Digital Economy, A Leveller or a Source of Economic Inequality

By the middle of 2016 the Pradhan Mantri Jan Dhan Yojana had opened more than twenty crore bank accounts, mostly for people who had never had one. In August of that year the National Payments Corporation launched the Unified Payments Interface, which lets a person send money from one bank account to another by phone in seconds. In November the withdrawal of high value notes drove millions to try digital payments for the first time. A farmer's wages, a widow's pension and a student's scholarship could all now travel as data. The question in the topic is whether this world of data narrows the distance between rich and poor or opens it wider.

The case for the leveller begins with costs. Digital technology reduces the cost of copying and moving information to nearly zero, and that benefits those who were kept out by high costs. A poor person who must travel to a distant town to open an account, or pays a moneylender, can now use a mobile phone. Direct benefit transfer using the Aadhaar number and bank accounts sends subsidies straight to beneficiaries, and the government estimated that it cut leakages by tens of thousands of crores of rupees. Money that formerly passed through many hands, some of them corrupt, now arrives whole.

Information is a second source of levelling. ITC's village internet kiosks called Choupals, begun in 2000, gave farmers in Madhya Pradesh live prices and weather, which reduced their dependence on middlemen. Platforms such as online marketplaces allow a weaver in a small town or a home cook to reach customers across the country without a showroom. Online education offers lectures from leading teachers to students who cannot attend those institutions. Start ups born in small cities have shown that talent is not limited to the metros. The World Bank in its report of 2016 called such gains digital dividends.

Money that formerly passed through many hands, some of them corrupt, now arrives whole.

The tools also create new forms of work. The platforms of ride hailing, food delivery and online freelancing, which spread quickly after 2012, provide income to people without formal jobs and allow them to set their hours. Young people with a smartphone can earn through content and small businesses. Women who cannot easily leave the house can work from home. The entry barriers are low, and the possibility of earning has drawn millions. Yet these workers are classed as partners and not employees, and they bear the costs of vehicles, fuel and downtime without the protections of regular jobs. Earnings fall when more people join and incentives are cut.

Against this, the argument for inequality is strong. First, access itself is unequal. In 2016 fewer than three in ten Indians used the internet, and the shares among rural people, women and the poor were far lower. A survey found that men were much more likely than women to own a mobile phone. Those without electricity, connectivity, a device or the ability to read cannot take part. The gap between those with access and those without is called the digital divide, and it reproduces the old divides of income, gender, caste and region. As services such as banking, ticketing and welfare move online, those on the wrong side of the divide risk exclusion, not inclusion.

Skills are the second filter. The benefits of digital technology flow most to those with education, who can use it to earn more. Economists Erik Brynjolfsson and Andrew McAfee argued that technology rewards those who can complement it with skill and capital, and displaces routine work. Wages for high skill workers rise and those for middling clerical jobs stagnate. Software engineers earn many times what data entry operators earn, and automation of back office work threatens the latter. The language problem makes it worse, since most online content is in English while most Indians do not read it comfortably.

Third, the digital economy tends towards concentration. Platforms benefit from network effects, in which a service becomes more valuable as more people use it. A search engine, a social network or a marketplace that gets ahead attracts still more users, and the leader takes most of the market. A few firms, based in a few countries, earn most of the profit and hold the data, which is the new resource. Small shopkeepers now compete against giant e commerce firms with deep discounts, and drivers on platforms accept the terms the company sets. The wealth of the founders and investors of digital firms is among the largest in the world, and the share of national income going to labour has declined in many countries.

Privacy and security add burdens. Poor households are more exposed to fraud, and a mistake in a record, such as a failed fingerprint authentication, can deny a ration to a person who is entitled to it. Reports of such exclusions from several states show that digital systems can fail the weakest users and offer them little recourse. Data collected about the poor can be misused, and India lacks a law that protects personal data.

The policy conclusion is that technology alone does neither. The outcome depends on what surrounds it. Public investment in connectivity, such as the BharatNet programme to link panchayats with optical fibre, and in electricity and affordable devices determines who is on the network. Education and digital literacy in local languages determine who can use it. Competition law and rules on data, taxes on the biggest firms and protection for gig workers determine who gains. Public digital infrastructure, such as the payment system that anyone can use at the same low cost, spreads benefits more evenly than a private monopoly.

In the end, the digital economy is a multiplier of whatever it meets. Where access, skills and fair rules exist, it will carry the poor upward faster than any earlier technology. Where they do not, it will give more to those who already have. The first years of its spread in India show signs of both, and the balance between them has not settled. It may be some time before anyone can say which force won, and by then the newer technology, whatever it is, will have raised the question again.