Can India leap to the top?

Unlike China, India has witnessed an industrial revolution in services. It has the potential to become the largest digital economy in modern services, thanks to the Fourth Industrial Revolution. With more than half a billion internet users in India, twice the size of the US, a rapidly rising middle class, and a large youth bulge in an ageing world, India has the makings of becoming the world’s largest digital economy.

The global digital revolution has enabled India to leapfrog several stages of development. India’s labour productivity growth in the digital economy and modern services sector has grown rapidly and exceeds productivity growth in the manufacturing sector. Its labour productivity growth in modern services exceeds China’s productivity growth in the manufacturing sector.

However, the drivers of growth in the digital economy cannot be taken for granted, given the rapid changes in the digital revolution and globalisation. A key challenge is to promote digital entrepreneurship in India and a faster pace of the creation of new enterprises. India has the potential to double the size of the digital economy, with many more new entrants to the space.

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Our empirical assessment of where and why new enterprises in the manufacturing and services sectors locate in 600 districts in India shows that there are two key drivers of entrepreneurship: physical and human infrastructure. India’s digital economy is concentrated in the megacities because secondary cities and small towns lack the infrastructure. This has not only constrained digital entrepreneurship but also resulted in a digital divide. Scaling up investments in digital infrastructure will promote digital entrepreneurship, create more jobs in Tier II cities, and reduce the digital divide.

The public sector has played a big role in scaling up investments in traditional infrastructure (like roads and highways), and this has benefited the manufacturing sector, located around the Golden Quadrilateral Highway, an initiative undertaken by former Prime Minister Atal Behari Vajpayee. Similar initiatives to promote the digital economy will provide a boost to India’s growth.

The potential for increasing the role of the public sector in digital infrastructure investment is huge compared to traditional infrastructure investments. A cost-benefit analysis shows that the returns on investments in digital infrastructure are much higher in India compared to investments in traditional infrastructure like roads and highways.

There is potential for India to benefit from the changing landscape of global digital integration. Global trade in services is growing at a much faster pace compared to that in manufacturing. In the post-Covid-19 world, the upward movement in services trade is likely to continue, gain momentum, and remain resistant to political and economic forces that now threaten to reverse the global integration in manufacturing.

Challenges

While the Industrial Revolution was a marathon run, the digital revolution seems like a sprint. India has already made a big leap in the digital revolution, as the aggregate number of internet users in India exceeds that of most developed economies. It has produced the CEOs of Google and sent millions of Indians to Silicon Valley.

India shows up at the top of artificial intelligence (AI) skill penetration across many sectors on online job platforms and can easily expand its role in the growing global market for digital information-technology services—big data and analytics, digital legacy modernization, climate change agenda, and the Internet of Things.

For India to become the largest digital economy, it should not just rely on the existing digital giants but also promote newcomers and the entry of new firms. This can be achieved by announcing a new digital economic and social contract to promote digital entrepreneurship. Women entrepreneurs and under-represented population groups in entrepreneurship are more likely to benefit from the digital technologies for business creation due to lower start-up costs required for many digital businesses, wider access to external markets offered by the internet, and greater potential for agglomeration economies, as was the case with small and informal enterprises in the manufacturing sector that exploded in the tradable sector.

Digital entrepreneurship cannot be promoted and sustained in a regulatory vacuum. India will need to establish a regulatory regime that promotes competition by increasing interoperability and data mobility so that consumers can use multiple platforms and services and switch from an inferior digital service to a superior one. Providing greater choices to consumers will enable many more new enterprises to enter the digital economy, promote innovation, and create jobs.

A new regulatory and social contract can also promote people’s right to privacy, which is a concern in India and globally. Like manufacturing enterprises that use labour, land, and capital to produce output, digital enterprises also use personal data to produce their output. For digital enterprises, the use of personal data inputs transcends costs associated with labour and capital inputs. This creates huge social risks, as data collected for one purpose has the potential to be misused for other purposes, harming individuals and societies. The more data that is reused, the greater the risk of data misuse.

The misuse of personal data is the biggest barrier to digital entrepreneurship. Personal data should be protected and supported by policies that secure both people and the data systems on which they depend.

India has the potential to become the largest digital economy in the world if it can implement a new economic and social contract to scale up investments in digital infrastructure, reduce the digital divide, and change the data landscape to improve the lives of nearly 400 million people who don’t have access to the internet and protect their data. An integrated national data system supported by an effective data governance framework embedded in a human rights framework will enable India to realise its full potential to become the largest digital economy in the world.

(The writer is a Senior Fellow at the Pune International Centre, and he has worked for the World Bank, WTO, and ILO and taught economics at Oxford University.)