Ashima Goyal

Can technology drive inclusion?

ASHIMA GOYAL | Updated on December 19, 2013

Investment in technology must benefit the poor.

Three ways of facilitating innovation that can benefit us all.

Private innovations normally favour the better-off. This is not true, however, with the internet and mobile communication technologies (ICT).

There are three ways of facilitating innovations that benefit the middle and below-middle classes as well.

First, direct investment in technologies going into products that the less well-off use. This could be either through public investment or subsidising private investment. Second, raise the demand for such technologies through income transfers to the poor. Third, better public provision of relevant infrastructure or other measures that reduce transaction costs for their adoption, thereby expanding consumption possibilities for the poor.

Large market size stimulates innovation not only because the innovators stand to profit from it, but since adoption and further adaptation of technology are also responsive to economic incentives.

While the market size for technologies can be increased through the second as well as the third routes, the latter one is more suited to ‘active inclusion’, referring to conditions allowing the many to contribute to and participate in growth.

Provision of public goods can directly increase productivity, when compared with individual income transfers.

A strategy focused on public goods also suits India’s young demographic profile by providing more reward for work. Redistributive strategies, on the other hand, are more useful for addressing smaller pockets of persistent poverty.


Also, inclusive growth is a major objective of Indian policymakers. The two goals can go together if inclusion itself is of the type that facilitates growth.

ICT applications are consistent with this framework, supporting both growth and inclusion. ICT helped India to capitalise on the business process outsourcing wave, but by largely creating opportunities for a certain skilled elite.

One reason for this was poor governance and delivery of public services such as health, education and infrastructure, which are greater obstacles for the less well-off. Also, inability to afford private substitutes — say, high fee-demanding engineering colleges — constraints their participation in availing of the new opportunities.

Even small businesses are more dependent on public services than their big corporate counterparts. While ICT itself can improve public services, its domestic adoption has lagged far behind potential.

For example, transparent e-delivery systems can vastly reduce the scope for discretion and corruption dogging many public services.

The mobile is an example of a technology product whose falling costs made it accessible to all income classes, demonstrating ICT’s potential for inclusion and boosting productivity of people.

Yet, development of mobile-enabled services in India has lagged behind even what has been achieved in many African nations.

There are divergent views on ICT’s potential contribution to equity. Normally, more skill- and capital-intensive techniques develop faster and benefit the better-off.

If more innovation were to occur at the intermediate level, the poor, who tend to be stuck with low-level technologies, can migrate to using these, thus raising their productivity and prospects.

Indeed, this is what the process of development ought to be. Two ways to shift the poor to intermediate technologies — say, from hand to machine-milking — is to invest in their improvement and adaptability to local conditions. The second is making them accessible through income transfers or reducing transaction costs.

Again, as greater use of intermediate technologies raises the profits for their makers and induces further innovation, the above two routes are complementary. Price and market size both stimulate innovation or production re-organisation.

A high-end good may fetch higher prices for the innovator, but if lower-cost substitutes are available, the market size effect can well dominate the price effect.

There is always a market size threshold, determined by relative prices, productivity and quantity. Below this threshold, innovation will tend to be high-skill and capital-intensive, thereby widening the rich-poor technological and productivity divide. But it is not so above that threshold.


The Indian and Pakistani experience with mobile banking illustrates how simple reductions in transaction costs can induce inclusive innovation.

The regulatory structure for mobile banking in both countries was laid out around the same time period. Pakistan, just as India, started in 2008 with a bank-led model that was expected to continue until the players and stakeholders had gained some maturity. Like in India, customer account relationship there had to reside with some financial institution (FI). Also, each transaction had to be through the customer account with no actual monetary value stored on the mobile-phone or server.

But four years after the approval for mobile banking transactions, Indian volumes have remained low, even with some growth. Mobile banking transactions, at about 5.6 million, are still far too tiny compared with the country’s large mobile subscriber base. Out of more than 850 million mobile subscribers in 2012, a mere 12.2 million were registered for mobile banking services, with a small fraction within them being active service users. As against this, Pakistan, with a much smaller population, has recorded twice the level of transactions achieved in India.

Comparing the regulations in India with those in Pakistan provides clues on the drivers of the relatively greater success achieved by the latter.

Pakistan did insist on a key role for FIs and data records to ensure security and stability. But the critical differences were higher initial levels and limits, more income categories, a wider universe of business correspondents, more flexibility and functions for FIs, and reduction of transaction costs for users.

Mobile banking services were also not restricted to just mobile service providers, but could be offered even by fuel distribution companies, Pakistan Post and chain stores. Elements that had discouraged participation, such as biometric fingerprint scans or physical presence preconditions for account opening, were removed. Instead, electronic account opening, with a digital image, was permitted.


The above features increased creativity in use, enabling a closer link to customer needs. They brought in both the more and the less well-off. Bill payments and P2P transactions accounted for more than 80 per cent of Pakistani mobile transactions. Pakistan was, thus, able to decisively enhance market size for mobile banking services, while inducing continuing inclusive innovation.

What this also suggests is that the key to expediting inclusion through ICT has not been well understood by our policymakers. To start with, there have been failures in the provision of ICT-supporting infrastructure such as broadband and electricity. On top of these are regulatory measures that end up limiting potential market size.

A strategy of focusing on customer needs and reducing their transaction costs would work well for India, given its naturally large market size. If better public services expand the size of the market by bringing in more consumers, and induce more intermediate innovation, that itself can create more inclusion. And growth.

(The author is Professor of Economics. IGIDR, Mumbai.)

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Published on December 19, 2013
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