Building institutions through identity

We believe this negative spillover is misdirected, and find little substantive basis for opposing this most promising of initiatives, one which aims to provide an electronic national identity to each of the country’s 1.2 billion citizens. In contrast, our lens as technology economists reveals a familiar tip-of-the-iceberg challenge in grasping the true socio-economic benefits of fundamentally transformative projects such as this.

Consider first whether the Rs3,170 crore outlay for the UID initiative will provide the best return on the social subsidy rupee. Couldn’t the same political and economic outcome be achieved by using the money to directly expand welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and the Public Distribution System (PDS), as some have suggested? Granted, the true expense and benefits of large-scale government initiatives and especially of information technology (IT) roll-outs are notoriously hard to pin down before all is said and done. However, unlike most government outreach efforts, UID is designed to pay for itself very early on. It will lower leakage from existing welfare programmes rather than expand or supplant them. Realizing a mere fraction of these complementary cost savings will cover the relatively modest initial outlay in no time. Additionally, the promise of business gains for a variety of private enterprises (some banks and other financials, for starters) will encourage these institutions to co-invest in lowering the costs and increasing the accuracy of establishing identity for, say, loan applicants. Reducing credit risk lowers the cost of capital, leading to a multiplier effect for other businesses.

And this is just the tip of the iceberg. The real game changing benefits of UID are in the longer run, as it creates and strengthens basic national institutional underpinnings. As Nobel laureate Douglass North and others have shown over the last 50 years, developing “economic institutions" such as property rights and access to credit are central to sustaining and accelerating economic growth in industrializing nations. Aadhaar will spark this kind of institutional change for hundreds of millions of citizens, promising a new phase of Indian growth that is fuelled by empowering the rural poor with the incentives and mechanisms to become productive contributors to the nation’s gross domestic product. The socio-economic benefits of increased financial inclusion alone could far outweigh the project’s implementation and operating costs. Along the way, countless new, larger businesses will be created.

Another lament brewing in the cocktail party circuit is of privacy threats and the authoritarian risks posed when UID links an individual’s digital footprint across multiple government agencies. True, privacy reform is among the most important civil rights issues of today’s industrialized world. But UID privacy concerns seem like the faux social conscience of an urban elite which doesn’t recognize that most of UID’s beneficiaries would rather opt for regular square meals enabled by PDS or the ability to get a small business loan. The “Big Brother" scenario also assumes massive successful IT systems integration, a utopian dream even within the boundaries of the best organizations around the world, and a Herculean task for government agencies constrained by political and inter-agency organizational barriers. And frankly, what privacy rights do Indians have now? By uniting advocates and activating the privacy debate in India, Aadhaar will do more good than harm on this front.

True to its name, Aadhaar (which means “foundation" in many languages) is also an underlying platform for the delivery of citizen services. Its federated architecture (think Facebook or the iPhone application ecosystem, but even more open) will be the IT foundation upon which numerous applications that are hard for us to imagine today will be built, an ecosystem of government-to-citizen, business-to-citizen, and perhaps citizen-to-citizen apps. As a platform, it faces many of the usual adoption, diffusion and acceptance challenges, and a central early goal should be achieving critical mass in adopters and beneficiaries, after which positive feedback will create exponential growth. The UID authority should continue to harness all available academic, corporate and political resources towards reaching this tipping point. What is perhaps hitherto unknown to the public is the extent of pro-bono work being done by leading experts in overcoming some of the project’s technical and scalability challenges, a healthy use of Nilekani’s accumulated social capital.

Will everything associated with this initiative be strictly beneficial to society? Probably not. Should we worry about the dangers of potential tracking, profiling and data misuse by a UID-enabled Big Brother, whether an individual, an organization or the state? The answer is yes. But are these reasons to cast long shadows on the entire initiative? A quote from Isaac Asimov, author of the famed Foundation series, comes to mind: “If knowledge can create problems, it is not through ignorance that we can solve them." As this new foundation for our rural economic institutions is laid, the country needs the vision to see past the transitory dust clouds being raised, and focus instead on the future that will be built on Aadhaar.

Ravi Bapna & Arun Sundararajan are business professors at University of Minnesota’s Carlson School and New York University’s Stern School, respectively, and conduct their India-based research through the SRITNE centre at the Indian School of Business in Hyderabad.

Comments are welcome at theirview@livemint.com

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