Digital revolution the key to powering India’s economy

Conventional wisdom for the future of India is that the country must grow like China, Japan and South Korea. That it must build large companies creating thousands of jobs and exporting goods.

I believe that domestic consumption, not exports, will drive India’s growth. The economy will be services-led and not manufacturing-led. Small businesses will lead rather than large corporations.

Serendipitously, this condition has arisen at a time when globalisation is reversing. Mr Jeffrey Immelt, chief executive of General Electric, recently noted: “Globalisation is being attacked as never before.” He talks about how the whole era of the globalisation of the last 40 years is under threat. Protectionism is growing around the world.

Brexit is the latest proof of the challenge. Countries no longer want to participate in global formations. Trade deals are slowing down. The World Trade Organization has not cut a deal in many years, and the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership are stuck in all kinds of wrangling. Fundamentally, globalisation is slowing.

The value of global trade has come down in the past six to seven quarters. Data as tracked by The Economist shows global trade is falling. The Baltic Dry Index indicates a dramatic drop in freight prices, a proxy that suggests globalisation is slowing down. India’s exports standing at US$22.17 billion (S$30 billion) in June have slowed for the 18th consecutive month.

Meanwhile, a key component of delivering services, the mobile phone, is becoming the universal electronic product in everybody’s hands. India is selling 25 million smartphones per quarter and is anticipated to have 700 million smartphone users by 2020. Internet penetration is growing. With 332 million Internet users, India is now the second largest Internet market, ahead of the United States.

Another building block in India is the Aadhaar number — the world’s largest digital infrastructure for establishing unique identities. The system has a billion people, and in less than six years, it can already authenticate 100 million transactions per day.

The world has only a dozen platforms that can handle a billion users, and those include Microsoft Windows, Microsoft Office, Facebook, WhatsApp, Android and YouTube. Aadhaar is the only billion-user platform outside the US and the only governmental one.

Designed in 2009 as an online identity platform for all Indian residents, Aadhaar provides open Application Programming Interfaces, or APIs, which can be integrated easily into any electronic device. These APIs enable online authentication using a fingerprint or iris. Recently, Samsung introduced an Aadhaar-compliant tablet with a camera that, in a single click, performs iris authentication.

With the 2014 introduction of Prime Minister Narendra Modi’s Jan-Dhan Yojana scheme for financial inclusion, more than 290 million bank accounts are linked to Aadhaar today, and several billion dollars of benefits and entitlements have been transferred to people’s bank accounts electronically in real time. Jhan-Dhan (J) for bank accounts, Aadhaar (A) for identity and the mobile phone (M) form the JAM trinity.

The arrival of New Age platform aggregators — from Amazon and Flipkart for small merchants to Uber and Ola Cabs for taxis — will create a huge digital footprint that could be leveraged by individuals and businesses to secure credit. Such platform aggregators will also create jobs, not as monolithic large organisations, but as millions of small entrepreneurs connected to a platform. These platforms enabling seamless transactions give the service economy a big boost.

India is the largest young country in an ageing world and will continue to have a young population for the next 25 years, whereas China has started ageing. Indians will either migrate or do outsourcing work. Care providers around the world will come from India. There will be doubling of gross domestic product growth in housing, education, health — all services. Services are labour intensive, and their incremental return on capital is much faster than manufacturing. And then there will be services such as tourism that create jobs — Thailand, for example, has 25 million international visitors per year while India has only 8 million.

Another factor is that manufacturing trends are changing dramatically. Robotics, 3D and automation are changing industries. Automation will hit manufacturing before India can catch up. Manufacturing is becoming a high-end, capital-intensive activity and as such will not contribute to job creation.

Manufacturing outsourcing trends, too, are reversing, with operations like those of Foxconn going back to the West. Such automation and outsourcing reversals are going to happen in every industry. Fundamentally, manufacturing is getting squeezed as the future of manufacturing will be high-tech and automated.

Many economists have suggested that India should copy China, but it cannot. When China started its development journey, it had no established competition. Global overcapacity challenges India. For example, China has a steel capacity of 822 million tonnes, while India has 86 million tonnes. Recently, the Indian government had to protect its steel industry by introducing minimum import pricing. Normal competition without tariffs will be difficult in many sectors.

India’s manufacturing and agricultural sectors are fragmented due to excise and other taxes, and also due to a lack of infrastructure, cold chains, storage processing and more. Yet India has a single market for banking, telecom, insurance and capital markets.

Consider this: To launch an insurance policy or a mortgage in the United States, one must go to 50 regulators. In the European Union, one must go to all the member countries. China has a single market, but no free movement of labour. India’s combination of a free market for labour combined with a single market for services is the reason that services is the country’s biggest growth area. The only place where India can achieve economy of scale is in services. This is apparent in the dramatic growth of service tax.

The India Stack, a set of programming interfaces built on the trifecta government-created people’s bank account of JAM, enables paperless, presence-less and cashless transactions. The Reserve Bank of India introduced the Unified Payment Interface last month, allowing all payments to be made by mobile phone. Backed by JAM, this will lead to dramatic leaps in productivity.

Dramatic consequences will follow, creating thousands of startups and billions of dollars of capitalisation.

Four shifts will happen: First, banking at scale, because everything a bank can do, individuals can do on a mobile phone. Second, investment at scale: People can buy a mutual fund on the phone with one click. Third, credit at scale, where entrepreneurs can get a loan with just one click by aggregating their own data. And fourth, skilling at scale: As platforms are created, India will have millions of people who are gathering skills to operate in this new economy, thanks to great strides in reading and maths literacy happening at scale.

World trade may be shrinking and international barriers may be emerging, all making movement of labour difficult. India, with its vast unified market, youthful labour force and growing digital platform-backed services alone, is poised to build a new power economy.

ABOUT THE AUTHOR:

Nandan Nilekani, former chairman of UDAI, which launched Aadhaar, is now chairman of EkStep Foundation, which is focused on enabling learning opportunities. This essay is adapted from a speech he delivered at Microsoft Think Next 2016 in Bengaluru.