Can rural India reap digital dividends?
The virtual world has increased the possibilities of trade in the real world
One
of the primary agendas of the liberalization which began in 1991 was to
improve competitiveness and reduce the transaction costs which largely
restricted India’s trade with the rest of the world. But a quarter
century after economic reforms were initiated, this Coasean problem of
transaction costs remains more relevant than ever. The World Bank’s
latest World Development Report, or WDR, points to the potential of Internet and communication technology (ICT) in pruning these.
The Coase theorem (named after British economist Ronald Coase)
states that if trade in an externality is possible and there are
sufficiently low transaction costs, bargaining will lead to an efficient
outcome regardless of the initial allocation of property. Since the
digital revolution, the virtual world has increased the possibilities of
trade in the real world, minimizing these transaction costs.
Transaction costs include search and information costs, bargaining and
decision costs, and policing and enforcement costs.
The WDR cites the example of the
Taobao villages in China to show the extent to which the Internet can
induce development. Taobao, a consumer-to-consumer portal established by
Chinese e-commerce giant Alibaba, allows entrepreneurs to open online
stores and sell their products to interested consumers. A Taobao village
is a cluster of rural e-tailers where at least 10% of village
households engage in e-commerce.
It’s worth looking at the potential
benefits of such a model in India. Over half of India’s population
depends for its livelihood on an agricultural sector that cannot support
it adequately. Structural reforms may improve the sector’s viability,
but the only long-term solution is enabling the rural population’s
access to other forms of economic activity. An e-retail model that aims
at incorporating rural households could offer some utility here.
As matters stand, e-commerce in India
is almost entirely an urban phenomenon. Clustering rural retailers as
the Taobao model does creates the volume necessary for incentivizing at
least some portion of the logistical and financial support urban
retailers enjoy. And it could have the secondary benefit of providing a
boost to artisans who lack access to a wider market, making traditional
crafts unsustainable.
E-commerce ventures structured along
similar lines such as ITC e-choupal, Craftsvilla and Kerala’s
Kudumbashree have had moderate success in the past.
The major obstacle, of course, is the
lack of rural Internet access. India has the ironic reputation of having
the second largest number of Internet users and the largest offline
population in the world. Internet usage is highly skewed in favour of
men and urban households compared to women and rural households. Prime
Minister Narendra Modi’s Digital India initiative aims at resolving this
bottleneck. Its goal of connecting rural areas with high-speed Internet
networks is laudable, as is its focus on digital literacy. How such a
mammoth undertaking will play out remains to be seen. And to be
successful—particularly in the context of the Taobao model—it must form
robust linkages with other government initiatives that range from
providing a cradle-to-grave digital identity to universal access to
banking services.
Other hurdles wait further down the
road. Judging by the government’s Start-up India push, the infant
industry syndrome is an occupational hazard in the Indian policy
environment. Rural e-commerce should not fall into the same trap. If the
Internet has to become an effective catalyst for efficiency and
innovation, competition is essential. Alibaba’s Taobao advanced so much
on the efficiency frontier due to intense competition from eBay.
The last thing the rural economy needs
to add to the protectionism the agricultural sector enjoys is a
subsidized, protected retail segment.
ICT alone accounted for one-fifth of
global growth from 1995 to 2014. In 1990, American economist Paul
Michael Romer said, “Economic growth occurs whenever people take
resources and rearrange them in ways that are more valuable… History
teaches us that economic growth springs from better recipes, not just
from more cooking.” Technological change is an endogenous factor in
growth and Internet is technology at its best.
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