Infrastructure

India needs to focus on digital infrastructure

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This digital transformation has been accompanied by a growing wave of technological entrepreneurship.

By Ejaz Ghani

Infrastructure investment in digital technology—increased access to mobile broadband, fibre-optic cable connections, and power-supply expansion—combined with the expansion of low-cost smartphones has enabled millions of Indians to connect to the internet for the first time. The number of enterprises and households that now have access to a computer has increased dramatically, and internet consumption is growing in double digits. This digital transformation has been accompanied by a growing wave of technological entrepreneurship.

Asia has taken the lead in technological entrepreneurship, as it now accounts for 52% of global growth in tech-company revenues, 43% of start-up funding, and 85% of patents filed. More than 90% of the world’s smartphones are made in Asia. Four of the world’s top-10 technology companies by market capitalisation are in Asia. While India still lags behind China, it is ahead of European countries, in terms of mobile and fixed broadband performance.

Digital transformation is now changing the landscape for development. Goods and services can now be unbundled and splintered in global value chains, and they can be transported to anywhere in the world. The number of services that can be transported digitally is constantly expanding—banking, insurance claims, call centres, desktop publishing, compiling audits, completing tax returns, and much more. Patients at home are now able to speak with their doctors and students can access high-quality education via virtual classrooms. Jobs and labour matching are now increasingly done online, like Upwork, which can connect employers and employees across national boundaries.

Digital technology has begun to change the drivers of structural transformation and economic growth. Services are now growing much faster than the manufacturing sector. Growth convergence between India and the developed world is now much faster in the services sector compared to the manufacturing sector.

Low income countries in Africa that started with a lower level of labour productivity in services, and were further away from the global labour productivity frontier, have experienced a much faster catch-up and growth in service labour productivity. Take Ethiopia for example, which has experienced a much faster growth convergence. So have China and India. This is good news for most developing countries, as there is more room for catch-up, growing faster, quicker, better, and smarter.

We examined the impact of technology on economic and social development in India (‘The Service Revolution in South Asia’, by Ejaz Ghani). We compiled evidence on which sectors are more technology-intensive in manufacturing and services sectors, their movement between urban versus rural areas, and across core/intermediate, and periphery/ districts. This shed light on how major growth centres are evolving, where are the best jobs going, and how are outsourcing relationships changing. Is outsourcing leading to similar spatial dynamics in the two sectors? And so on.

Technology and new spatial trends

India has experienced several new spatial development trends. First, in the manufacturing sector, the formal and organised sector has begun to make the transition out of urban areas and towards rural locations within districts. In contrast, the informal or unorganised sector is still transitioning towards urban areas within the 500-odd districts in India. Looking across spatial locations, the organised sector is increasingly locating along major infrastructure transport corridors. The entry of new plants, in the organised sector and formal sector, has played a key role in these spatial transformations.

Urbanisation is helping the informal sector. Informal enterprises are expanding in the tradable goods sector and contracting in the non-tradable sector. The big issue here is the role of technology in making informal sector more tradable. Low-tech services have grown exponentially in large cities.

Services are now the key to economic growth in developing countries, more so than manufacturing, but we still don’t have a good sense of their spatial dynamics. There still exists knowledge gap in how these emerging trends interact with urbanisation and structural transformation. A key challenge is to group industries by technology intensity, and look at the interaction of this intensity with the ability of locations to examine the impact of the digital communications infrastructure.

We believe that communications input is essential for service businesses in ways that transcend manufacturing firms (where we have shown physical infrastructure like the Golden Quadrilateral highway system to be important). We can collect some basic measures like the share of villages with telecommunications equipment, and calculate local penetration of the internet and other modern communications. Ideally, we will also be able to marry the two and find earlier measures of nascent modern communications as well. It would be particularly exciting to connect the spatial growth of services to where the buddings technologies like the internet were located. This would provide deeper insights into how the development of villages (and the many variants of firms within services) associates with the quality of modern infrastructure. This should become a key pillar of the national technology strategy.

The policy challenge is to connect the manufacturing and services trends together with technology and spatial development to see how they resemble and contrast with each other. For example, do we see that substantial services inflow to the urban areas pushes manufacturing activity outward? Or is there a more common connection by wage level (for example, high-wage manufacturing and services agglomerate together) and the sorting is mainly across wage brackets common to both manufacturing and services? Are services growing in India’s biggest cities and thus pushing manufacturing towards more distant locations?

India’s digital transformation represents both a challenge and an opportunity. Private sector participation in infrastructure projects has collapsed recently, with investment dropping by more than 50% in 2019. This drop is unprecedented and alarming. Like many other sectors, infrastructure was brought to a near standstill by Covid-19. However, the private sector retreat in infrastructure investment has jeopardised recovery and the ability to build back better once the pandemic is under control.

In today’s globalised world, falling behind technologically carries major costs. If the promises of digitalisation are to be fulfilled, the world will need to align financing and investment strategies more tightly to sustainable development outcomes, with active participation of the policymakers, the World Bank, the International Monetary Fund, and the United Nations.

India has the advantage of demographic dividend and a youth bulge, while the working age population in advanced countries is declining; the country also has a huge pool of tech talent. In addition, India alone produced more than 70% of the world’s science, technology, engineering and mathematics (STEM) graduates between 2016 and 2018. By scaling up investments in human and physical digital infrastructure, and increased collaboration with local and global entrepreneurs, India can easily expand its role in the growing global market for digital information-technology services, such as big data and analytics, digital legacy modernisation, climate change agenda, and the Internet of Things.

(For more by this author, see: https://ideas.repec.org/b/wbk/wbpubs/16360.html).

The author is senior fellow, Pune International Centre, and former lead economist, World Bank

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