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Business Intelligence: The Battle for Digital India

At a time when China’s Tech Giants have reached and even surpassed their US counterparts, India’s Tech sector lags behind its East Asian rival in scale and scope. Yet, India is among the top three global economies in number of digital consumers. with 560 million internet subscriptions in 2018, up from 238.71 million in 2013, India is the second-largest internet subscriptions market in the world. In this Business Intelligence focus, we explore the challenges and opportunities associated with the ascent of Digital India

Few people outside India know Faqir Chand Kohli or FC Kohli who died on November 26 at the age of 96 in his home in Mumbai. FC Kohli is credited for his role as the father of the Indian IT industry. Born in 1924, he graduated from Queen’s University in Canada and the MIT in the US before returning back to India to join the Tata Group in 1951 and to become the first CEO of Tata Consultancy Services (TCS) which he helped found in 1969. 

FC Kohli’s life and career epitomize India’s economic transformation starting from the 1980s when the country’s political elites started to shift their focus from the rural masses and the public sector the socialist playbook championed by the Party of Congress under the rule of Indira Gandhi – to the private sector which has long suffered of the country’s infamous Licence Raj.  When Rajiv Gandhi came to power in 1984, following his mother’s assassination by a Sikh extremist, he shifted the country’s alliances from the Soviet Union to the United States and embarked on an ambitious liberalization agenda which was amplified in the 1990s by his successors. The nascent IT industry was a perfect playground for implementing a pro-market and pro-business agenda without risking a backlash from the country’s entrenched political Barrons and its bureaucratic elite – the Indian Administrative Service (IAS). As a result of this new political impulse, “Technoparks” and IT Clusters were created all around the country and attracted tens of thousands of graduates from India’s elite Institutes of Technology (IITs) and Institutes of Management (IIMs). Cyberabad, the giant IT cluster near Hyderabad was touted to become the world’s next Silicon valley. 

Fast forward to 2020, at a time when China’s Tech Giants have reached and even surpassed their US counterparts, it is fair to question the legacy of that period and to ponder the current state of India’s IT industry which lags behind its East Asian rival in scale and scope. What did India’s successive governments miss since the golden days of Cyberabad? Perhaps they missed a good old fashioned Industrial policy that would have gone beyond offshoring to build the ground for a new generation of IT companies. Or perhaps they failed to build a vibrant competitive integrated market with deep capital markets needed to finance rising tech unicorns. The fact that India is a Federal multicultural state with a high degree of power devolution to the State, provincial and local level may have hindered the deployment of countrywide policies. Indeed, India has 22 recognised languages, none of which is an official language, and an estimated minimum 2,000 dialects. According to Professor Amit Joshi of IMD Business School. skill, talent and drive are not lacking. Instead, minor modifications to regulations, infrastructure and capital markets may be what is missing.”

In order to reverse the steam and to catch-up, Modi launched in 2015 a “Digital India” strategy with the help of strategy consulting firm McKinsey, which drafted in 2019 a comprehensive progress report, titled “India’s Trillion dollar Digital Opportunity”. The Digital India programme aims to provide broadband highways, universal access to mobile connectivity, public internet access, reforming government through technology, eKranti – electronic delivery of services.

A 2017 report from Morgan Stanley Research found that two major initiatives—digitizing its predominantly cash-based economy and reforming its archaic tax system—have the potential to amplify India’s expansion, making it one of the world’s fastest-growing large economies over the next 10 years.

The 2019 McKinsey progress report outlined some key findings related to the actual strength and future potential of the digital economy in India:

  • India is among the top three global economies in number of digital consumers. with 560 million internet subscriptions in 2018, up from 238.71 million in 2013, India is the second-largest internet subscriptions market in the world. Likewise, India has the second-largest number of instant messaging service users worldwide, behind China, and the most social media users. Aadhaar, India’s unique digital identity programme, covers more than 1.2 billion people, the largest system of its type globally
  • India has the second-fastest rate of growth of digital adoption among seventeen mature and emerging economies. India’s monthly mobile data consumption per user, at 8.3 gigabytes (GB) per month, is over 54 times the figure in mid-2016 and higher than countries like China at 5.5 GB per user, and comparable to digital leaders like South Korea at 8-8.5 GB per user.
  • India’s digital divide is narrowing fast as less affluent states leapfrog to catch up with more affluent states. Among the lower-income states, Uttar Pradesh alone added 36 million internet subscriptions between 2013 and 2018.

According to McKinsey, India can scale up fivefold to $1 trillion of economic value the size of its digital economy by 2025, up from its current $200 billion of economic value generated annually — which represents 8 percent of India’s GDP in 2017–18, with half of the opportunity originating in new digital ecosystems across diverse sectors such as agriculture, education, energy, financial services, government services, healthcare, logistics, manufacturing, trade, and transportation.

The Covid-19 could accelerate the shift to online transactions (such as e-commerce and payments) and provide a tailwind to growth in India’s digital economy. India’s e-commerce industry witnessed an order volume growth of 31 per cent for the third quarter of this year that ended in September, as compared to the same period last year. In a report released earlier this year by Morgan Stanley, the investment bank projected India’s 670 million internet users could rise beyond 900 million by 2027. Online shoppers would increase to reach 590 million up from 190 million in 2020. In addition, the average spending per online shopper is expected to nearly double to reach $318.

The ascent of India’s digital economy and its future shape are mired in geopolitics. Indeed, following skirmishes at the Sino-Indian border earlier this year, India banned Tik Tok and a host of other Chinese IT applications from operating in the country, putting an end to years of economic rapprochement between the two Asian giants. It seems that following the latest military incidents the Indian Government has definitively moved back from the tactical rapprochement attempted a few years ago with its Himalayan neighbour which culminated during the high years of the “BRICS entente”. India has also withdrawn from the RCEP Trade Agreement which was signed earlier in November, sending confused signals to the ASEAN countries about the continuation of its “Look East Policy”. Meanwhile, as reported by the Financial Times, following the US-China trade war, the Trump Administration ban on some high profile Chinese tech endeavours in the US (e.g. Tik Tok) and the latest military spat with India, China’s Tech Behemoths have scaled up their presence in South East Asian economies pouring billions of dollars of capital to acquire emerging local start ups and established Internet companies, focusing on Indonesia, which the region’s largest market and which is still open to Chinese investors.

Modi has instead chosen to strengthen its business and technological alliance with the United States, welcoming billions of dollars of incoming investment in the country by the likes of Apple, Google and Amazon. New Delhi has also been ramping up its “Malabar” naval exercises this year with the United States, Australia and Japan. Altogether, the four countries constitute the so-called QUAD (Quadrilateral Security Dialogue), an informal strategic forum initiated in 2007 by the former Prime Minister of Japan, Shinzo Abe, which is widely viewed as a collective response to China’s increased economic clout and military power.

Meanwhile, the local Indian tech ecosystem is ambivalent between its desire to benefit from the huge experience and financial power of the FAANGs through a bandwagoning strategy and its eagerness to contain the overwhelming reach of these “Tech Moguls”. Mukesh Ambani, India’s richest man, has warmed up to partnerships with the FAANGS through his Mobile Telco, Jio Platforms, which has amassed over 400 million subscribers, and raised more than $20 billion from 13 high-profile investors, including Facebook, which alone invested $5.7 billion into the Indian firm, according to Techcrunch. Jio Platform has also received a $4.5 billion investment from Google giving the latter a 7.73% stake in the former, in order to collaborate on developing a customised version of the Android mobile operating system for low-cost, entry-level smartphones to serve the hundreds of millions of users in a typical “bottom of the pyramid” strategy.

On the other hand, as reported by Techcrunch, more than 150 Indian startups are working to form an alliance and toying with the idea of launching an app store to cut their reliance on Google while the latter’s Android system continues to power 99% of the smartphones in the country. For its part, Tata Group is launching its own consolidated Internet marketplace – named Tata Cliq – to counter Amazon and Walmart’s subsidiary Flipkart dominance over the country growing E-commerce market. As we write these lines, Tata Group has also agreed to acquire shares in the Ali Baba backed local online grocer BigBusiness. As Bloomberg reports,About half of India’s $1 trillion retail market comprises grocery sales and there is huge potential for growth.