Returning to a city area in the early hours, following an extensive journey is an unparalleled experience. I have had the pleasure of enjoying it on multiple occasions, with the first time being particularly memorable. During my early twenties, a group of friends embarked on a bus ride from Bangalore, to reach Chennai (then Madras) at around 4:00 am. It was too early to reach our lodge. Taking advantage of the situation, we decided to explore the bustling Anna Nagar market.
This was the first time I witnessed the awakening of a market, an experience that left a lasting impression. The earliest individuals to arrive were the tea makers, followed closely by the vegetable sellers who engaged in negotiations with the trucks for their daily supplies. Hawkers swiftly set up temporary stalls, while labourers skillfully balanced heavy loads on their heads, requesting passage through the market. Thousands of less fortunate individuals were seen relishing their first meal of the day on the streets. Manual rickshaws and auto-rickshaws were actively transporting office workers and students, while the roads were congested with various modes of transportation, ranging from motor bicycles and scooters to overused green-coloured buses. It was a truly captivating sight, witnessing one of the largest bazaars in Tamil Nadu spring to life.
That was a good example of a traditional “bottom of the pyramid” market in South Asia. Such markets are vast and diverse. While the transaction values are limited, volumes can be in millions per day. This is one reason why these markets remain as they were for centuries, without attracting innovations. Given the transaction costs, for a long time, it was not worth digitalizing these markets. There were other obstacles too. South Asian populations were unconnected and unbanked. Their digital literacy was poor. So it is understandable why nobody attempted transforming these “analogue” markets into digital.
Fast forward to 2023, these markets are the very components that are about to make the pillars of digital economies. South Asia today has a huge smartphone base. It is projected that the number of smartphones in India alone will exceed 660 million by 2023 end, positioning India as the second-largest smartphone market globally, following China. Moreover, the smartphone penetration rate in India has risen to 71% in 2023, compared to 66% in 2022. In 2013, only 38% of individuals in India aged 15 years or older possessed bank accounts . However, ten years later, due to the Aadhaar programme,almost every individual in India now possesses a bank account. So street tea makers and auto-wallahs will serve as the fundamental building blocks of India’s digital economy tomorrow, transcending the influence of large conglomerates.
When it was launched in 2016, Unified Payments Interface (UPI), the real-time payment system developed by the National Payments Corporation of India (NPCI) didn’t look too promising to be a major component of the digital economy of India. Initially, it was better known as a smartphone application that allowed users to transfer money between bank accounts. The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions and is used on mobile devices to instantly transfer funds between two bank accounts. By 2021 it was so popular that, UPI had daily handled transactions worth between INR 250 -300 billion. Within five years of its launch, more than 260 million Indian citizens had made a UPI-enabled transaction. It is expected that more than 500 million will use digital payment solutions by 2025.
Sri Lanka has nothing that can be compared with UPI. Neither is there anything like Aadhaar that makes every citizen a part of a payment system. So the contribution of the electronic payment component to the digital economy cannot be large. While things may change within the coming years, so far we have nothing much to boast about. Yet, we do have a digital economy, and we know its size.
We calculated the digital economy component of Sri Lanka’s GDP first in 2021 for the previous year. A digital economy encompasses all economic activities that result from everyday online connections among people, businesses, devices, data, and processes. For the first time, the joint contribution of these components to Sri Lanka’s economy has been studied in a paper the author did for UNCTAD. This paper has since been published and is available on the public domain of the web.
Few disclaimers, though. There has never been a universal technique to calculate the size of the digital economy
element within an economy. The lack of a generally accepted definition of “digital economy” or “digital sector” and the absence of product and industry classifications for Internet platforms and related services are obstacles to measuring the digital economy. Still, there have been many workarounds. They all depend on how the digital economy is defined.
An IMF staff paper dated 2018 identifies the following five components as the most visible in any digital economy. The aggregate of these five components represents the digital economy size: ICT equipment, semiconductors industry; Telecommunication and Internet access services; Data processing, software and other information services; Online platforms, including e-commerce platforms; and Platform-enabled services (e.g., the “sharing economy”). This was the framework that has been chosen to calculate the digital economy size in Sri Lanka for its simplicity and straightforwardness. In 2020 there was little or no information available for the fifth category. An estimation of the rest ended up determining Sri Lanka’s digital economy size at USD 3.46 million at the exchange rates at the time which amounted to 4.37% of the GDP.
Two years is a good interval to repeat this exercise. Sri Lanka has faced a period of unprecedented economic turmoil, marked by the most severe economic crisis since independence and the debilitating effects of COVID-19 lockdowns. The artificially maintained value of the Sri Lankan rupee (LKR) plummeted from USD 0.005 to nearly USD 0.0025, before temporarily stabilizing at USD 0.003. This economic downturn resulted in a significant contraction of the country’s GDP. Notably, these events have had a profound impact on Sri Lanka’s digital economy.
We recalculated the figures in this backdrop.
Perhaps the only real change here is the jump of the aggregate figure by a little more than USD 200 million to USD 3,686 million. The figures are affected by exchange rate fluctuations. The electronics industry and telecommunication services have experienced a nominal decline due to the depreciation of the rupee, but in real terms, production has improved. This is evidenced by the nearly twofold increase in data usage from 80-160 Petabytes per month in 2020 to 200-240 Petabytes in 2022. Additionally, e-commerce transactions have witnessed a rapid surge in both volume and value, contributing to the digital economy’s share of GDP reaching 5%.
This situation is not too bad for a developing country. However, in more industrialized nations, the percentage is inherently higher. As the economy becomes more advanced, it becomes evident that the digital sectors make a greater contribution.
In what manner can we establish a connection between the expansion of the digital economy and the “bottom of the pyramid” markets that were previously addressed? Do the Sri Lankan tea makers and street vendors fall within the realm of the digital economy, or do they exist outside of it? Are the tea-pluckers and fisher folk able to reap the advantages of digital growth? If not, what measures could be implemented to integrate them as integral components of the thriving digital economy?
Not that the poor are out of the digital economy. They are already within that 5%. They work in the electronics industry; they use data and contribute to those Petabytes of usage. Some of them may be in the software industry too, if not as programmers, as the support staff; there may be firms that still use tea-makers in the place of coffee vending machines. They are also at the platforms, running Uber rides; and delivering food. Yes, they are
already in, though we still do not know quantitatively exactly at what level. I will not be surprised if they contribute more than the corporate sector.
That does not mean we have reached our limits, by any means. There are more and more opportunities for the “bottom of the poor” within the digital economy. For example, Sri Lanka can follow the current Indian example of the Open Network for Digital Commerce (ONDC) initiative. It is an open-source e-commerce platform that aims to create a more democratic and open e-commerce ecosystem in India.
Currently, the Indian e-commerce market is dominated by a few large platforms, such as Amazon and Flipkart. This has led to concerns about the concentration of power and the lack of opportunities for small businesses. ONDC aims to address these concerns by creating an open platform that is accessible to any seller or buyer, no matter how small. This will allow even MSMEs to compete with larger platforms and reach a wider audience. ONDC is also expected to reduce the cost of e-commerce transactions, as it will eliminate the need for businesses to pay fees to proprietary platforms. The ONDC project is still in its early stages of development, but it has the potential to revolutionize the Indian e-commerce market. It is being supported by the Indian government, as well as many private sector companies.
I would like to conclude this with an interesting observation made by Nandan Nilekani, the visionary behind the digital India initiative. He notes that while the digital economies of the Western world heavily rely on advertising revenues, that approach may not be feasible for the digital economies of South Asia. Consequently, the key to success lies in increasing transaction volume. Achieving this objective necessitates the inclusion of a significant portion of the population in the digital economy, particularly those at the lower end of the socioeconomic spectrum. Therefore, the empowerment of the “bottom of the pyramid” plays a crucial role in positioning South Asian nations on the digital economy map.