Digital Public Infrastructure for the Developing World

(Photo by iStock/Naturecreator)

On a recent visit to rural Andhra Pradesh we stopped to buy a cup of tea from a chaiwallah, an informal entrepreneur selling tea by the roadside. After producing a hot cup of masala chai, she gave us a QR code to make our payment. This lady in a remote rural location not only had a digital bank account that allowed her to receive digital payments, but she had the proof of identity needed for such an account: a unique 12-digit number linked to her biometrics, her Aadhaar. Moreover, she clearly trusted digital payments through the United Payments Interface (UPI). It was easy enough to use it that she preferred it to cash.

Digital public infrastructure (DPI) (in this case, the “India Stack”) is at the heart of a revolution that is transforming the Indian economy. An intermediate layer between physical infrastructure (like broadband) and sectoral applications (like social security) DPI provides the building blocks for offering transformative digital services—such as systems for digital identity and payments—at scale. DPI rose to prominence globally during the COVID-19 pandemic enabling digital government-to-person payments through cash transfers. India Stack is one example of such DPI; others include Brazil’s Pix fast payment system or Australia’s Consumer Data Right.

The story of India Stack begins in 2009: Approximately 400 million Indians did not have a form of individual identity, which meant that the majority of the population was unbanked and lacked access to credit. This also meant that many were unable to claim public services and the benefits that were their due because of the high cost of verifying their identity through manual processes and physical documents. This was the start of the Aadhaar project, which offered a universally accessible ID, a foundational form of digital identification. By 2022, around 1.3 billion Indians, nearly 95 percent of the population, could digitally prove who they are. The Aadhaar project morphed into India Stack during the mid-2010s to include components such as payments and financial data governance, in addition to identity. The payments component, UPI, allows for seamless peer-to-peer payments. These payments, in terms of volume, have increased from less than a billion transactions in FY 2018 to over 83 billion in FY 2023. Finally, the data governance component enables the secure storing and sharing of data, ensuring that ownership and control over the data reside with users. This in turn allows citizens to leverage the data trail they leave while using Aadhaar and UPI.

India stack is a unique approach to developing digital infrastructure through a partnership between the government and the private sector. As such it is different from a corporation-centered partnership like the DC commercial Internet or a government-centered partnership like Beijing Paternal Internet. The interoperable, low-cost, and open-source nature of India Stack allows for the model to be quickly and affordably replicated in other developing economies. Such a model offers an inclusive, bottom-up approach to development and growth that developing countries need but which has heretofore been sorely lacking.

What Other Developing Economies Can Learn From India Stack

Developing countries like India are characterized by institutional voids, which is when the formal institutional structures that support and drive market economies are weak or non-existent. For example, when many people lack secure property rights (and hence access to information, credit, public services, and other critical economic infrastructure), the power of markets cannot be unleashed, and economic and social progress falters. DPI in the form of India Stack endows digital property rights to citizens as a means of overcoming these voids, a mechanism that other developing economies could follow to increase incomes and productivity by bringing vast millions that operate outside the formal economy into it.

Overcoming identity voids: In developed economies, where passports and other forms of identity documents are offered from birth, personal identity verification is a de facto norm. However, in developing economies, a lack of secure modes of identification can restrict people’s access to government and public sector services. DPIs that provide digital identification can offer a mechanism to overcome such voids; Aadhaar, for instance, acts as a seamless proof of identity for informal entrepreneurs in India to access state benefits as well as other public services such as registering a business. This removes the hurdles that lower-income and marginalized communities face by bringing them under the banking and government services ambit, empowering them to become more active entrepreneurial agents. Indeed, Aadhar has enabled almost 50 percent of Indians to open their first bank account or access mobile services.

Overcoming financial voids: In developing economies, informal entrepreneurs often lack access to financial institutions on terms beneficial to them, if not entirely, due to a lack of collateral or credit history. In developed economies, where pre-existing bank accounts and prior online activity are widespread, this is a far simpler process. DPIs in the form of payment interfaces offer a mechanism to bridge finance-linked voids in developing economies. For instance, UPI creates a transaction “audit” trail for informal entrepreneurs, who would otherwise have no such record of their financial activity. Since UPI operates through bank accounts, the banks now have this information and can use it to offer entrepreneurs unsecured working capital. Not surprisingly, UPI has led to a significant decline in the cost of capital for loans compared to exorbitant rates in the informal lending market.

Overcoming market voids:
In developing economies, market voids arise from weak physical infrastructure, supply chain, and market access opportunities. This increases the barriers for informal entrepreneurs in terms of discoverability, visibility, and market creation, a kind of market void that digital commerce platforms can help to overcome. For instance, Open Network for Digital Commerce (ONDC), built on top of India Stack, offers every seller a digital storefront that allows for visibility and discoverability across the nation, making it possible for customers to connect with sellers across the country. Though ONDC is still in its early stages, it is already empowering informal entrepreneurs in significant ways. For example, Namma Yatri, an ONDC-powered service for booking auto-rickshaws in Bengaluru, has seen around 5 million trips completed within 6 months of launch.

Bottom Up

DPIs open a path for a bottom-up approach to economic development in developing economies, a powerful alternative to the standard top-down approach of trickle-down economics (which has had limited success in these economies). Top-down approaches fail to empower informal entrepreneurs who, even while they constitute a majority of the population, often fall outside the realm of national policies. By contrast, DPIs following the India Stack model offer an alternative that can be specifically attractive to developing economies.

Far from challenging political interests, such a model can even be politically expedient, for instance by delivering increased incomes while broadening the tax base through a formalization of the informal sector. Because DPI offers an approach that is simpler, more open, and interoperable, it lowers the costs for those in the informal sector to move into the formal economy while increasing the benefits that accrue to them from doing so. This also increases the overall trust that citizens have in the formal system driving them to believe that they are better off inside it than outside. A major implication of all this for governments is that they should not only build such digital infrastructure but also continue to find ways to prevent it from being captured by special interests alongside finding more and more use cases to extend their reach into vertical beyond financial services such as health, education, agriculture, mobility, and e-commerce more generally. Doing so holds the promise for inclusive and sustainable growth for more than half the world’s population.

Read more stories by Sreevas Sahasranamam & Jaideep Prabhu.