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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

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.

Could the Taobao model help India reduce its transaction costs? Tell us at views@livemint.com

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