active operational simultaneously. And when, 2+ 1 kicks in, then the capital ship of the third Battle Group will be a Nuke Sub or amphibious assault ship/Helo carrier. These BG’s will not only be there for deterrence and defence of the homeland and expeditionary operations, but more importantly, to ‘fly the flag’ from Vietnam to Venezuela – where significant Indian economic & commercial assets and interests are expected to lie in within the next 20 years. The soft power that is talked about by all. And which China with its hospitals ships and visiting warships to areas of their interest have been doing for some time, and of course the western powers perfected to an art form over the last 300 years! The fly the flag activities will be cross subsidized by the MEA, since this will form part of its outreach and ‘winning friends’ program. If and when India gets to the high table of the permanent member of the UNSC, this will be a hygiene factor. And if the roadmap and intent is laid out in advance, then an enabling condition.

Now your Bank account in the sky!

There have been 100 mobile money deployments in emerging markets. At least 84 of them within the last three years. What I have found to be common for those that are successful (14 of them, as defined by number of payments relative to the size of the addressable market) are growing the customer base and network in tandem. This makes the overall agent economics and agent enrollment efforts remunerative. What is not so explicitly stated, but key, is role of ‘Regulation’. In under regulated, low banking penetration, light regulatory touch economies such as Somaliland, Kenya, Tanzania, and Uganda it has worked well. But in robustly regulated and supervised markets like India – the outcome is poor. M-pesa cant be re skinned for local conditions just with addition of 'a' and 'i' and drop of an 'e', Vodafone has been experimenting with M pesa in India for some years. They launched in 2011 with a pilot in Chomus, Rajasthan. And recently with ICICI Bank. It would be interesting to assess the outcome of that pilot and understand goals set with ICICI Bank. The original program was envisaged to board 10 million farmers for its financial inclusion efforts. Before that Tata Teleservices launched its own domestic money transfer program with Corporation Bank. As did Axis Bank and Airtel for the same purpose. While Airtel & SBI’s JV was short lived. In India it seems banks and telcos are dancing an endless tango to see how best to crack the conundrum of mobile money. Ideally the telcos have been trying hard to edge the banks out of this - they see it as a next value driver and best geared organizationally to deliver tangible results. And the Banks are generally wary and averse against this being driven solely by telcos and the customers being owned by them. Probably for the same reason. Except they call it fear of systemic risk! So what is the way out? Even if the over strict interpretation of Banks role for cash-in/cash-out (CICO)is maintained, there are ways to skin the cat - so that 'unbanked beneficiary' can still avail of the service.. But for this to happen (and happen it has to) two things need to change. First, the differentiation between a payment service providers and credit issuers has to be understood. In the former accepting and keeping 100 % of monies collected in pooled accounts by way of escrow or reserve requirement does not constitute systemic risk, or, constitute what is known as a Systematically Important Payment System (SIPS). In fact the mobile wallet poses even less overall risk than banking and any other payments systems. For e.g. in 2010 the accumulated balance in all Mpesa, Kenya accounts represented just 0.2 % of all bank deposits even though M Pesa transactions accounted for over 70 % of all electronic transactions! Further, as a measure of abundant caution, PPI’s do not intermediate funds or issue credit! Second, regulatory dispensation has to now accommodate a sender/receiver or both NOT necessarily (a) Having any form of formal Bank account, but just having an unique mobile wallet issued by a RBI certified PPI’s. This mobile wallet, is what I call as - ‘Account-in-the-Cloud. Lets us give it a generic brand name – My Paisa account. (b) As per prevailing RBI norms some form of KYC applies for creation/loading up such a virtual wallets. Aadhar, as a (mandatory in time) RBI accepted e-KYC tool per se – as valid ID proof serves that purpose, The aadhar number also doubles up as an unique identifier mapped to the wallet and mobile number, and in due course to a no frills account or regular account. (c) Of course until UID reaches mass acceptance, the older KYC norms used thus far over the last 60 years will suffice for creation of the wallet as per prevailing RBI Prepaid guidelines. (d) While the conventional Bank-ICT based BC/BF/CSP Model has yet to categorically deliver any tangible over the last 7 years. Either, by way of account registration and/or account activity terms. Arguably it may have met its penetration levels into villages. This effort is now best also complemented by established private players (viz. FMCG, retailers, fair price shops, etc) to allow for network effects to kick in a la Tanzania with its 27000 agents for a population of 37 million, or Somaliland with its 8600 agents for a population of 3.85 million. (e) In India a clear a million such existing unique established and trusted points of presence are there built up over the last 100 years. Even if we don’t count the Telco touch points. Allowing for cash -out on such a larger definition of BC's/BF's/BA's by leveraging established & accepted networks of private payments processors & agent aggregators, will be par for the course (f) No program can be sustained if it not remunerative to the stake holders, and does not make sound business sense. So a competitive fee structure payable to the key stakeholders is key. This has to be either borne by the consumer like it is done for PO/MO’s etc or by the Govt for DBT. A fee structure of between 2-4 % with an appropriate cap would find a sweet spot. With account in the cloud, and with minimum stake holders the fee structure could even be aggressive without destroying the business proposition. Once this is done, direct cash transfers or payments or remittances can be done directly into a farmer’s, citizen, or customers or any aadhar-wallet account, to be redeemed at merchant points for goods & services or cash out, via the established private payment processors outlets. Subsequently one could look at e money issuers (Non bank PPI’s ) to also pay the customer interest on an e float maintained by the account holder by way of some form of subvention where on the pooled account some interest is earned.

Band of men in their yellow submarine!

Unlike the lyrics of the famous Beatles song, one does not “live a life of ease, and have all you need”, if you join the submarine arm. As recent events have shown. As I am sure many of your readers know only too well submarine accidents are not the domain of 'happens only in India'! And from 1947 to now probably around 80 accidents have taken place. Since the year 2000 itself , there have been twenty-seven major naval incidents involving submarines from: ten American submarines, five Russian, five British, two Canadian, one Chinese, two Indian, one Australian, and one French. Eight nuclear submarines have sunk as a consequence of either accident or extensive damage: two from the United States Navy, four from the Soviet Navy, and two from the Russian Navy. Only three were lost with all hands: two from the United States Navy and one from the Russian Navy. All sank as a result of accident with the exception of K-27, which was scuttled in the Kara Sea when repair was deemed impossible and decommissioning too expensive. All of the Soviet/Russian submarines belonged to the Northern Fleet. Although the Soviet submarine K-129 (Golf II) carried nuclear ballistic missiles when it sank, it was a diesel-electric submarine and is not in the list below. Of the 8 sinking’s, 2 were due to fires, 2 were due to explosions of weapons systems, 1 was due to flooding, 1 was weather-related, and 1 was sunk intentionally due to a damaged nuclear reactor. In 1 case, the cause of sinking is unknown. All of the subs are in the Northern Hemisphere, and there are none in either the Indian or Pacific Oceans. In fact it is to the credit of the Indian Navy to have had over 40 years of submarine operation almost blemish free. I don’t know of any other Navy who can claim the same track record. Having said that, there is no excuse for any peacetime accident in one’s own berthing station regardless of the cause. Commanding any warships is a non compromising job. The Captain of a warship is responsible and accountable for his ship and men at all times, short of an unexpected act of God. In the merit order of calamities. Losing a submarine in war is forgiven, than losing it in peacetime while on patrol or exercise. And certainly, losing your ship while it is in harbor or tied up alongside is not acceptable. Captains, whose ships are hit and sunk in wartime, therefore choose to go down with their ships to avoid the shame & ignominy of their fellow men in not being able to secure their ships, and bring their men home back safely, and are in line with naval traditions from centuries of seamanship. Death before dishonor best describes this practice. Nothing has changed since. Two points; (1) Other than the usual suspects (engineering/material failure/faulty equipment, battery, electrical, aux, etc) which will be investigated. The issues of (a) human error by way of SOP’s/ inspection regime before and during handling of ordinance loading (b) Availability, preparedness and adherence to ’Stand by' SOP's in case of exigency /eventualities of such nature, and (c) any reduction in the recently concluded 'full overhaul' for submarine fleet operational reasons, merit some attention. If I recollect this is the third incident within Mumbai naval dockyard and harbor in last few years. Sinking at ones berthing station was last evidenced at Pearl Harbor! And that was during 'imminent hostile action. Since then the US Navy changed their strategy, as did all professional navies of the World. The sinking’s of USS Thresher (1963) and USS Scorpion (1968) with all hands on deck were defining points in submarine history - as that kicked off the most ambitious submarine safety, rescue program, and culture of its kind (SUBSAFE). Lessons obviously lost on the Russians with their plethora of mishaps with various submarines over the last few years! (2) Perhaps this will give a fillip to (a) expediting the 30 sub fleet plan & replacement of obsolescence (b) improve submarine rescue capability, and (c) last but not least, a secular and steady programme of navy indigenization – with near zero dependence on diffident suppliers of yore! Sending ships to and fro their original yards and paying top $ for such services for major overhaul and refits creates an unhealthy dependency. I hope the Navy BOI headed by a senior submariner does get to the bottom of it and makes requisite changes in SOPSs, inspection & verification regime, safety regulations compliance, command & control, training, drills, exercises, manuals, contingency plans, emergency response, etc. When you join the submarine arm, you it is not just a well paid job or post with good retirement benefits. It is a calling, a passion. Where margins of error are zero, and consequence is life!

Toon to Tango

05 December 2003
Mumbai: Animation has come a long, long way since the first public screening of animation with cinematic apparatus that used hand-painted sequences on celluloid strips. Today the global market is worth about $50 billion and is projected to become a $70-billion industry by 2007. Though global figures looks quite impressive, the share of the Indian animation market is a mere $0.6 billion, with just $20 million in export. It may be growing year on year, but is not going anywhere. The Indian animation sector is, at best, at the crossroads, while its better-off cousins — IT and business-process outsourcing services — are consolidating their scale, reach and focus, and continue to create ripples in the global market. The industry is beset with problems of size and scale, lack of global presence and marketing muscle, low margins, time and quality issues, low level of supply of quality animators, low entry barriers, and poor domestic demand to give the much-needed boost for such a fledgling market. Several companies of late have shut shop overnight, merged with parent/larger companies or scaled down, and most stuck in the sub-$1-million scale, even after a decade of being around. So while the world ''outsources'' more or less everything to India, has animation missed the bus? Clearly there are two types of companies today — the first category catering to the typical back-end ''outsourcing'', and thesecond having core competencies in original storytelling and indigenous character development for local market fare and co-productions. The former is by and large denominated by low-end or relatively low-value work catering to 2D animation. On an average it costs about $30,000-75,000 for an average episode produced in India as compared to $100,000-150,000 or so in the Philippines, Taiwan or Japan. A standard 22/24-minute episode if made in India costs 70% less compared to the production costs in the US; Disney, Sony, DreamWorks, Warner Bros and Pixar being some international firms that are quietly reaping the benefits of this cost-advantage. India does remain a preferred destination in spite of very strong competition from Taiwan, the Philippines, Japan, South Korea and Mainland China. This despite the fact that these countries have been servicing the outsourcing needs of the West for over three decades, while Indian companies only entered the fray in the mid-90s. The Indian animation segment traditionally owes a lot to the advertising and TV fraternity where TV commercials and brands accepted character illustrations like The Amul Girl, Gattoo (the Asian Paints mascot), The Handiplast Boy, The Bata Bubble Gumme, 30-second ''animercials'' for brands like Hutch, Amaron, Orange, All-Out Mosquito Repellent, 7-Up, Kellogg''s, ICICI, Morten, Good-Night and Vicks. This proves that animation is now an acceptable medium to convey brand properties and values. The various mythological films and serials also spun off cartoon forms to educate the masses and complement efforts of organisations like UNESCO, UNICEF, Doordarshan and the ministry of health and family welfare to address social issues using the more benign cartoon and animation format to deliver a social message. Unfortunately the same agency fraternity has not been able to grow the market mainly because animation for them is still seen as a distinct post-production and visual effects process rather than as an integral component of the master production process, thereby making it prone to severe budget restrictions and low attention value. Ironically animation companies depend on these ''sponsors'' to give them steady work while at the same time make them prone to being squeezed for margins and back-breaking work in tough times. The plethora of interest groups like TASI, APAI, ASIFA-India and Nasscom, and concomitant duplication of efforts and a disjointed national image that is conveyed are not helping either. In the 2002 Annecy Festival in France, the Oscar and in Cannes, the South Koreans had organised their animation studios under one umbrella and stall. The studios were competitors to each other in their home country (like in India) but projected Korea as a major outsourcing hub (unlike in India). This ensured that Korea as a country had a better chance of grabbing business than any other individual entity working in isolation. The nascent Indian animation market must find ways to move up the value chain and get out of the current mindset by adopting a three-pronged strategy: 1. Original character development and storylines for the significant domestic and cross-cultural audiences 2. Moving on to 3D/digital graphics, flash-and-live action animation and taking on the resultant high-end outsourcing work available from US studios as they themselves quite clearly look to pare costs. This can be made possible by a distributed workflow model, which in turn has been made possible by common hardware, database systems, tools and off-the-shelf software suite, enabling artists scattered across the world to send in scene files and have them rendered into finished frames centrally. 3. International co-production, whilst an emerging option for sharing risks and resources, is not a particularly new idea. It is in an experimental stage even for the mature Indian film industry. What co-production and owning intellectual property rights does to companies is to leverage alternative revenue streams and footprints that come with the turf — terrestrial, video/CD releases, print, merchandising, licensing, first-run cable and theatrical rights. This will provide the necessary commercial environment for development of character, experimentation and even co-production. It is in these areas that tomorrow''s opportunities lie and where India can become the ''most preferred'' offshore facility for such type of high-end/high value work. These strategies quite clearly will put them on a path of achieving a critical mass that has eluded them so far — something which just 2D outsourcing will never be able to put it in the big league. There are companies in India that can ramp up and manage from 10 to 100 people in a month and to 1,000 in six months for the right kind and size of a project, but, alas, such projects continue to be the exception rather than the rule. Today, somehow, several TV channels have stepped in and provided the much-needed fillip to the struggling industry by running local animation fare. Even global and domestic brands like Asianet, ESPN-Star, Sony Max, Discovery, Nickelodeon and TNT Cartoon Channel have found ready acceptance of local animation fare among their respective target audiences (Tenali Ram, Hanuman, Pandava). Turner International''s Cartoon Channel is currently telecasting episodes of Adventures of Chota Birbal while a mainstream entertainment channel has commissioned Bheema Kheema, India''s first 52-episode series for children to be aired from mid-February 2004. In the US, the biggest market in the world, a recent partnership between IT giant IBM and independent producers for CG feature film production, economics of scale and size and workstation technology will radically alter the dynamics of the animation market yet again. And it is true that mega-size projects ($60 million-plus) and revenues determine who does what work where. It is no secret that Pixar''s (one of the few independent computer-animation companies) five animated full-length feature films have earned it more than $2 billion from worldwide box office. And sample this. The ''hit'' of tomorrow (Foodfight, produced by Larry Kasanoff, TDRL, involving 138 speaking ''main'' characters, 6,254 ''secondary'' characters, 174 sets that include 5,000 ''buildings'' and 12,000 lights) was ''filmed'' in the garages of Santa Monica and in the by-lanes of Taipei and Mumbai (and not in the backlots of Shanghai and Hollywood) at half the cost of a typical Pixar full-length CG feature film.

Get our IT Act Together

24.December.2004


Well intentioned cyber laws are only as good as their subsequent intrepretation and implementation.

The noise and colour of an Indian shaadi(wedding) brass band, more or less, describes the events of the last few days. That the law is an ass, in the case of Baazee.com, a 100 per cent Indian subsidiary of eBay - the world's largest online marketplace - is in some danger of being proven so. Except, in this case, the law is fairly robust; it is its interpretation and style of enforcement that is asinine!

Baazee was in the news recently on account of a rather profitable valuation and subsequent acquisition by eBay making its shareholders both happy and rich! Reportedly at $50 million for a subscriber base of just about 1 million registered users… the largest dotcom deal after the sale of IndiaWorld (Sify) to Satyam at the height of the internet boom No doubt an isolated case of an Indian dotcom success in today's post internet bubble world, but much needed success nonetheless. So what are the issues which have bought a fairly open and shut case to such prominence?

First, as everyone knows, an auction or marketplace site is much like a mandi, bazaar, stock exchange or flea market except that it has no physical boundaries. It is virtual and almost anybody in the world with an email id and internet access can participate by just registering and listing the product description of what they want to sell - not the product per se!

So in this case. It was not the 'objectionable' "DPS (Delhi Public School) clip" that was found on the site, contrary to what is reported in most media, but just an innocuous text description of the item.

Second, trading sites are fairly self-regulating. While anyone can register and transact, all buyers and sellers rate each other based on feedback on the reliability and trustworthiness of their transaction experience. The site, unlike the local kirana wallah (grocery shop-owner) neither 'owns', 'creates' or 'publishes' the product nor is necessarily aware of what passes through their site since there are literally millions of transactions taking place at any point of time. If one types the keyword "DPS Dhamaka" on the world's most famous search engine - Google, the results throw up links to sites actually containing the infamous clip! Baazee or Google, Inc as 'intermediaries' are in no practical position to pre-emptively control what is available on their sites nor act as moral gatekeepers. In short they have limited responsibility.

Third, a detailed mandatory user agreement between the user and the site further protects the service provider and defines what is not allowed to be listed (viz. objectionable material, pornography, weapons, drugs, etc,) and what indeed constitutes breach of this agreement and penalty for being in breach. This includes barring a subscriber from access and even being brought to the notice of the 'cyber crime division' of the local law enforcement agency.

Situations which could fall under a similar dilemma in the real world are where a newspaper editor or publisher cannot be quite held directly responsible, under existing legal jurisprudence, if their classified section carries fairly 'explicit' ads of massage parlours or escort and dating services.

Similarly in the digital or electronic world, if subscribers send objectionable text, voice or multimedia material over the net, mobile phone, telephone lines, Wifi- or Bluetooth-enabled devices then can the local telephone company, internet service provider or spectrum licensees be held directly responsible?

In such cases, the spirit and principle of section 79 of the IT Act ought to kick in and restrict the direct liability of the service provider (unless or otherwise clearly proven that the site or "intermediary" knew about it or did not exercise all due diligence to prevent the "offence").

Fourthly, in its currently strict interpretation of section 67 of the IT Act (electronic transmission and / or publication), the Municipal Corporation of Delhi (MCD), under the jurisdiction of which is the Palika Bazaar, the telecom company on whose network these MMS's were sent, and the director of IIT, Delhi where the images were found stored, stand implicated.

Had baazee failed to pull out the objectionable material, the police would have been perfectly right to enforce the law. Clearly, from all accounts baazee took of the offending listing within 48 hours of its listings and much before the law even got to know about it… mainly on being alerted by its online self-policing 'watchdog' feature.

Recently in the UK a member of the Queen's Household was dismissed from service for listing the Queens X'mas Gift to him - a $10 X'mas Pudding cake - up for auction on eBay! Needless to say, there was no question of anyone being hauled up from the site, let alone arrested. So what is the reason for the rather over-the-top reaction by all concerned here?

There has been a sudden spate of raids all over the country on cyber cafés, seizing of mobile phones, random checking of SMS / MMS of students, emails of actresses, etc, ever since. Unfortunately since the IT Act of 2000 has been passed there has been no sensational case which has come up and therefore, by all counts, this is a test case since there are only a few in the enforcement and legal fields who are familiar with the nature of the internet and modern communications technology and cyber laws which govern them.

It is obvious that however well intentioned the law, it is in the interpretation that there is going to be a veritable free-for-all till wiser counsel prevails!

Finally, the internet services "intermediary" community, as small as it is here, is largely underrepresented and fragmented with little or no spokes-person, body or special interest group to promote and protect its cause. To that extent the internet business in India though admittedly regarded as a child protégé, alas, is one which has been orphaned at birth. The little representation caters to motley interest groups and their limited charters and agendas. It is time for someone to step up to the plate.

Regulation of the internet will remain a Pandora's Box

The internet cannot be regulated the same way as newspapers, magazines, films, radio or television. By Probir Roy

02.February. 2005

IT Act I; scene 2 now unfolds after a very private act, which set off a very public storm. The Baazee school-sex MMS episode left an aftermath of a flurry of raids on cyber cafés, seizing of mobile phones, random checks of students'' mobile messages, scrutiny of an actress''s emails, and a generally heightened awareness of the threat of intrusion of hidden web cams and camera phones in people''s daily lives.

The government has moved quickly — it has set up a committee to suggest modifications in the five-year-old IT Act. This provides as good a time as any to take a step back and revisit the caveat-driven nature of the web.

First, the internet is the manifestation of humankind''s quest for limitless personalised two-way ''rich'' interaction with thought. At a point-and-a-click, the hypertext layout allows users to change topics on a whim, travel to distant places, gather world opinion or information on a subject in a matter of seconds, engage in digital trade and commerce and help in medicine and education. This nature of the internet must be protected and perhaps even promoted by any legislation that claims to be fair to this medium.

Legislation that seeks to concurrently regulate the internet must continue to recognise the unique and ubiquitous nature of the medium. The internet is not like the print medium, the communications infrastructure industry or the audio and visual entertainment industry. It is all, yet none of these! To paint it with the same law brush, tempting as it may be, or indeed even look for parallels in these sectors, is short-sighted. This has been proven in other parts of the world.

The interaction between ''receiving'' data and ''publishing'' it is where the core of the law and its interpretation should focus at this point. What is clear is that each side has its rights; the online publisher has freedom of expression and the receiver has the right to be secure from harm in his electronic space.

In a Baazee-like case, it is a tightrope walk — while direct publisher or distributor liability may not be clearly established, clever legal arguments and overseas rulings may not absolutelyexclude it either. A recent case in which an ordinary corporate website carried advertising on a subject matter in violation of the provisions of the pre-natal sex determination law, direct liability could be attributed to the company on account of inadequate due diligence having been exercised by it.

What of the proliferating web journal, Blogger-community, which has suddenly given power to anyone with an email id and a the ability to put down words on a screen to become both an electronic ''publisher'' and ''distributor''?

Provisions of law that attempt to give one side or the other an unreasonable burden in conducting its business are doomed to failure. Certain definitions and provisions of the Cyber Act 2000, in their current form are clearly limiting or burdensome. Anyone who has studied economics will endorse that the internet is a ''flow'' — an evolving medium in a 24x7 flux to find form, yet at loggerheads with it.

Laws on the other hand are ''stocks'' and lag behind, never able to anticipate those which they vainly attempt to govern. A good example are our ISPs, who had to rollback their VPN services launched in the late ''90s (which account for a dominant part of their revenues) on account of policy retrofitting done only in December 2004.

Over-enthusiastic or inadequate use and interpretation of sections 67 and 79 could have a bearing on direct responsibility and liability issues affecting evolving interactive service intermediaries such as web logs, search engines, newshopper, mobile value-added service providers and even mobile virtual network operators.

Notwithstanding the ambiguity of privacy laws in general in India — as applicable under Article 21 of the Constitution — is that cyber laws must not hint at censorship or impinge on the basic right of speech and expression. They may regulate the labelling on the ''packaging'', but never the content.

Till recently, major US mobile carriers offered adult content as a premium service, till they voluntarily withdrew it, even though US regulations preclude service providers from acting as content gatekeepers and censoring content in any way. And what of some news sites being subpoenaed to reveal their source of information! Clearly the same ''standards'' don''t seem to apply in the real world.

The foundation of the internet rests on the bedrock of technological innovation. Therefore, while technology is clearly the enabler, it is also keenly limiting and can impact current interpretations of due diligence. Talk about monitoring and regulating content on the net through the use of advanced technology and methods like filtering, labelling and rating, have been in vogue at various points of time. Given the varied technical nature of the protocols involved, it is likely that filtering tools will do very well with some of these, and extremely poorly with others.

For example, filtering software can easily block access to newsgroups with names like ''alt.sex''. However, no technology can identify the presence of sexually explicit images in a file that''s being transferred. Keyword-based blocking, as used by Baazee or by MSN''s blogger service (MSN Space), uses text searches to categorise data. If a posting or site contains objectionable words or phrases, it is blocked. Yet any internet buff knows that, at best, keyword searching is a crude and inflexible approach that is likely to block sites that should not be blocked while letting ''adult'' content pass through unblocked.

Searching and filtering has two key shortcomings: First, keyword searches cannot use contextual information. Searches can identify the presence of certain words in a text, but they cannot evaluate the context in which those words are used. For example, a search might find the word ''breast'' on a web page, but it cannot determine whether that word was used in amurgh masala recipe, an erotic story, or in an scientific piece on infant nutrition.

Second, keyword searches cannot interpret graphics. It is not currently possible to ''search'' the contents of a picture. Therefore, a page containing sexually explicit pictures will be blocked only if it is accompanied by text on the same page as the picture and the page contains one or more words from the list of words to be blocked. Ratings systems, on the other hand, imply making value judgements to categorise various types of content. Users are limited to choosing between a small number of ratings systems, each of which has its own biases and viewpoints.

The origin of the internet was found in defence programmes at DARPA in the ''60s. But its 21st century progeny in the avatars of ''darknets'' — anonymous service providers; underground P2P networks (which operate at the fuzzy edge of institutional acceptability) — and proliferating ''Blog services'' will have rule makers of any ilk scratching their heads long into the future. So, whether the wise men in recently constituted committees and groups really have the measure of key issues at hand or vice versa is something one hopes to track and keep readers of this column informed.