Digitalisation and the role of the State

India faces critical policy choices in shaping its development trajectory in the context of the transformations being ushered in by digital technologies. Digital start-ups like Ola, Flipkart, Zomato and Paytm, which epitomise service sector digitalisation, are only one part of the unfolding digital transformation story.

The country needs to recognise that digital technologies such as Big Data, digital platforms, machine learning/artificial intelligence, etc., and digitalisation of services (like finance, transport and retail) driven by them are transforming the manufacturing and agricultural production landscapes as well. While there are a number of cross-cutting issues that need to be addressed, the role of data and the hardware infrastructure of the digital economy call for prioritised attention.

Driven by data

Data is the driver of most of the advances in the digital economy. Digital platform businesses such as Swiggy/Zomato, Ola/Uber, and Facebook/LinkedIn, which act as intermediaries between two or three different groups of users, generate their revenues by selling the data generated from the user interactions on their platforms to third parties.

They benefit from the scale advantages enabled by their inherent network effects. For instance, when Uber increases the number of cars under their pool and under-prices its rentals, that incentivises more users to register on that platform. The latter in turn draws more car owners (and advertisers) to it. The benefits of this network effect gets multiplied for the platform-owning company through the greater amount of data that gets generated for analytics and predictive modelling. The greater the latter, greater is the revenue potential that accrues to the company owning the data. Equally important is the potential for future revenue generation from the innovations based on data analytics — both for the “original” data owning company as well as the third party who can buy data or data intelligence from it.

The increased use of sensors in devices and application-driven machines and the growth in networked devices (IoT) are continuously adding to data capture by private parties. A number of acquisitions undertaken by many leading manufacturing firms (apart from financial, retail or health sector firms) are being driven by the need to gain access to this critical competitive edge.

In the leading manufacturing countries, process innovation, maintenance operations, production quality, and inventory operations, among others, are being algorithmically monitored and improved using the data mined/accessed through various channels. .

All kinds of public data, whether of utilities usage or farming practices or the environment, are also goldmines for analytics-based innovation. Thus the manner in which access to data is managed by public policy will have critical implications for the ‘digital development trajectory’ and for ensuring that the new technologies can be used widely for solving the many development problems facing the country.

It is therefore critical that the new government takes cognisance of these economy-wide and societal implications of data ownership. Bills related to data ownership, data storage, etc., must be finalised while taking care of the long-term interests of domestic stakeholders and putting all the necessary checks and balances in place to protect privacy.

To help small entrepreneurs overcome the entry barriers associated with data access and storage, public infrastructural support to the digital economy in terms of public digital platforms, public cloud and public data ownership must also be considered, similar to what some sub-federal governments in China or the European countries are doing. This will be critical in sectors such as finance, energy, water supply, health, and education for securing strategic national interests and for enabling equitable development trajectories.

Digital infrastructure

India’s development trajectory will also be impacted by the policy choices related to the electronics industry — on whether the country will give prioritised focus on developing and strengthening the indigenous electronics hardware sector while simultaneously building up synergies between the software and hardware segments of the information and communication technologies (ICT) sector domestically.

Coherent policy formulation across different policy domains to support indigenous digital capability build-up by factoring in hardware-software synergies is called for. This is an imperative to counter growing imports of digitalised products (and services) in sectors varying from industrial automation, automobiles, healthcare and education, to renewable energy, public safety, smart cities, finance, defence and agriculture.

Sensors and robotics combined with Big Data and the advances in machine learning yield significant gains in productivity to the developed country firms making use of these technologies in their production of goods and services. Rapid indigenous technological improvements to build up synergies between manufacturing and software capabilities will be crucial to build up international competitiveness.

In the absence of government support for the former, the Indian manufacturing base will face further erosion as domestic firms unable to bridge the digital gap become irrelevant against imports across a number of industries. Building up the synergies between manufacturing and software capabilities may also be one way to improve the overall employment elasticity of manufacturing. It goes without saying that the State and Central governments’ investments in educating and skilling the population will have to increase manifold to meet the growing employment challenges.

Within the ICT sector, there is a critical need to support the domestic telecom equipment manufacturing segment, as it provides the network connectivity and access for the digital economy. Depending on foreign equipment manufacturers for this critical digital infrastructure layer will leave India dangerously vulnerable as the country’s strategic sectors become more and more digitalised and integrated.

India must ensure domestic market access for high-tech products to allow them to reach the scale economies necessary to compete internationally. Budgetary allocation to industry-oriented R&D projects for the design and development of innovative products and solutions must also be increased. Policy choices will thus have crucial implications for equity in and sustainability of the evolving digital development trajectories.

The writer is a consultant at the Institute for Studies in Industrial Development, New Delhi.

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