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31 Dec 2024 : The Hindu Editorial,

Editorial 1: UPI duopoly’s rise and market vulnerabilities

Context

A major hindrance is the extreme market concentration of two Third Party App Providers (TPAPs) in the UPI network — Phone Pe and Google Pay.

 

Introduction

The rise of Unified Payments Interface (UPI) in the eight years since its launch has been meteoric, with the UPI ecosystem now accounting for nearly eight in every 10 digital transactions in India, with a value of over ₹20.60 lakh crore in August of this year alone. This success, however, is no small feat for a country like India, which is characterised by low digital literacy and a historic reliance on cash, and is deeply reflective of the critical role UPI has played in fostering public trust in digital payments.

  • UPI’s continued success will heavily depend on whether its ecosystem can maintain and build upon such public trust,
    • It will depend on the ecosystem’s performance on metrics such as resilience, reliability, and openness to innovation.
  • This is particularly important as UPI’s penetration remains at 30% of the population, which is impressive for a new payments technology, but shows how much of India remains to be brought into the digital payments fold.
  • Achieving this will require substantially new innovations in everything from service offerings to app design and the overall product base of the UPI ecosystem to make it relevant for the remaining 70% of the country.
  • A major hindrance is the extreme market concentration of two Third Party App Providers (TPAPs) in the UPI network — Phone Pe and Google Pay.
    • Together, they control over 85% of the total market share, whereas the next biggest player, Paytm, controls merely 7.2%.

 

Major risks

Emergence of a Duopoly in the UPI Ecosystem

  • The emergence of a duopoly, especially a foreign-owned one, at a relatively early stage in the UPI ecosystemcreates three major risks.
  • First Risk: Increased Systemic Vulnerability
    • High market concentration in the payments space can lead to single points of failure, where any sudden stoppage or break in services can have ripple effects across the entire financial structure.
    • Given that nearly eight out of 10 transactions carried out via UPI in a month take place on either PhonePeor GooglePay, these two apps have effectively become such single points of failure.
    • To ensure the system remains robust, it is essential to develop failsafes and backup mechanisms to keep the system functioning smoothly.

 

Second Risk: Decreased Competition and Innovation

  • There is a risk of decreased competition and innovation in the payments and financial ecosystem.
  • By consolidating a disproportionately large share of the market and user base, the two dominant TPAPs benefit from a scale that creates high barriers to entry for smaller and newer market participants.
  • As all service providers in the UPI network are subject to a zero-charge framework for users, they primarily compete to achieve user scale, which they then leverage for commercial purposes by cross-selling other financial products.
  • The widespread scale of operations and user base that the two foreign-owned TPAPs have consolidated creates an inherently uncompetitive market.
  • The lack of competition disincentivizes investment in new innovations, as the existing dominant players need not do anything more to maintain their current positions.

 

Third Risk: Foreign Dominance

  • Both TPAPs in the duopoly are 
    • foreign owned — PhonePe by Walmart and GPay by Google.
  • No Indian TPAP or service provider can realistically hope to compete against the dominant TPAPs without billions of dollars in funding.
  • This foreign ownership creates multiple potentially new lines of failure, including data protection and backdoor access to sensitive information of Indian citizens, many of which Indian regulators might not even be aware of.
  • It is therefore prudent policy to encourage the development of Indian TPAPs, which can strengthen the UPI ecosystem by providing a counterbalance to the current dominant platforms.
  • This is not an argument against having foreign-owned UPI players or service providers, but rather a call to create a more level playing field for Indian apps and developers.

 

Regulatory Response and Delays

  • While the existing duopoly has been repeatedly flagged for its associated risks by regulators and parliamentarians, it remains to be substantially addressed.
  • In 2020, the National Payments Corporation of India (NPCI) issued a circular instructing all TPAPs to cap their market share at 30% of the total volume of transactions processed via UPI during the previous quarter and imposed an upper limit of two years for implementation.
  • However, the NPCI subsequently extended this deadline.
  • Four years later, the two TPAPs in question are no worse for the wear, with PhonePe alone accounting for 48.36% and Google Pay for 37.3% of market share in volume, as of August 2024.
  • It is now being reported that such delays could continue beyond this year.

 

Potential Increase in Market Share Cap

  • To further add to the troubles of Indian developers, recent reports suggest that the NPCI may potentially increase the market share cap from 30% to 40%.
  • Every subsequent extension given by the NPCI, with any potential increase in the market share cap, will only allow the dominant TPAPs to consolidate their hold.

 

Conclusion

Under the right conditions and with the right incentives, however, the UPI ecosystem has every potential to offer smaller market participants a level playing field where they can innovate and compete with larger established players. As UPI enters its next phase of growth in both reach and innovation, the implementation of a market cap is a key step in insulating the ecosystem from such risks that stand to substantially erode public trust and derail UPI’s success and future transformational capabilities.

Editorial 2: States and the danger of poorly manufactured drugs

Context

The Union government must help States to improve drug quality.

 

Introduction

Over the last few years, there have been a number of incidents across India involving not of standard quality (NSQ) drugs, the most recent being the deaths of five young mothers in Ballari district, Karnataka, allegedly due to contaminated drugs manufactured by a pharmaceutical company in West Bengal.

  • Unique Nature of India’s Drugs and Cosmetics Act, 1940: Due to the unique nature of India’s Drugs and Cosmetics Act, 1940, the pharmaceutical company located in West Bengal can sell its drugs in all States across the country, despite being licensed and inspected only by drug inspectors in the State where its manufacturing facility is located.
  • Licensing and inspection responsibilities: Since each State is responsible for licensing and inspecting pharmaceutical manufacturing units located within its territory,
    • it means that there is little that States such as Karnataka can do to stop poorly manufactured drugsfrom other States flooding their pharmacies.
  • Data supporting the assertion: Data supports this assertion.
    • Out of the 894 samples randomly tested by our State drug laboratories over the last three years, an overwhelming 601 samples that failed testing were from manufacturers located in States other than Karnataka.

 

Information sharing is a way out

  • Regulatory tool to deal with NSQ drugs: The only regulatory tool at the disposal of my department to deal with these NSQ drugs manufactured outside Karnataka is to prosecute the pharmaceutical company.
    • Criminal prosecutions take a very long time, and during the pendency of the trial, there is nothing that we in Karnataka can do to stop the pharmaceutical company from continuing to manufacture and sell its drugs within Karnataka.
    • Only the drug inspectors in the home States of these pharmaceutical companies can take steps to cancel or suspend their manufacturing licences.
  • Need for urgent solutions: Given this reality of drug regulatory laws in India, it is imperative that we think of solutions to improve the situation urgently.
  • Information sharing: A simple and cost-effective measure, which may help improve the quality of drugs across the country, is to promote greater information sharing between the drug control departments of State governments and various public procurement agencies.
    • Currently, there is no way for drug inspectors of the Karnataka Drugs Control Department or the Karnataka State Medical Supplies Corporation Ltd. (KSMSCL) to verify the antecedents of pharmaceutical manufacturers located outside our State.
  • Centralized database for Drug Testing Results: For example, it would be of great help if all central and State drug testing laboratories made available their test results in a centralised database.
    • This would enable a drug inspector or a procurement official in Karnataka or any other State to track the number of times a pharmaceutical company’s drugs have failed testing across the country in any government laboratory.
    • It will become easier for drug inspectors to adopt a risk-based approach while making enforcement and procurement decisions.

 

Have a centralised database

  • Similarly, it would be very helpful if all State drug inspectors made available inspection reports and licensing information for all manufacturers in their respective States in one centralised database.
  • By making available this information in a single database, it will become easier for procurement agencies such as the KSMSCL to verify the antecedents of pharmaceutical companies before purchasing drugs from them and avoid scenarios such as the recent scandal in Maharashtra where dubious suppliers sold spurious antibiotics to a public hospital.
  • Such a database will also help procurement officers to understand the quality of inspections across States and prioritise manufacturers from States with a reputation for conducting more rigorous inspections of their manufacturing units.
  • In the absence of such a verifiable database, most procurement agencies have to just take the word of pharmaceutical companies submitting tenders. The KSMSCL does not have an independent way to validate the claims of pharmaceutical companies located outside Karnataka when making public procurement decisions. This impacts public health.

 

Central Register for Blacklisted Manufacturers

  • Apart from inspection and test reports, it would also help if the Union Ministry of Health could create a central register which records all pharmaceutical manufacturers blacklisted by different procurement agencies for supplying NSQ drugs.
  • This would be very helpful in weeding out the bad players from the market and improving the quality of drugsavailable in public hospitals.
  • Most tenders require pharmaceutical companies to disclose if they have been blacklisted by any entity.
  • But, currently, there is no way for procurement officers to verify the authenticity of this information independently.

 

States and legal powers

  • A third simple reform is to equip individual States with the legal powers to block manufacturers from outside the State from continuing to sell drugs within their State,
    • while they are under investigation for the sale of drugs that may have caused deaths or other serious adverse events to patients within the State.
  • State drug controllers should have the power to bar pharmaceutical manufacturers, located out of State, from selling their drugs within their State until the manufacturer is able to demonstrate that it has rectified the problems that led to the manufacture of NSQ drugs.

 

Conclusion

However, since the Drugs and Cosmetics Act, 1940 is central legislation, there is little that an individual State such as Karnataka can do to amend the law or its enforcement in other states. The initiative for legislative reform must come from the Union Health Ministry. Karnataka will be happy to support any reforms that will help improve the quality of drugs in Karnataka and across the country.