Navigating Economic Storms: the Role of Digitalization in India’s Remarkable Growth
Introduction
Over the past decade, digitalization has propelled India to become the world’s fifth-largest economy, redefining its economic landscape. This exponential digital transformation and innovation touches every part of society, from enabling street vendors to receive and make digital payments to supporting a government-backed venture capital fund for the country’s space sector. India’s economy has displayed steady and resilient growth despite recent headwinds of global uncertainty. It currently is the world’s fastest-growing major economy with a GDP of $3.8 trillion and a growth rate of 7% (IMF, 2024). Its expanding digital economy has played a crucial role in bolstering economic growth and fostering innovation and investment. But what exactly is the digital economy? The term has been used widely since the Government of India launched its ‘Digital India’ initiative in 2015. ‘Digital economy’ is an umbrella term, broadly referring to the rapid digitalization of products and services and their manufacturing processes. Its growth is closely tied to advances in the global Information Communication Technology (ICT) industry.
The Modi government’s ‘Digital India’ initiative aims to accelerate digitalization through a government-supported infrastructure and policy framework to drive its expansion. The following article analyzes the successes and limitations of India’s growth, focussing on its digital economy sector, and explores future opportunities and challenges. Broadly, initiatives like ‘Digital India’ coupled with the government’s prudent management of India’s political economy have sustained growth despite both, global and domestic pressures, including high inflation. However, New Delhi faces additional challenges on its way forward, including rising inequality, geopolitical competition, and a lack of domestic R&D. Addressing these issues is essential for India to build on past successes and climb up the global supply and value chains.
Inflation and Its Impact on the India’s Economy
Inflation refers to the general rise in price levels of goods and services in a country and has varied impacts. Inflation can be witnessed in day-to-day life in the form of rising prices of household products such as groceries and can have grave macroeconomic consequences if left unchecked. It can be measured as a percentage of increase in the prices of a basket of goods and services consumed by the average household, called the Consumer Price Index (CPI).
India’s year-on-year inflation rate for September 2024 rose to 5.49% (National Statistics Office, 2024). This was primarily due to rising prices of food products and manufacturing equipment. India’s September inflation figures are higher than other major economies such as the United States (3%), United Kingdom (2.6%), China (0.4%), and Indonesia (2.5%) (IMF, 2024). The rise in India’s inflation is notable after two months of relatively low price levels at 3.6% in July and August.
Inflation is a particular challenge to technology-intensive sectors as it increases prices of already hard-to-procure intermediary goods and increases manufacturing costs. Inflation manifests itself in two forms: demand-pull inflation and cost-push inflation. Demand-pull inflation stems from rising aggregate demand, meaning more people are chasing the same amount of goods in an economy, raising prices. On the other hand, cost-push inflation occurs when the cost of production increases, making producers transfer higher costs to consumers by increasing prices.
India faces a dual narrative where inflation is coupled with rising industrial output and growth, resulting in greater economic activity and employment. However, higher prices may cause India’s central bank, the Reserve Bank of India, to reconsider its monetary policy and raise interest rates, creating uncertainties. Despite inflationary pressures, India’s digital economy continues to thrive, buttressed by a strong policy framework and widespread digital adoption.
Digital Economy and Policy Framework Driving India’s Growth
India’s rapid digitalization is central to its remarkable growth. The growing number of tech users, primarily smartphones, is a major driving force behind digitalization. This has enabled India to leverage its indigenous digital payment infrastructure, the Unified Payments Interface (UPI). UPI allows users to merge multiple bank accounts in one application, catering to several banking needs including merchant payments and peer-to-peer collect requests (National Payments Corporation of India, no date). QR codes facilitating these merchant payments are now commonplace in the country, being used by everyone from small street vendors to large corporations. It has streamlined payments across different sectors, catalyzing growth in small and medium enterprises. Further, its widespread use is emblematic of growing digital literacy across India, even permeating in rural areas. This is evidenced by the significant increase in the volume of India’s digital payments, rising from approximately $26.83 million in 2013-14 to approximately $2.27 billion in 2023-24 (Department of Financial Services, 2024). Overall, UPI has streamlined accounting, reduced ‘off-the-book’ transactions, and provided the government greater oversight, making it a vital component of India’s modern economy.
A robust policy framework bolsters India’s digital transition under the flagship Digital India program, including schemes such as StartUp India, Pradhan Mantri Grameen Digital Saksharta Abhiyan (PMGDisha), and Unified Mobile Application for New-age Governance (UMANG). StartUp India has played a crucial role in liberalizing India’s start-up atmosphere through tax benefits and streamlined compliance. It aims to catalyze business growth through sub-schemes like the Bharat Startup Knowledge Access Registry (BHASKAR), providing entrepreneurs a digital platform to share knowledge and collaborate on common themes. The PMGDisha scheme, the world’s largest digital literacy program, has been instrumental in advancing the benefits of government schemes to India’s rural areas. 438,570 training centers have been set up across India under this scheme, equipping marginalized communities with skills such as marketing, e-commerce, and finance, empowering them to improve their quality of life, and often offering rural families a source of livelihood (Invest India, 2024). The Modi government’s policies have been essential for ensuring that the benefits of digitalization reach individuals across India.
India’s digitalization is drawing multi-national corporations to establish manufacturing centers within the country, boosting employment, and productivity, and helping mitigate the effects of inflation. Production-linked incentives have catalyzed capital investment from companies including, Dell, Foxconn, and HP, encouraging them to produce goods locally. The Modi government’s 5% cash-back policy on factory prices has been a strong incentive, with added benefits available if these firms source intermediary goods from Indian suppliers (Bloomberg, 2023). The growing appeal of a China+1 strategy further strengthens India’s attractiveness to producers and investors in the technology sector as large corporations seek to diversify their supply chains. Thus, the government can leverage India’s rising status as an alternative manufacturing hub to amplify its growth trajectory. India’s success in digitalization has paved the way for further advancements in cutting-edge sectors like AI and space technology, offering the potential for greater innovation, investment, and growth.
Leveraging Emerging Technologies
Emerging technologies, including space and AI, create opportunities for leveraging the successes of India’s digitalization and provide new avenues for growth. India’s well-established space program provides local companies a platform to develop indigenous technologies. Recent successful missions by the Indian Space Research Organization, such as the Chandrayan 3 moon lander, have significantly boosted India’s space industry. Privatization and deregulation in this sector place India at the vanguard of attracting investment among its emerging market peers. For instance, the proliferation of data networks and communications systems raises the demand for satellite programs, resulting in greater investment and growth. 2021 was a remarkable year for the Indian space sector, with investments reaching $68 million, a year-on-year increase of 196% (EY India, 2022). These figures have only continued to grow, contributing $24 billion to India’s GDP over the years and supporting 96,000 jobs across public and private sectors (Koshy, 2024). The space sector thus remains a key area for economic growth in India.
India’s start-up ecosystem, tech-savvy population, and rapid digitalization position it at the forefront of harnessing AI to drive growth. AI can provide opportunities for job creation and improving socio-politico-economic conditions. Optimizing public services to bolster New Delhi’s growing digital public infrastructure in areas including, healthcare, education, and governance through AI could accelerate digitalization and amplify its impact. According to The Economic Times (2023), generative AI is projected to add $1.2-$1.5 trillion to India’s economy in the next 7 years, underscoring the sector’s potential for exponential growth. Beyond direct benefits, adopting AI will create jobs and encourage workforce upskilling, leading to positive externalities. The AI sector, therefore, presents substantial future growth opportunities, especially within India’s digital economy.
Challenges Facing India’s Economic Growth
While the above-mentioned emerging technologies provide India with further growth opportunities, its economy is still confronted by significant challenges. Rising tariff barriers worldwide may limit markets for Indian exports going forward. Donald Trump’s recent election victory has exacerbated uncertainty, dividing economists on the potential impact of his policies on India. While some argue that India will benefit as an alternative to Trump’s main rival China, others worry that Indian exporters may suffer under Trump’s protectionist agenda. Higher costs for finished and intermediary goods may be compounded by this protectionism, especially in advanced tech industries. Diversifying exports and trading partners is a viable risk mitigation strategy in the current context. The World Bank’s Country Director in India, Auguste Tano Kouame, argued “In addition to IT, business services and pharma where it excels, India can diversify its export basket with increased exports in textiles, apparel, and footwear sectors, as well as electronics and green technology products.” (The World Bank, 2024). This may help combat sectoral inflation, offsetting overall economic losses incurred in one sector with gains in another. Hence, geopolitical uncertainties and inflationary challenges call for prudent economic and supply chain management to sustain India’s strong growth trajectory.
On the economic front, India faces structural challenges such as rising inequality and a lack of domestic R&D, limiting the potential of its digital sector. Data from 2019 evidences this shortcoming, with India’s gross expenditure on R&D amounting to 0.66% of its GDP compared to USA’s 3.17% and China’s 2.24% (PRS Legislative Research, 2024). While aggregate growth is strong, its benefits need to trickle down to society’s marginalized communities. A continuation of current trends risks the widening of the wealth gap between India’s rich and poor. Hence, India must increase per capita income and GDP, rather than solely pursuing high growth rates. Expanding domestic R&D will be a step in the right direction, making India’s digital economy more self-sufficient. Despite the government’s efforts, most Indian manufacturing relies on foreign intellectual property, rendering its industry more assembly-oriented than innovation-driven. The development of indigenous intellectual property will provide Indian enterprises with greater autonomy, raising investment and growth potential in the process.
Conclusion
India’s digital economy has shown remarkable resilience given the geopolitical and economic headwinds the international community is faced with today. Despite inflationary pressures, India’s digital economy has been driven by government initiatives, technological advancements, and private sector dynamism. However, this growth needs to be democratized and made accessible by prioritizing inclusive growth, encouraging domestic R&D, and expanding digital infrastructure. These steps would be crucial to reduce New Delhi’s reliance on foreign intellectual property and broader income inequality in India. Having said that, rapid digital transformation has been among the Modi government’s most significant successes and has become a robust pillar supporting India’s evolving economic landscape. To conclude in the words of a managing director from an emerging investment firm I had the privilege to work with, “India’s growth story is one of immense promise, fueled by the synergy of digitalization, favorable demographics, and adaptive foreign policy.”
Ishan Jasuja is a Fellow at the Sixteenth Council.
