Digital public infrastructure: A dubious way to foster competition

Aadhaar, for instance, was developed to provide every citizen with a digital identity, enabling access to crucial government services and benefits.

The resounding success of India’s DPI, like Aadhaar and the Unified Payment Interface (UPI), and similar platforms in other countries, like Brazil’s Pix Payment System and Estonia’s X-Road, has spawned a global interest in DPI.

As adoption has kicked off, the core objectives of DPI implementation in India have also expanded, with an apparent shift in focus from improving governance and state capabilities to creating dynamic and competitive markets, as in the case of India’s Open Network for Digital Commerce (ONDC ).

Addressing competition deficiencies has traditionally been under the purview of antitrust regulators, but direct state intervention can play a legitimate role in sectors where the public interest is at stake.

For instance, healthcare, characterization by inelastic demand and high public-good potential, often trends towards natural monopolies, which makes a strong case for government involvement, either through DPI or traditional public-sector provisions.

However, in sectors like e-commerce, where these conditions may not hold, the use of DPI could contribute to three main risks: inefficient allocation of state resources, potential market failures on account of government-led DPI and compromised regulatory integrity.

Consider them one by one. Addressing anti-competitive practices through government-financed DPI necessitates the use of scarce state resources.

For instance, ONDC aims to reduce the online market dominance of tech giants like Amazon by creating an open, transparent and independent digital alternative.

However, the feasibility of such initiatives, based on financial evaluations, should be assessed not only on a short-term basis, but also for long-term sustainability.

Applying such a DPI philosophy to every digital sector to combat monopolistic tendencies would place an undue burden on state resources when more cost-effective solutions are available.

In a rapidly evolving digital market, the urgent and more pertinent question that arises is whether a DPI platform is best placed to strengthen competition when companies own and control multiple stages of the supply chain.

This vertical integration also allows for vast data collection and its use at scale, which erects market barriers. DPI platforms, designed to be open and standardized, cannot counter the strategic advantages of vertically integrated players, or will likely struggle to keep up with the pace of rapidly evolving digital markets.

Competition regulators, whose job is to oversee market dynamics and prevent monopolistic practices, are better positioned to uphold the principles of a competitive and transparent market environment.

For instance, in the Google ads antitrust case brought by the US Department of Justice, regulators are considering requiring Google to license its underlying advertising databases to competitors, which would let other firms build on the same infrastructure and reduce the competitive edge Google gained from network effects.

While the state’s role in absorbing the high initial cost of building specific DPI systems is intended to pave the way for private players to enter the market as platform users, government-led DPI initiatives can also contribute to market failures, with unintended consequences that become apparent only over time.

For instance, while UPI has revolutionized digital payments in India, regulation by the Reserve Bank of India (RBI) has restricted foundational competitors in the instant payments space.

Instead of fostering a competitive market with alternatives to UPI, this approach expects all public and private players to use a single quasi-public platform that dominates the space. This can stifle innovation.

Finally, although the state has significant power to create dynamic markets through regulatory oversight, when the state enters a market as a direct player to increase competition while simultaneously acting as the regulator of that industry, it compromises the regulatory architecture.

This dual role undermines the principles of fair competition and can create an environment in which regulatory decisions are influenced by vested interests.

It is notable that UPI is built and operated by National Payments Corporation of India (NPCI), a non-profit initiative of India’s central bank in collaboration with the Indian Banks’ Association whose ownership is shared by a consortium of private and public sector banks. The regulator’s interest in NPCI’s success could explain why India has no UPI-rivaling payment system.

In such instances, the state’s involvement in DPI could go against the cause of decentralized markets and instead perpetuate the sort of power concentration that hurts its long-term health and hinders innovation.

The responsibility of maintaining fair and free markets should lie with an independent competition regulator. As the above examples show, state-led DPI is not the answer.

India’s DPI initiatives, including Aadhaar and UPI, have transformed public service delivery and digital payments, no doubt. While the benefits of deploying DPI platforms are abundantly clear, broadening its intended scope to shape markets is not just over-ambitious, it entails significant risks.