With its still developing physical infrastructure, India has made significant strides in building its digital space with greater public participation using Digital Public Infrastructure (DPI). The country’s DPIs have notably transformed how identification, payments, and service platformisation operates (Alonso 2023). However, this article does not primarily focus on DPIs, as there is ample existing discourse elaborating on their successes and shortcomings in India, as seen in this analysis piece by Chakravorti 2023. Instead, this commentary aims to highlight a crucial aspect of the government’s strategy concerning the overall growth of the digital economy. The intent is to provide a review of the skewed focus, push, and support for the development and deployment of DPIs, which instead requires a more comprehensive approach to growth and digitalisation in an increasingly data driven society.
Globally, the digital economy constitutes more than 15% of the world’s Gross Domestic Product (GDP) and has exhibited remarkable growth, outpacing the physical world’s GDP by a factor of 2.5 over the past decade (WEF 2022). The research conducted by Huawei and Oxford Economics estimated the global digital economy to be valued at approximately US$11 trillion in 2016, with projections indicating an increase to US$23 trillion, equivalent to 24.3% of global GDP by 2025 (Huawei & Oxford 2020). Within the context of India, the core digital economy sector demonstrated exceptional growth, surpassing the overall economic growth rate by a factor of 2.4 between 2014 and 2019. In its approach to digital transformation, India has diligently invested in establishing Digital Public Infrastructure (DPI). However, alongside this infrastructure focus, an emerging discourse among economic thinkers points to a significant divergence in optimum strategy, which is that the prevailing approach, while crucial, might be tangential to what truly propels economic growth in digitally enabling and enabled sectors. It’s becoming increasingly apparent that India’s overemphasis on DPI might not have directly translated into the desired outcome either on private sector productivity, inflow of foreign direct investments (FDIs), or ranking improvements in global digital indices. Let’s briefly look at each of these components separately.
The IMD World Digital Competitiveness ranking for 2022 has placed India at 44 among 63 assessed countries, measured across three factors: Knowledge, Technology, and Future Readiness (IMD WDC 2022). Interestingly, India has maintained a relatively consistent ranking between 44 and 48 between 2018 and 2022. For 2022, India’s standing across these three factors continues to hover in the 40s, with the lowest score attributed to Future Readiness. This indicates a systemic policy and governance gaps in how we approach the digital economy and its various facets including competitiveness, thereby lacking integral indicators crucial for holistic growth. Apart from digital competitiveness, the 2020 Digital Intelligence Index by Tufts University tracks the historical and current momentum of digital transformations. The exercise has been undertaken across 90 world economies representing 95 percent of the world’s online users. The intention is to track the digital progress and growth over the years by combining 150 unique indicators across four drivers: Supply Conditions, Demand Conditions, Institutional Environment, and Innovation and change (Digital Intelligence Index 2020). Among 90 countries, India’s rank is 61 with a score of 43.13 (out of 100), indicating a breakout stage, where current digitalisation is relatively low, but the growth rate is progressively positive. The index very aptly portrays where India lags. Even with India’s progress in establishing digital infrastructure to increase accessibility and affordability of digital services, indirectly strengthening demand, it is quite ironic to find that it scores the lowest in the demand driver, securing the 84th rank among 90 nations, with most indicators within this category positioned in the bottom quartile (India, DII 2020). This pattern is also echoed in other indices, such as the ITU ICT Development Index and UN e-Governance Readiness Index, corroborating similar outcomes (ICRIER 2023). While a detailed critical analysis of these indices is needed to understand the nuances and is reserved for the next article, the underlying point remains the same. Based on these global economy wide studies, it can be argued that the aggregate picture is very different from the domestic narrative that the government is promoting.
Digital infrastructure, including high-speed Internet, cloud services, and data analytics, acts as a catalyst for innovation, enabling businesses to streamline operations, create new products/services, trading digital goods and optimise supply chains (MGI 2016, WEF 2020). While DPI includes elements like digital IDs, e-governance services, and universal digital access, which is crucial for inclusive growth, its impact on enhancing private sector productivity might be indirect or even tangential to the overall goal of economic growth. Research by Avgerou in 2008 highlights that while DPI facilitates social inclusion and public service delivery, its impact on private sector productivity might be indirect, demanding a robust, broader, and comprehensive approach (Avgerou 2008). Studies by global agencies underline the important role of data and digital infrastructure in stimulating private sector productivity. For instance, one of the crucial enabling components of the digital economy is access to fast Internet. The speed test global index ranks countries based on the speed of Internet in mobiles and broadband. India currently ranks 89 (out of 182) in the broadband category, severely limiting our capability to pursue goals of an advanced digital economy over the coming years (Speedtest Global Index 2023). Apart from that, the ADB study on capturing the digital economy across 16 world economies also highlights various challenges to India’s limited diversification and narrow scope of digital goods and services. The country also faces crucial gaps in infrastructure, limited high-skill jobs, and a lack of a robust regulatory environment, thereby impeding the growth of overall productivity or investments (ADB 2021).
“It’s high time for the discourse and policy actions in India to shift beyond digital public infrastructure and govtech. It should pave the way for deliberations on curating strategies for private sector led growth through FDIs”
On the other side, the investment landscape looks relatively stable. India has experienced a consistent uptick in FDI inflows over the last two decades. Those are primarily concentrated in core digital sectors, including computer hardware and software (15%), telecommunications (6%), and services (16%) and services sectors, a digitally enabling sector receiving 16% of cumulative FDI (DPIIT 2023). This increasing FDI momentum positions India favourably to potentially propel its digital economy to reach one trillion USD by 2030, contributing 13-14% to the nation’s GDP as modelled in other studies (Bain&Co et al 2023). Although the net FDI inflow has increased, the investments in the service sector have decreased and hit the lowest since 2017. It should be noted that the services sector is the most digitally enabling sector with the highest level of IT and ICT integration in its value chain operations and management. In contrast to FDIs, domestic Investments as a percentage of nominal GDP have remained the same for the last ten years, with 30.6 % reported in June 2023 (CEIC 2023).
Comparative studies like the Global Competitiveness Report and other indices, which are mentioned in the article, often rank countries high not only on the availability but also the quality of digital infrastructure including factors like economic competitiveness, investments, labour productivity and innovation capabilities. The outcomes of both Digital Intelligence Index and the IMD World Digital Competitiveness Ranking showcases that countries sustaining rapid digital growth prioritise not just infrastructure but also private sector-led initiatives and innovation. This underlines the importance of balancing DPIs with an ecosystem conducive to private sector innovation, inflow of investments, and a coherent regulatory environment. Global reports find that robust digital infrastructure is crucial for attracting investments (UNCTAD 2019, World Bank 2021). However, they also highlight that investments are often directed to economies fostering a comprehensive digital ecosystem, including robust data security and privacy regulations, not just infrastructure. WEF’s article on the Fourth Industrial Revolution underscores that economies benefit most from digital transformations when they embrace a holistic approach that empowers the private sector to innovate, invest, and compete globally (WEF 2016).
To address this issue of productivity and investments, the World Economic Forum (WEF) initiated a Digital Foreign Direct Investment (FDI) initiative in 2020. The initiative catalyses FDI inflows into digital sectors and centres on three core pillars: unlocking supply, stimulating demand, and fostering cross-country projects to facilitate connectivity (WEF 2020). Through these strategic efforts, the WEF seeks to encourage and facilitate investments that can further propel the growth of the digital economy. According to this report, the top three policy and regulatory factors influencing investor’s decisions for financing new digital activities are data security regulations, copyright laws pertaining to intellectual property, and data privacy regulations. These factors highlight the global significance of issues related to the digital rights of firms and consumers, although their impact may not be uniform across different regions. These are the same factors that have been neglected by Indian legal-regulatory authorities for a very long time and are gradually getting mainstreamed through legislative means. Moreover, studies focusing on key determinants influencing Foreign Direct Investment (FDI) in core digital sectors, such as hardware and software, also emphasised the importance of fostering a robust digital policy environment that caters to the needs of both citizens and firms (Arora 2021). The key determinants such as market size, infrastructure quality, economic stability, clearing legal and regulatory ambiguities, and the creation of free trade zones, are critical for attracting FDIs (IMF 2001).
Need for a comprehensive approach to growth and development of Digital Economy
Given that a substantial portion of India’s FDI inflows are directed toward core digital sectors such as hardware, software, telecommunications, as well as digitally enabled sectors including services, trade, and automobile, there exists a pressing need to develop a comprehensive strategy and outlook for greater private sector led domestic growth in digital economy sectors. This renewed approach requires the government to take a policy stand on Digital FDIs, as described in the World Economic Forum’s 2020 report presenting a unique set of challenges for both public and private sectors. Effectively implementing targeted Digital FDIs within India’s emerging digital/IT domestic as well as multinational enterprises (MNEs) would be the key deciding factor for India’s domestic digital economy. It will require the formulation of non-traditional policies, regulatory frameworks, and the creation of an enabling environment tailored as discussed in this article, to the distinctive dynamics of the digital investment landscape situated in India. In conclusion, while Digital Public Infrastructure is indispensable for inclusive growth, India might benefit more from a comprehensive approach that emphasises enhancing private sector productivity, and attracting investments by focusing on robust digital infrastructure, data utilisation strategies, and roadmap for attracting digital FDIs. Such a strategy could align more directly with the needs and aspirations of India’s rapidly evolving digital economy.