Digital ecosystems: Who should finance what?

Feb 21, 2022 08:11 PM IST

Three financing models dominate the discourse, and a combination of all three might help India address the gaps of financing in its fast growing digital space

Last month, the ministry of electronics and information technology (MeitY) released its report on India Enterprise Architecture 2.0 — which envisions the development of a digital ecosystem that enables an integrated delivery of services in the country. This is an improvement on the first version with more clarity as to the vision, principles and implementation aspects of such an ecosystem, but is missing a component essential to discussions on data governance — the financing models that need to drive the development and maintenance of digital platforms and digital communities.

Governments can facilitate technologies where the market doesn’t see an immediate profit. The UPI revolution was boosted when BHIM — backed by the government — was launched. Google Pay and Amazon followed later. ( HT Photo) PREMIUM
Governments can facilitate technologies where the market doesn’t see an immediate profit. The UPI revolution was boosted when BHIM — backed by the government — was launched. Google Pay and Amazon followed later. ( HT Photo)

Most civil society debates and government critique tend to avoid in-depth discussions on how digital public infrastructure should be financed — largely because the conceptual framework for financing is not fully developed. Traditional economic models have no direct applicability as digital goods are consumed differently. A movie theatre, for instance, has limited seating, but an online platform such as Netflix potentially has an unlimited number of “seats”. This has a direct impact on revenue, market share, and fundamentally changes our understanding of how movies and TV shows are consumed. Consequently, it also has a bearing on the financing mechanisms that should be allowed in a given sector as these differences could give rise to new benefits and pitfalls. Netflix can reach a wider audience at a lower cost, but can also dominate the market more easily than traditional theatre companies. How should we then regulate Netflix? Should we think of it as a PVR or a Google?

Economists and lawyers don’t have a clear answer to “who should finance what?”. Looking back, we’re unsure if Aadhaar would have been better off if it was privately financed. Looking forward, we don’t know if UPI should be owned and operated entirely by the government, instead of being co-owned by banks. Such questions require more attention, discussion, and resources to have a clear answer.

The two forms of financing that dominate the discourse are government-led on one hand and market-dominated on the other. Economist Mariana Mazzucato argues that the State must provide initial financing for digital innovation. Her thesis is that most of the breakthrough technologies central to our modern digital life have sprung out of investments in public-oriented missions such as landing man on the moon and connecting universities. Governments should not be mere “fixers”, but instead be actively “entrepreneurial”. They have got it right in the past — it was public investment that was responsible for all the technologies on the iPhone — with GPS, Siri, touchscreen, and the internet itself. They should, therefore, continue to invest in future innovation as well.

Journalist-businessman Matt Ridley, on the other hand, challenges such a top-down view of innovation. In his book, How Innovation Works, he argues, with numerous historical examples, that innovation is spontaneous and organic. It emerges out of freedom, and so, Ridley argues, governments should move out of the space of innovation, allowing individuals to innovate, fail, and innovate again. He doesn’t believe that government financing can improve the innovation capacity in any country or culture and, therefore, believes that governments should not pick winners. Instead it is the duty of the government to dismantle barriers that private players face and leave the job of innovating up to them.

A third form of financing has played a role in India’s digital journey — philanthropy. Multiple foundations and private individuals have donated time and resources to build the technology products that have helped shape the development of India’s digital infrastructure. Organisations such as iSPIRT have built IndiaStack and other related technologies. The “not for profit” model has also extended to organisations such as the National Payments Corporation of India, which operates the UPI service.

So, how should India think about financing its digital public infrastructure? There is no one-size-fits-all solution. Different parts of the ecosystem will have to be financed differently. For instance, information access portals — the interface between the citizens and the government — have to be continuously updated with information and adapt to newer operating systems and technologies. Private financing will be more suited for this as government processes are notoriously slow. The IRCTC portal, which is still very archaic when compared to some other modern portals, makes this point. Users are better off using another interface to book tickets, which then plugs into the IRCTC on the backend.

On the other hand, governments can facilitate technologies where the market doesn’t see an immediate profit horizon. The UPI revolution was boosted when the BHIM app — backed by the government — was launched. Google Pay and Amazon followed later. Similarly, philanthropic capital can help in cases where the agility of the private sector is required but where a market doesn’t exist. For instance, open stacks such as the National Health Stack or the MOSIP ID platforms are funded by philanthropic initiatives.

In most instances, an optimal combination of all the three models discussed above is required. This calls for us to first develop a values framework with built-in principles and a clear description of the available choices. With the pace at which India is digitising, such a rubric is both urgent and imperative to develop and guide future policy and regulation.

Rahul Matthan is partner at Trilegal and Prakhar Misra is PhD candidate at Johns Hopkins University 

The views expressed are personal

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