Nandan Nilekani has used a fine analogy to compare the new digital payments network in India with its peers in other parts of the world. He told this newspaper that the Unified Payments Interface (UPI) is like a highway without tolls while countries such as China or the US have walled gardens in which private companies control access to payments networks. Nilekani has touched upon an issue that we had commented on in these columns earlier.

Economists had been undecided during the heated debates on Net neutrality whether the Internet is a private good, a club good or a public good. Some clarity on this technical issue is of prime importance for contemporary public policy. These three categories of goods can be explained using the same motoring analogy that Nilekani used. A car is a private good. A toll road is a club good. An open road is a public good.

These distinctions are drawn based on two concerns—whether anybody can be excluded from using it and whether its use by one person reduces the availability for another person. These are, respectively, the conditions of non-rivalrous and non-excludable use.

A car is a private good because it can be used only by a few people while others cannot use it at the same time. A toll road is a club good because it excludes people who do not pay the mandatory levy while its use by one person does not reduce availability to other people once the toll has been paid. A regular road is a public good because it neither excludes anybody nor is its use rivalrous.

UPI has the features of a public good. It has an open architecture that others in the financial sector can build products on. The rest of the world depends on private networks that are club goods—you can come into the system after paying a toll to the company that has built the network. The toll operator not only allows you to come in after payment but also has the power to choose on your behalf which restaurant or motel to use during your journey.

In the Indian case, the combination of UPI with another open platform—Aadhaar—means that there is explosive potential once network effects come into play. The move to a cashless society in India is not exactly around the corner, since India still has one of the highest rates of cash usage as a proportion of its gross domestic product. However, that does not take away from the transformative potential of the UPI-Aadhaar combination.

That leads to another issue that casts light on the role of the state in the digital economy.

The traditional theory of public finance says that public goods should be owned by the state. It is slightly more complicated in the digital world, where digital platforms are created by private companies that need to collect tolls to make their innovations pay off. The sheer speed of innovation means that the state cannot take over the job of creating digital platforms that are free of tolls. On the other hand, network effects also create monopolies in the digital world, as was repeatedly pointed out in the landmark browser battle between Microsoft and Netscape at the turn of the century.

The Indian government has—either accidentally or otherwise—placed itself at the centre of this public policy issue. There are at least three digital public goods it has created that come to mind—Aadhaar, UPI and the National Agriculture Market. There are no gatekeepers who will collect tolls for either using these platforms or to build products on them. The question is: Should the government try to nurture new age public sector companies such as the National Payments Corporation of India, the creator of UPI, rather than endlessly subsidize the lumbering public sector dinosaurs of the planning era?

There are no easy answers, since there is cracking tension between the need to build digital public goods on the principle of open access while at the same time being sensitive to the fact that the rapid innovations of today are not possible without the private sector. These are issues that the Indian government will have to think about in the coming years: open roads or walled gardens?

Who do you think has the greater role in a digital era—the government or the private sector? Tell us at views@livemint.com

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