By K Raveendran
An IMF working paper has commended India’s digital public infrastructure (DPI), which is known by the term India Stack, as a great success and recommended it for other countries, but with a rider that these countries may not have India’s enabling factors such as a vibrant ecosystem that includes a huge pool of IT talent.
India Stack is the collective name of a set of commonly used DPIs consisting of three different layers — Aadhaar, complimentary payments systems based on Unified Payments Interface (UPI), Aadhaar Payments Bridge, Aadhaar Enabled Payment Service, and data exchange such as DigiLocker and Account Aggregator. Together they enable online, paperless, cashless, and privacy-respecting digital access to a variety of public and private services.
The paper notes that the benefit of this initiative is felt across the country and served India well during the pandemic. Aadhaar helped facilitate the transfer of social safety net payments directly from the government treasury’s accounts to beneficiaries’ bank accounts, helping to reduce leakages, curb corruption and providing a tool to effectively reach households to increase coverage. Up to March 2021, about 1.1 percent of GDP in expenditure was saved due to the digital infrastructure and other governance reforms. Using this digital infrastructure India was able to quickly provide support to an impressive share of poor households during the pandemic. In the first months of the pandemic about 87 percent of poor households received at least one benefit.
The IMF document says India Stack has been used as a platform to foster innovation and competition; expand markets; close gaps in financial inclusion; boost government revenue collection; and improve public expenditure efficiency. Digital payments are now ubiquitous, UPI accounts for 68 percent of all payment transactions by volume. The use of digital payments has expanded the customer base of smaller merchants, documenting their cash flow and improving access to finance. Roughly 4.5 million individuals and companies have benefited from easier access to financial services through the Account Aggregator, since it was first launched in August 2021, and adoption is increasing rapidly.
Digitalization has also supported formalization of the economy, with around 8.8 million new taxpayers registered for the GST between July 2017 and March 2022, contributing to buoyant government revenues in recent years. Government service provision is streamlined; for example, citizens can access documents issued by state and central government through one platform. Similarly, the India Stack has digitized and simplified Know Your Customer procedures, lowering costs; banks that use e-KYC lowered their cost of compliance from $12 to US 6 cents. The decrease in costs made lower income clients more attractive to service and generated profits to develop new products.
The paper notes how India’s journey highlights lessons for other countries embarking on their own digital transformation. India Stack’s development is guided by a foundational building blocks approach, and a focus on supporting innovation across the ecosystem. The building block approach involves unbundling the components of the solution to a set of problems and identifying a minimal common core. This modular approach fosters innovation, allowing solutions to be built to multiple problems based on the common core.
For a large and diverse country such as India, a building block approach provides those closer to the problem with the basic tools to create tailored solutions. A focus on supporting a vibrant ecosystem implies the need for interoperability between the different DPIs and a competition-focused design. In India, interoperability was supported through open standards, allowing anyone to utilize the functionality provided by India Stack. These principles are applied to other DPIs in education and health, including the Covid-19 vaccine and distribution platform, CoWIN. Using a digital backbone allowed India to scale its vaccine delivery quickly and overcome challenges such as large-scale internal migration. The technology underlying CoWIN has been deployed in Indonesia, Philippines, Sri Lanka and Jamaica to help facilitate their vaccination programmes.
The working paper points out that the government played a catalytic role, acting as an anchor client and establishing institutions to ensure continuity in India Stack’s operations. DPI is an example of a two-sided market where the value of the platform increases for both participants as the numbers on each side increases. By using the DPI to provide social benefits, the government encouraged take up by individuals and gave service providers the comfort of access to a large client base.
The government also promoted the use of technology as ‘utilities’ and created a category of not-for-profit companies with a public purpose. The National Payments Corporation of India, an initiative between the Reserve Bank of India and the Indian Banks Association, which unites and operates retail payments and settlement system, is an example of such a company. This is one strategy to strike a balance between curbing monopoly rents and providing these services effectively and efficiently, without the various human resources and procurement challenges that often plague large government projects. The tax administration also played a pioneering role in rolling out a tax ID (PAN) using an innovative PPP approach, from where important lessons were drawn to develop Aadhaar, the paper notes.
Importantly, the paper asserts that certain features of India’s journey would be difficult to replicate elsewhere. The in-house development of Aadhaar, supported by systems integrators firms, was feasible in India due to the high level of capacity in IT within the domestic labour market. This allowed India to avoid vendor lock-in and lack of interoperability and created a need for sufficient resources and capacity to continue maintaining and developing the infrastructure.
Other countries have approached this challenge differently, including by using open-source software under the format of digital public goods shared between countries. These types of resource and knowledge-sharing initiatives mean that governments with shallower IT capacity can implement DPI. There are also features arising out of India’s specific context which may not be applicable for others. For example, to access the full functionality of India Stack, individuals need access to a smartphone and a bank account. For other countries with low adoption of smartphones and lack of access to banks, payments systems based on mobile money that can be used on a feature phone are the dominant form of digital payment. (IPA Service)
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