From multi-million-dollar venture capital deals to multi-billion-dollar initial public offerings, a lot is happening in digital India. In these otherwise difficult times, it has now become a happy routine to hear success stories of enterprises building solutions using digital technologies. So far this year, India has added 40 unicorns — startups valued at over $1 billion. Most of these are in the digital economy.
India has not taken the typical path towards structural transformation. Its share in labour-intensive sectors such as textiles has not grown much and has instead been falling in recent years. In skill-intensive manufacturing — electronics and machinery — India is a marginal player. In sectors such as automobiles, protectionism has created a large domestic production base but relatively less success in exports. But information and communication technology (ICT) services and chemicals and pharmaceuticals have shown impressive export growth. These capabilities can be used to create high value enterprises that are world leaders in the digital economy. In areas like digital payments, India is creating best practices for others to follow.
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Influence on other sectors
Digital technologies are special because many of them are general purpose technologies. Take electricity for example. It can interact with other technologies in a wide range of domains to transform systems of production and consumption in deep and varied ways. Their deployment can create many spillover effects in the economy. General purpose technologies improve the production function for ideas — new ideas become easier to come by. For instance, Artificial Intelligence (AI) is improving the possibilities of finding new ideas in domains ranging from drug discovery to manufacturing to cloud computing. In 2019, researchers at MIT used AI to identify Halicin as a likely broad-spectrum antibiotic.
Digitalisation of the economy means digitalisation of the global value chains as well. The digital component of various goods and services has been increasing in the economy. It can be a source of advantage — digital capabilities can help India play a greater role and create more lead firms in global value chains. India might be able to improve competitiveness in some sectors in which it was lagging behind.
Developing countries are usually trying to catch up with the developed ones that are close to the frontier of technological development. But when a new technology comes forth, a developing country with the relevant capabilities too can leap forward and take a leadership position. Japan did this with automobiles and consumer electronics. The advent of any general purpose technology is a rare opportunity to deepen capital, improve labour quality and/or enhance productivity. Some countries will take a lead and benefit disproportionately in the technology’s early days, and others may catch up later. India should aspire to be a leader in this technological revolution, but success cannot be taken for granted. Many countries are trying to seize this opportunity. While it is not a constant sum game, and there are benefits of collaboration across borders, there will be relative winners and losers among countries when it comes to exports.
Markets are responding to the opportunities. The labour market is moving to train personnel to work with these technologies. Educational and skilling systems are adapting to the new demands, and skilled personnel are getting well-paying positions. Financial capital is being directed in a big way towards deployments of digital technologies. Larger firms in traditional sectors are investing in these technologies – expecting that digitalisation could be a source of advantage. Most importantly, entrepreneurs are investing crucial years of their lives to build enterprises.
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The role of the State
While the market processes will do most of the work in the digital economy, the State also has important role to play. The Union government has stated the possibility of India’s digital economy growing from about $200 billion in 2017 to $800 billion to $1 trillion by 2025 at current prices. This would imply that the share of the digital economy would grow from about 8 per cent to 18-23 percent in 8 years. How the digital economy is defined would partly define the achievability of this target. For instance, as the digital services content increases in various goods and services, what portion of the value added is considered to be “digital economy” matters.
The Union government has launched initiatives under the campaign called Digital India. The schemes and initiatives are divided into three categories — digital infrastructure; governance and services on demand; and digital empowerment of citizens. Some of them, especially those relating to digital infrastructure, seem to have been well-implemented. These relate to digital identity, financial access, broadband connectivity, etc. Digital infrastructure is being used to transform service delivery in many domains. For the vast majority of initiatives, however, it is difficult to tell whether success is being achieved. In any case, the impact of such initiatives may be seen with a lag. For instance, while the skill development and digital literacy schemes report large numbers of certifications, the impact in terms of improved empowerment and employment is not clear.
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Govt’s focus areas
While such schemes are useful for overcoming challenges that require public expenditure, such as supply of digital infrastructure, more is required to achieve robust growth of the digital economy. The State must learn to deal with the digital economy by building its capabilities. Four areas in which this approach is urgently required are: regulation, negotiation for market access, taxation, and securing rights in the digital economy.
When a government selects a target like creating a trillion dollar digital economy, it is easy to neglect concerns other than maximising deployment of technologies. The opportunity should not, however, blind us to the potential pitfalls of these technologies. To some extent, these problems can be answered by the market forces, based on choices made by individuals, families and communities. But the State has a role to play in regulating technologies.
If people in India and abroad are going to trust digital technologies, the trust will have to be earned by individual firms and also by India as a source of these solutions. For this, some regulation is required to prevent and mitigate the harms. Regulation of the digital economy includes regulating traditional sectors being transformed by digital technologies – eg. fintech’s disruption of financial services – and regulating on the basis of new concerns emanating from digital technologies – eg. privacy concerns created by widespread processing of personal data. So far, the Indian State has focused on cybersecurity, and more recently, on data privacy. But as new technologies emerge, the State will have to learn about them, and take a considered view on regulating them. It is unlike any other traditional form of regulation. There are novel issues emerging around human-technology relations that need to be addressed.
As digital technologies grow, the issue of market access could also become important. The State has a role to play in ensuring easy flow of data across borders, and market access for goods and services with high digital content. This is to be done at a time when the world is becoming more fragmented and there is greater ambivalence towards trade and digital integration.
As digital technologies become more valuable, the State will have to develop a stable tax regime. On taxation of income of foreign investors in India, we are yet to develop a stable regime, and the unpredictability of State action has often spooked investors.
Digital technologies have provided new opportunities for the State to intervene in the lives of citizens. It is important to secure the personal and property rights of citizens in the digital economy, and define the purposes and limits of State intervention. For instance, the proposed data protection law that is being considered by Parliament defines the rights of citizens but without specifically limiting what the government can do. It gives vague and general powers to the government to exempt its own functions.
Overall, governing the digital economy will require a great deal of trait-making in the State. There are limits to how much can be done by simply leveraging private sector capabilities. The State must also find ways to learn and adapt. For this, it will need to adopt a collaborative rationality that is consistent with the enormous complexity of the digital economy. The mechanisms of regulation and governance that worked in other sectors are quite inadequate for the digital economy. The State must learn through collaborative dialogue and use multiple sources of information.
India has a mixed record of achieving economic objectives it set out. For long, growth in manufacturing has been a stated objective of the government. The Make in India initiative was launched in September 2014. In 2015-16, the manufacturing sector was 17.1 per cent of the economy. In 2020-21, the share of the manufacturing sector had fallen to 14.4 per cent. Before the pandemic hit, in 2019-20 the share was 14.7 per cent – the lowest since 1967-68. So, the Make in India initiative has coincided with a steady decline in the sector’s share of the economy. The history of the Indian State is full of examples of such initiatives failing to produce the intended outcomes. If India has to create a robust trillion-dollar digital economy, the State will have to build capabilities consistent with such an economy.
Suyash Rai @suyashrai is deputy director and fellow at Carnegie India. Views are personal.
This article is part of a series examining the relationship between the global and the local, in partnership with Carnegie India, leading up to its Global Technology Summit 2021 (14th-16th December 2021). Click here to register.
(Edited by Anurag Chaubey)