Will India Seize Digital Revolution Opportunity- Complete Article

Will India Seize Digital Revolution Opportunity?

Policy Reforms for a Digitalised Indian Economy

SUBHASH CHANDRA GARG

Economy, Finance and Fiscal Policy Strategist and Former Finance and Economic Affairs Secretary, Government of India

COMPLETE ARTICLE

THE DIGITAL AGE

India led the agricultural transformation and became rich for many millennia. India, however, resisted industrial transformation and missed it massively by coming on the bandwagon quite late. The world is now undergoing the third transformation- digitalisation of production of all goods and services.

Shall we be able to seize this digital revolution opportunity?

Chip, Code and Internet are the Basic Building Blocks of Digital Age

Fossil fuels- coal and petroleum- converted to steam and electric energy made industrialisation of economies possible using the technology embedded in machines. The mechanisation engineered fundamental transformation of agricultural economies all over the world. The industrial revolution was built on two big technological innovations- power and machines.

The countries which harnessed the power of this mechanisation- the industrialised countries- grew their GDP, became rich and the living standards of their people improved enormously. India was a late comer to industrialisation and adopted wrong policies in the socialist era and therefore could make only limited gains in the industrial era.

Another fundamental transformation is underway in the 21^st century built on three fundamental technological innovations- the integrated circuits or the chip, software or the code and interconnected communication or the internet. These three innovations have massively modified and augmented the capabilities of the two killer innovations of industrial era- electricity and machines in three different ways.

First, the electric engineering improved into electronics, which created integrated circuits or micro-chips or simply the chip. These chips, machined into computers, could manipulate the electrons on a semiconductor surface to do functions of calculations, storage of information/data, retrieving and transmitting data etc. This is the hardware.

Second, the software programming or coding could write codes to bring massive intelligence to the computers. A code, written in machine language or transmitted to chips via the software, makes the chip perform the functions of calculations, storage of information/data, retrieving and transmitting data etc.

The chip and the code together are somewhat like the cells in our bodies which makes our body and mind to do everything which the humans do. The chip and the code work on information in data form to do all the work we do with our computers, laptops, cell-phones and whatever other electronic device. All the information/data is in the form of electrons or electronic form, appropriately stored or worked.

Third, the discovery of electro-magnetic transmission made it possible to transmit the data and information over big distances in a jiffy. The technology of internet allowed the computers to be joined into a network regardless of distances. It is far easier, cheaper and speedier to transmit electronic data through the internet than through any physical medium. The revolution in communication technologies using electromagnetic forces in different ways and mediums- fibre optics, mobiles, satellites etc.- makes the internet simply unbeatable.  

The combination of the chip (integrated circuits in the hardware) and the code (coded programming or the software) or the Information Technology and the internet (communication technology using electro-magnetic forces), together referred as Information and Communications Technology or ICT, is the foundation and flourish of ICT revolution.

The ICT revolution work on manipulation of data stored and operated with simplest of basic unit- the binary digits of 1 and 0 or on and off in electric impulse terms. No wonder, the ICT revolution is also the digital revolution.

India has to be a leader in all the three technologies- the chip, the code and the internet- to become the economic powerhouse of 21^st century, which is absolutely necessary to make up for the lost opportunity in the industrial era.

Digitalisation of Production and Distribution of All Goods and Services Produced is the Real Opportunity

Digital technologies have enormous potential to transform all the constituents of economy- whether in agriculture, industries or services- by digitalising the manual and mechanical production processes of goods and services. The digital technologies have multiple advantages over the manual and industrial processes.

Digital technologies have unbeatable advantages in services specially. By digitising voucher entries, the whole edifice of accounts, payments, tax compliance etc. can be not only be made real time with multi-locations integrated and all accounts and reports generated and printed instantaneously anywhere, anytime and at very little cost. No wonder entire accounting and payments have become so efficient and cost less. UPI system rides on the integrated accounts of every bank account holder in India.

Quality of entertainment programmes have improved by leaps and bounds with movies delivered at home televisions in ultra-high definition and other modes as it is possible to digitalise entire content, including music, in top quality format. It is possible to distribute a book, a sports event or a cinema instantly all over the globe. Contrast this with the book printing of industrial era which required every word to be composed by manually arranging letters on a composing plate and then to go through machine printing, compiling and distributing physically.

The goods production and distribution processes can be digitalised to varying extent. At the minimum, one may organise sell and purchase of books or any other commodity quite efficiently on electronic commerce platforms. The e-commerce is actually a service which aids in better distribution of goods produced to the consumers. Traditional function like rearing of crops could be massively improved by digitalisation of the process of watering, applying fertilisers and many other functions. The ultimate in the digitalisation is the production of a commodity using 3-D printing process.

Traditional cameras could not compete with digital cameras and went out of business. Hundreds of products produced using industrial processes earlier have gone out of use replaced by digitally produced goods and services. Likewise, many services traditionally delivered- trading, wholesaling, accounting etc. have been massively disrupted and in many cases fully replaced by digitalised delivery.

Covid-19 made everyone realise that a company specific office establishment is not required to write even codes for digitalising the economy and governance. Education can be delivered equally, if not more, effectively by using digital technologies. It will not be out of place to see very soon lot of the commerce, education, travelling, entertainment etc. delivered by employing digital technologies.

This is the age of transformation. The governments may not operate from the buildings of Ministries and Departments. The officers and assistants may work from home or multi-departmental offices organised in their residential societies. Same might be the fate of private sector office establishments. Some companies have already started asking question why should they be spending fortune on hiring big office or tech production centres when the net productivity of their staff working remotely is much higher.

Whichever country gets it right and aggressively seek to digitalise the production processes will come out to be more competitive and productive and will lead the race of transformation to digital economy.

Digitalisation Sweepstakes

There are three sweepstakes in the race for digitalising the economy which will decide the ultimate winners of the digital era.

First, the development of digital hardware industry- production of chips, electronics and digital content transmission equipment.

Second, the development of digital software services- the ability to write the best codes to use data and information to digitalise the production and consumption processes.

Third, the digital infrastructure and skills to enable production of hardware, software and digitalisation of economies.

The digital machines or the hardware (the chips and its operating equipment and communication networks) itself will grow into a major contributor of digital economy. Design and production of computers, laptops, cell-phones, telecom equipment, data storage equipment, transmission systems and networks and myriad other hardware are what human body was to agriculture era and machines were to the industrial era- the basic goods and the capital goods of digital era. The hardware is not only necessary for digitalising the domestic economy but is also the differentiator in export competitiveness of next 20 years at least.

The programme or the code contained in the brain cells makes an animate body work. Humans have larger and more evolved brain cells; humans can do phenomenal kinds of work- from the simple repetitive manual work to most artistic and advanced philosophical work. Animals have smaller and simpler brain cells and therefore can do a limited type of work. Machines of industrial era- Industry 1.0 and 2.0 especially- were simple machines with the capability of doing equivalent of repetitive manual work. Digitally programmed machines (Industry 4.0) can do much more work and undertake quite complicated tasks. Complex programmes or codes can be written for machines now which confer intelligence to machines. This ‘artificial intelligence’ makes machines auto-execute many tasks without human intervention. The code is the brain which assists humans to do much more than without these programmes. The code is the brain which makes machines do much more that without the programmes. The ability to write codes or programmes or software and use it to digitise more and more production processes is the competitive advantage in the digital age.

Digital era requires digital infrastructure. Letters in the agriculture era was carried by horses or humans from one place to another. In the industrial era, the post required infrastructure of roads, railways and aircrafts for being carried from one place to another. The digital era requires digital information highways of fibre optics, electro-magnetic spectrum and network of satellites to carry the post. The digital era infrastructure allows post to almost instantaneously carried from one place to another. Digital era infrastructure makes the transmission of posts much cheaper and personally delivered as well. Publishing a book or distributing a movie, thanks to digital infrastructure, is so much easy, less costly and extremely convenient in the digital era. The countries with better, efficient and everywhere available digital infrastructure stand much better chance to grow more rapidly.

Some countries like China, United States of America, Taiwan have raced ahead in digital infrastructure, production of the hardware and digitalisation of production processes. India has been notably ahead only in software development.

Digital Era Governments and Households

Digital era technologies- the chip, the code and internet/the communication technologies, riding on the digital infrastructure- are transforming not only the economies but also the governments and households. The governments can use digital technologies as effectively, advantageously and pervasively to produce and deliver public goods and redistribution as the private enterprise does to produce private goods and services.

The governments can and should examine each and every governance service it delivers for being digitally organised, produced and delivered. Likewise, all redistribution services can be delivered more efficiently and effectively directly to the intended beneficiary by using digital technologies. Digital age technologies can help transform policing, border defence, jails, courts, tax administration and any other governance service. Transaction of work in government offices can move from physical processes to electronic processes more productively and with better accountability. Delivery of scholarships, subsidies and pensions etc. can certainly be far more efficiently organised digitally than manually.

The governments invest a lot in infrastructure creation for betterment of people’s lives and for productivity of economy. The digital infrastructure is the differentiator for the digital age economies and people’s lives. The governments can and should invest in digital infrastructure to provide the competitive edge to the economy and governance support to the people’s lives.

Digital technologies are transforming households as well. This change is taking place for last two-three decades. Most households now use some digital age technologies- desktops/laptops, smart phones, digital televisions. Most household equipment- refrigerators, air conditioners, cameras, cleaning bots and so on- also have some electronics in them now. Most households communicate now using digital means- emails, messaging, video calls- these days. The digital technologies have entered notably in households. Many of other remaining aspects of household living- house security, electricity use etc. are also increasingly adopting some electronics in their management. It is a matter of time that remaining aspects of households- transportation vehicles, cooking food etc. will also be more and more electronics driven.

The countries which actively digitalise their governments and households and institute business and household friendly digital governance, will see not only their citizens live better lives but also grow faster economically.

CURRENT STATE OF DIGITAL ECONOMY OF INDIA

Digital technologies are transforming the economies the world over. Global digital economy is estimated to be of the order of about 5 trillion dollars now or about 5-6% of global GDP. However, there is still lot of non-standard measurement of global digital GDP. Production of microprocessor chips by Intel is unquestionably digital hardware. So are the laptops produced by Dell or desktops produced by Lenovo. Likewise, codes written by and BPM services provided by TCS and Infosys are also clearly digital economy. But is turnover of e-commerce platform like Amazon or Flipcart digital economy? Or, UPI payments all digital economy?

The confusion between digital economy and digitalisation of economy has to be very clearly understood. Sale of goods is trading whether performed by mom & pop store, malls or as e-commerce. Likewise, providing credit by banks is banking whether delivered by processing a manual file or digitally. Production processes are getting more and more digitalised across all sectors of economy by building in of integrated circuits and software programmes. The capex incurred on digitising a manual or agricultural or industrial process gets counted as value added by the supplier. There should not be double counting of digitalised services like trading, banking or entertainment as digital economy.

A good metric to assess is digitalisation of different sectors of economy. As the digital processes provide much bigger competitive advantage compared to the non-digital process, the digitalisation of different sectors fast will further the cause of faster economic growth.

The digitalisation can be measured by developing a good index taking into account factors like the extent of digital hardware and software capex out of total capex. The capex incurred by Powergrid and other transmission companies on computers, fibre optics, scanners and all other digital hardware and all the codes/programmes purchased as a proportion of total capex incurred would indicate, in a broad measure, the digitalisation of the power transmission. Other factors like proportion of consumers reached digitally out of total consumers or turnover achieved digitally out of total turnover of a company or an industry would also indicate digitalisation of that sector. An index of all the relevant factors can be built to gauge the extent of digitalisation.

Same principles and considerations apply in Indian context. The state of digital Indian economy is best figured out by assessing how much of Indian GDP comes from the production of digital goods and services. The state of digitalisation of Indian economy should be separately assessed by developing an appropriate metric for it.

Size of Indian Digital Economy

All the economic activities are organised into five-digit codes and in 21 sections, 88 divisions, 238 groups, 403 classes and 1304 sub-classes for compilation of GDP and various other statistical purposes.

There is one specific division which capture manufactured digital goods. This is the Division 26- Manufacture of computer, electronic and optical products, which have various digital goods organised into 8 groups.  There is one specific section- Section J- which has all the divisions which capture the value added from the digital services. The digital services are captured in Division 58- Group 582 Software publishing, Division 62- Computer programming, consultancy and related activities and Division 63- Information Service Activities with two groups- Group 631- Data processing, hosting and related activities; web portal and Group 639-Other Information service activities. Of other divisions in this section- Division 59- Motion Pictures, video and television programme production, sound recording and music publishing activities, Division 60- Broadcasting and programming activities and Division 61- Telecommunication are also substantially in digital mode.

Total GVA in manufacturing sector in 2017-18 at current prices was Rs. 23.20 lakh crore. GVA of the IT products manufactured (manufacture of computer, electronic and optical products, manufacture of electronic components, consumer electronics, magnetic and optical media and manufacture of manufacture of optical and electronic products put together) was only Rs. .85 lakh crore in the corporate sector or less than 3.6% of manufactured GVA. In the household sector, this was only .1 lakh crore out of total output of Rs. 8.7 lakh crore or less than 1.3%. Thus, total GVA from digital machines manufacturing was Rs. .95 lakh crores out to total GVA of 31.90 lakh crores or about 3%. If we include the GVA of communication equipment manufactured as part of digital manufacturing GVA, the situation improves marginally to Rs. 1.13 lakh crore (adding .18 lakh crore GVA of communication industry), which was 3.5% of the manufacturing GVA. India’s manufacturing of digital technology products is quite small.

The size of digital services is much larger. In 2017-18, the gross value added at current prices, under the head ‘information and computer related services’, was Rs. 5.91 lakh crores. This made up 6.79% of services GVA of 87.06 lakh crores.

Total gross value added in 2017-18 was Rs. 154.83 lakh crores. The GVA of the digital goods and services, both hardware and software, was Rs. 7.92 lakh crores or 5.12%. The digital economy GDP of India makes up approximately 5% of the total economy. India has a long way to go despite our proven prowess in producing and delivering digital business services and also in writing software programmes.

Digitalisation of Indian Economy

Agriculture and industrial economies begin getting digitalised when their manual and mechanical processes are improved upon with the addition of digital capital stock- hardware and connection to digital networks- and embedding of information technology services. The capital expenditure of all the traditional sectors of economy- agriculture, mining, manufacturing, construction and different kinds of services- on information technology equipment can be a good indicator of digitalisation taking place in any of these goods and services producing sectors. Likewise, the operational expenditure on information technology services by these traditional sectors can be additional indicator of digitalisation underway.

Data of capital expenditure made is available, for each sector of economic production, divided in four broad categories of a. dwellings, other buildings and structures, b. machinery and equipment, c. cultivated biological resources and d. Intellectual property products. Capital expenditure on digital hardware and software programmes purchased is part of machinery and equipment. Unfortunately, the disaggregated data on capital expenditure made on digital hardware, network connections and software programmes out of the total capital expenditure on machinery and equipment are not separately available.

Services are getting far more digitalised than the goods. Amongst the services, the financial services, accounting services, communication services, entertainment services, transportation services etc. are getting digitalised very fast. More than 90% of payments by value are made digitally now. Most banking services are consumed digitally now. Lot of television, movies and sports programmes are produced and delivered digitally these days. As the domestic production of digital equipment and machinery for producing and delivering these services are not produced in the country, there is a very heavy dependence on imports. Electronics imports exceed $50 billion and are the second largest item of imports making up more than 10% of total import bills. India has been good at delivering software services, but even the basic software for digitalising economic processes is imported in large quantities.

Digitalisation of economy is progressing, but it is still at a relatively nascent stage.

India is Still to Arrive in the Digital Age

UNCTAD publishes an annual Digital Economy Report. The last available edition is the 2019 edition. The world is fast digitalising but the ‘world is only in the early days of the data-driven economy’, concludes the Report, despite stellar progress. India is relatively a minor player still.

First, the global internet protocol traffic, which was only 100 gigabytes per day in 1992 grew to 100 gigabytes per second in 1992 and a little less than 50000 gigabytes per second in 2017.

Second, digital economy is highly concentrated in two countries- the US and China. 90% of market capitalisation value of world’s 70 largest digital platforms is in these two countries.

Third, 40% of colocation data centres in Feb 2019 were in the USA. India had only 3% of data centres.

Fourth, the e-commerce sales exceed 80% in South Korea, 60% in Japan and 45% in USA. India’s share of e-commerce is much smaller. Cross border B2C sales from India is almost non-existent whereas it exceeds more than 5% for quite a few countries.

Fifth, top 100% web-sites located in South Asia, including India, are hardly requested outside South Asia. Top 100 websites located in US-Canada region are requested almost everywhere in the world.

Sixth, not a single top 70 global platforms providing different e-commerce services- transportation, delivery, financial services, entertainment, media, search etc.- are Indian.

We have dominant presence in business process outsourcing (BPO) services industry with more than 50% share of the global market. This is more on account of our productive digital labour than digital entrepreneurship, capital or technology prowess.

PROGRAMMES AND POLICIES TO DIGITALISE INDIAN ECONOMY

The Government of India has been undertaking several programmes to promote digitalisation of governance and digital empowerment of common man. However, there is no coherent and well-directed strategy for digitalisation of economy. This is hurting India’s growth potential.

The government undertook a number of small standalone programmes in 1980s-1990s for advancing the objective of electronic governance. In the middle of the first decade of new millennium, the government adopted National E-governance Programme bringing together all the 30 odd discrete programmes. Further visioning, consolidation and some additions have led to the programmes being rechristened as Digital India Programme.

The Digital India programme also focuses on digital governance and citizen’s empowerment and organises government’s programmatic interventions in nine pillars. There is an element of digital infrastructure creation in the Digital India programme. However, the Digital India programme is not a Make-In- India programme for manufacturing hardware and software in India or creation of digital networks and platforms which are the real growth engines

The Make-In-India Programme is the manufacture in India programme and has 25 sectors to focus on. IT and BPM sector is one of these 25 sectors. There is no Hardware focus in the Make-In-India programme.  

India’s Trillion Dollar Digital Opportunity

The Ministry of Electronics and Information Technology (MEITY) published a report titled ‘India’s Trillion Dollar Digital Opportunity’. The report presents a detailed but a mixed-up strategy for India to seize the trillion-dollar economic opportunity by 2025.

The Report does not project goal of 1 trillion dollars Gross Value Added or GVA in 2025 from the ICT sector. Therefore, the $1 trillion goal is not related to the GDP of $1 trillion. It takes a wider concept of the ‘digital ecosystem’ which includes recognised parts of the ICT/Digital Economy comprising information technology and business process management (IT-BPM), digital communication services (including telecom) and domestic electronics manufacturing which are the recognised sectors of the GVA matric, but also turnover from ‘e-commerce’, ‘digital payments’ and ‘direct subsidy transfers’, which only have a part of their turnover and value added attributable to digital economy.

The report does, however, help focus attention to the economy sectors with excellent potential of mainstreaming digitalisation.

National Electronics Policy for Hardware

National Electronics Policy 2012

The chip designing and making and producing integrated circuits for manufacturing computers and embedding in consumer and other products, also called Electronic System Design and Manufacturing or ESDM or simply Electronics is first of three big digital revolution technology- the hardware.

India recognised in 2012 that it was losing the electronics hardware game and came out with the National Policy on Electronics or NPE 2012. The policy recognised very explicitly that the Electronics Industry was the ‘largest and fastest growing manufacturing industry in the world’ with turnover of about $1.75 trillion. It also recognised that Indian domestic electronics industry was quite small at only $20 billion with ‘actual value-addition in the domestically produced electronic product’ being ‘very low, ranging between 5 to 10 percent in most cases’. The NPE presented a scary kind of scenario, unless the Government took action, of Indian demand for electronics reaching to $400 billion by 2020 and India importing about $300 billion of electronics, which ‘may far exceed oil imports.’

The NPE 2012 articulated vision of creating ‘a globally competitive electronics design and manufacturing industry to meet the country’s needs and serve the international market’ and the specific objective of achieving a turnover of about $400 billion by 2020 involving investment of about $100 billion and employment to around 28 million’.

The NPE 2012 proposed a slew of measures like providing ‘attractive fiscal incentives across the value chain of the ESDM sector through a Modified Special Incentive Package Scheme (M-SIPS) to eliminate the disability costs in manufacturing on account of infrastructure gaps relating to power, transportation etc. and to mitigate the relatively high cost of finance etc.’ It also spoke of ‘setting up of Semiconductor Wafer Fab facilities and its eco-system for design and fabrication of chips and chip components.’ All other usual tried measures of giving ‘preference to domestically produced electronic products’, ‘incentives for setting up of over 200 Electronic Manufacturing Clusters (EMCs)’ ‘development of appropriate infrastructure’, a ‘fairly stable tax regime conducive to attract global investments and to encourage electronics sector’ and a ‘Fund of Funds’ were also promised.

The policy did not achieve its objectives though share of India in global electronics manufacture went up from 1.3% in 2012 to about 3.0% in 2018. Electronics imports exceeded $50 billion in 2019-20 with 40% of it coming from China. There has been notable progress in mobile handset manufacturing but the domestic electronics industry is still not $75 billion.

National Electronics Policy 2019 (NPE-2019)

NPE 2019 is some refinement but largely an updated version of NPE-2012. The target of $400 billion electronics manufacture turnover which was to be achieved by 2020 has been pushed to 2025. The NPE-2019 relies heavily on manufacture of mobile handsets (1 billion handsets; turnover $190 billion).

The NPE-2019 recounts very poor progress made in most of the interventions/measures initiated under NPE-2012. Capital investments reported by 134 units assisted under M-SIPS made capital investment of $1.3 billion and achieved turnover of about $10 billion. 20 Greenfield Electronics Manufacturing Clusters (EMCs) and 3 Brownfield Clusters were ‘sanctioned’ but none seem to have become functional. The amount committed by the Electronics Development Fund, the Fund of Fund set up to encourage Venture Capital Funds, could commit only Rs. 857 crore or about $130 million in total to as many as 13 ‘daughter funds.’

There are some modifications. Fabless Chip Design Industry is to be promoted now whereas the Semiconductor Fab Facilities proposed in NPE-2012 did not get established in the country.

The NPE-2019 does not offer anything new for promoting electronic hardware production in the country. The Government is supplementing the NPE-2019 by taking other measures- like Production Linked Incentives- to encourage establishment of industries which uses good amount of electronics.

Production Linked Incentive Scheme for Large Scale Electronics Manufacturing

The NPEs, minus the semi-conductor fab manufacturing, effectively targeted small-scale enterprises in the electronics sector. These enterprises either make some electronics component or use the bought out electronic components in consumer electronic products. These are not the manufactures of basic electronics like chips made by Intel or solar wafers etc. Nor are these enterprises big who can reap the advantage of scale manufacturing like Samsung or Apple in mobile manufacturing.

The Government recognised the limitation of the NPE-2019 in incentivising establishment of real large-scale manufacturing of electronic products. The new Scheme ‘Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing’ notes very rightly “there is a need for a mechanism to compensate for the manufacturing disabilities’ which are of the order of ‘8.5% to 11%’ ‘vis-à-vis other major manufacturing economies.’

The PLI scheme offers incentive of 4% to 6% on incremental sales of mobile phones and eight specified electronics components (e.g. discrete semiconductor devises like transistors, printed circuit boards etc.) manufactured in India to the approved companies. The PLI scheme is majorly targeted to get iconic mobile set manufactures to India and is expected to cost a total of Rs. 48000 crores over next five years.

An Assessment of India’s Electronics Manufacturing Policies

Global electronics hardware industry is the largest growing manufacturing industry as it produces electronics which are the change agents to transform production of all other goods and also delivery of services. The hardware industry has grown to be over $2.5 trillion and is expected to be the biggest growing industry for many more years.

India, however, has not been able to catch on the electronics manufacturing bandwagon. India’s 3% odd share is in the turnover of the electronics products. If the value added in the electronics hardware industry is taken into account, India’s share in global value added in the electronic hardware only is still smaller.

Largest value addition in the electronics hardware industry is concentrated in a few manufacturers who own most of the patents and are the master designers of the electronic products. In the personal computers and like products- ipads, notebooks etc.-Apple, IBM, Lenovo, HP dominates. In the mobile manufacturing, Samsung, Huawei, Apple and Oppo has more than 60% share globally. In the 5G technology-based instrument manufacturing, Ericsson, Nokia, Qualcomm, Huawei dominate the world.  Amongst the semi-conductor manufacturing companies, Intel, SK Hynix, TSMC, Micron Technology, Qualcomm, have huge dominance in the world.

It is unpleasant but true that in none of the electronics hardware manufacturing fields cited above, there is not a single Indian company is the top10 companies of the world. This should be a sobering thought for us. It is possibly recognised by Indian policy makers as the NPE-2019 and PLI-2020 both don’t talk about creating Indian electronics manufacturing behemoths in India, the types of TCS, Infosys etc. which we have in the information technology services space.

The only rightful strategy to root electronics manufacturing industry in India is to invite the global giants to come and manufacture in India. These global giants get most of their products manufactured in Asia, most prominently in China, Taiwan, South Korea, ASIAN countries and now Vietnam. They would come to manufacture in India only if they can manufacture their products, for both consumption in India and exports, competitively and make a little more profit than they do somewhere else. This calls for a policy strategy to study each segment of electronics manufacturing and what would it take for the leader companies to shift to India. The Government can then take a view and offer the compensating package to make one-two leading companies in each segment to shift base to India. The PLI Scheme is a right step in this direction but much more needs to be aggressively and fast.

National Software Promotion Policy

India has strong Information Technology Companies. India is the largest exporter of IT services in the world. However, when it comes to software products, India’s performance is as bad as electronic products manufacturing. The National Policy on Software Products (NSP-2019), a first policy targeting software products as such, adopted in 2019, makes a telling statement that contribution of software products in the Indian IT and IT enabled Services was only $7.1 billion out of total estimated revenue of $168 billion. The export of software products was still bad at only $2.3 billion out of total exports of $126 billion, giving India a share of only .5% of the global software market. The worst part was that India imported software products of $10 billion, which made India a net importer of software products.

Software or the coding is the second pillar of the digital revolution. Indian are considered geniuses in the coding. Most of the companies in Silicon Valley have Indian engineers to do the coding. Indian companies have also developed a few world scale software products. In the banking space, Indian companies have developed software products like Finacle and TCS BaNCS which are in top 10 software products. Yet, when it comes to top 10 or 25 software companies of the world, Indian companies do not figure anywhere.

The NSP-2019 applies hackneyed formula of promoting industrialisation in India by customising it to the software industry- nurturing 10000 technology start-ups, creating a talent pool of 1 million IT professionals, setting up a single window platform for facilitation of Indian software product industry, allowing set off of tax payment on the investment made etc.

The electronics manufacturing and software industries are the best value creators in the world of manufacturing and development today. These industries are promoted by iconic technology entrepreneurs and needs only an enabling environment from the governments. The top companies dominate the world of electronics manufacturing and software development and they employ the best brains. The type of interventions and support offered in the National Policy on Software Product might help some small enterprises to write software for local use. This is important and helpful but any hope that such enterprises can produce world beating software products would be entirely misplaced.

Lot of global companies have set up their software development establishments in India considering the special talent which Indians have in writing codes. The Government should not come in the way of these companies by capping their royalties. The Government would rather provide infrastructural support and enabling environment for more of the software development, like IT services, outsourced to Indians. It might lead to these companies relocating to India eventually.

It is time for major Indian IT companies and non-IT companies to get into the lucrative business of software products development, including software for machines, data centres, cloud computing and so on. Likewise, these Indian companies should go into the business of delivering software as service and other related services. Indian government should think of killer incentive scheme like the Software Technology Park Scheme. The big players need to be incentivised and supported for India to capture the software products markets like we did for information technology services.

Policies for Promoting Information Technology Services 

Information technology or IT services are business services performed from an away-location or by stationing the personnel of IT services company in the premises of the services outsourcing company. India captured the opportunity offered by fast and cheaper data transmission over distances which allowed the business services to be delivered in the US and other countries by IT companies located in India.

India’s cheaper and educated workforce provided the killer advantage. Lot of new technocrat entrepreneurs helped seize this moment for India- Infosys, HCLTech for example. Some of the traditional economy companies- TCS, Wipro for example, diversified in the IT services space.

Government created right policy environment. Software Technology Parks were set up which provided faster data transmission facility, the most differentiating factor for establishing successful enterprises and also other technological infrastructural services like data storage facilities. The Government gave one big fiscal concession- income tax profits exemption. These policies were adequate to set Indian entrepreneurs set up world class companies and capture one third of global business for India.

If the Government were to provide the policy and infrastructure support of the type offered under the Software Products Policy and the National Electronics Policy for the IT Services Export Promotion, there was a very good chance that we would not have seen development of IT services giants which we see today in India. As the IT services business is suited to both large and small businesses, the Software Technology Parks offered their services to both large and small businesses. Small businesses also thrived in this space. Electronics hardware and Software Products, by their nature, are more suited for the large- scale enterprises.

Polices for IT Infrastructure

Digital economy infrastructure is built on whatever medium- fibre optics, satellites, spectrum etc.- can carry and store data fast and in humungous volumes. In India, digital infrastructure has developed most on spectrum using mobile telephony. Most data are transmitted on spectrum in India as fibre optics have got relatively a short shrift, though it seems to be receiving attention now. Likewise, we have constrained use of satellites in moving data.

We have fallen into another trap in un-imaginatively using the digital infrastructure for digitalising economy. Like excessive pricing of land became a constraint on development of industries, excessive pricing of spectrum, especially after 2G scam, is coming in the way of adoption of digital technologies and would most likely constraint use of 5G technologies as well.

National Digital Communications Policy 2018

The Government has adopted National Digital Communications Policy 2018 (NDCP-2018) recognising quite well that ‘digital infrastructure and services are increasingly emerging as key enablers and critical determinants of a country’s growth and well-being.’  The digital communications policy is extremely important to achieve two big goals- transforming Indian economy into a digital economy by digitalising production and distribution of goods and services and second, by transforming individuals and households, the society, into a digital society.

The NDCP-2018 focuses on second objective and by and large ignores the first objective. Its vision statement states ‘to fulfil the information and communication needs of citizens and enterprises through the establishment of a ubiquitous, resilient, secure, accessible and affordable Digital Communication Infrastructure and Services, and in the process, support India’s transition to a digital empowered economy and society.’ It sets its goals in terms of providing digital infrastructure services to people- universal broadband connectivity at 50 mbps to every citizen, 1 gbps connectivity to all gram panchayats, 100 mbps broadband on demand to all key development institutions, fixed line broadband access to 50% of households, unique mobile subscriber density of 55 by 2020 and 65 by 2022, deployment of public wi-fi hotspots, and connectivity to all uncovered areas. There is no mention of enabling businesses to get digital infrastructure services to transform the production of goods and services digitally.

The policy talks about establishing a National Broadband Mission but ‘to secure universal broadband access through four different nets- BharatNet, GramNet, NagarNet and JanWifi. It also talks about Fibre First Initiative to take fibre to the home, and to key development institutions in Tier I, II and III towns and rural clusters. Grudgingly, it mentions to every enterprise as well.

The whole NDCP-2018 is welfare oriented and not business oriented. The global enterprises which have developed and own digital technologies are making enormous amount of money. Indian corporates do not have these digital technologies. The policy should have focussed on how to get these technology majors to bring their technologies by investing in India to create the most advanced and functional digital infrastructure in the country. There is mention of goal of attracting $100 billion of foreign investment. The requirement is possibly manifold and merely making such general statement do not get the FDI. We need to create customised solutions like the PLI initiative to get electronics manufactured in India. In fact, if we set our auction terms more business-like, getting world class cutting age digital infrastructure constructed in India would cost the government nothing.

Getting Fibre and Satellite Infrastructure Right

Market Analysis Group, IDATE conducted a survey in 2019 ranking the countries on the basis of homes and buildings connected to the fibre (FTTH &FTTB). Cut off criterion was minimum 1% of homes and buildings connected to Fibre. It found 64 countries in the world meeting this minimum threshold.

These countries had 1.2% to 95.7% homes and buildings connected to fibre. UAE, Qatar, Singapore, China, South Korea, Hongkong, Japan, Mauritius and New Zealand were top 10 countries with fibre penetration exceeding 53%.

India, unfortunately, was found not to have even 1% homes and buildings connected and therefore did not make it to the list of 64 countries included in the global ranking. That shows the pathetic state of optical fibre penetration in India.

There are two imperatives which make fibre the choice of digital infrastructure creation. First, the cost of digital services delivered through fibre should be competitive to the cost of digital services delivered through spectrum. Second, it should be possible to make fibre reach homes and buildings.

The fibre cost is pittance. However, laying fibre in Indian conditions is quite time consuming and costly. Piped Natural Gas (PNG) had the same disadvantage compared to LPG cylinders. However, two policy decisions smoothened the transition to PNG in cities of India. First, transition of buses and other modes to transport to CNG by the same concessionaire brought considerable business and pricing of PNG was just about the same as LPG. Most importantly, the laying of PNG and CNG infrastructure, which is far more demanding than Optical Fibre, was administratively facilitated. Likewise, appropriate policy incentives in the form of all digital services being delivered through fibre, reducing the cost of laying fibre infrastructure and facilitating its laying would be extremely necessarily if at all we can realise the policy goal of Fibre to All expressed in the NDCP-2018.

Satellite business is not reserved as a public sector monopoly under the Industrial Development and Regulation Act (IDRA-1951). However, by means of some administrative decision, private sector has not been allowed in the satellite business. ISRO and other public institutions have done a fabulous job of making and launching satellites providing excellent quality at most competitive costs. However, not allowing the private sector has constrained the use of satellites in expansion of digital infrastructure in India.

Government of India has recently permitted private sector in the satellite business. It should be hoped that this decision would be allowed to be implemented without any constraints and backroom controls. Indian entrepreneurs would soon make India a satellite manufacture and launching hub of the world.

The combination of fibre to every building (home and business), 5G spectrum and satellites for any digital application should help India create world class digital infrastructure to pave the way for digitalisation of Indian economy, businesses and households.

DIGITAL GOVERNANCE

The fundamental building blocks of digital age- the chip, the code and the internet- representing digital technologies, software programming and digital communication will not work to transform the economy into a digitalised economy unless the raw material of every digital good or service i.e. the data is allowed to be used freely and on commercial terms by the businesses and the digital businesses are allowed to operate as freely as the physical businesses are.

There are two pieces of proposed policies and legislations which have attracted very wide attention in this regard- the Personal Data Protection bill, 2019 and draft National E-Commerce Policy. Both measures have been highly controversial. The Personal Data Protection Bill is still to become a law and the E-Commerce Policy has not been adopted as yet, though some of its restrictive provisions are reflected in the FDI Policy. RBI had also come up in 2018 with some rule to mandate retention of financial data in India.

Fundamentality of Data Creation, Storage and Use for Digital Economy

Binary bites ‘0 and 1’ or ‘off and on’ in electronic current converted every digit, every letter, every picture, every sound and almost every way in which the humans thought, expressed and communicated. All the numbers, words, pictures, sound bites, information, expressions and everything else constructed in bites are data. For digital economy, data is everything- it is the input, it is the process of production and it is the output. Economy- the production, distribution and consumption of goods and services- cannot be digitalised without extensive creation and use of data.

Humans are factors of production and humans are consumers of most goods and services produced in the economy. Digitalisation offers a fundamental reset opportunity from the production systems of the industrial economy. Industrial economy was most competitive and productive producing goods at scale. This led to mass production of almost everything- shirts, cars, refrigerators, you name anything. Humans have enormous subtle and small variation in physical parameters even though they are from the same species. The mass production could afford only fewer variations. Shirts could be produced in three or four sizes. If the producers tried to make more variations, the scale and competitiveness was lost. In the process, the products could not be customised to each and every individual taking care of the precise specifications suited to him or her. Customisation was the lost cause in the industrial revolution.

Digital revolution- digitalisation of goods and services produced- brings back the customisation as the key differentiator of the products and services for every individual. Like mass production was the winner for industrial economies, customisation is the winner for digital economies.

Customisation requires data of personal attributes- precise measures of all the dimensions of foot for making fully fitting and comfortable shoes for each individual, likings and preferences of individuals for delivering the products desired, even producing a car which meets specific needs of an individual or family. The digital economy works, thrives and prospers by using the personal data.

Personal data can, however, be misused to target or manipulate a person or a group with similar attributes. Personal data of identity, health and other sensitive nature can be hacked or misused to cause financial and other harms to the person concerned. It is absolutely necessary that such misuse, manipulation and harm is prevented.

The absolute indispensability of personal data for digitalisation of economy and the uncompromisable state obligation of preventing the misuse of personal data is the most intricate conflict in the march of digital economy. How a nation or society arrives at a solution which achieves both the objectives and creates a balance will determine how it succeeds or fails in reaping the advantages of digitalisation of economy.

Data Legislation and Regulation in India

In India, unfortunately, the value and critical advantage of data for digitalisation of the economy did not get much appreciation. Protection of personal data, instead, got all the policy attention, most specifically after 2016.

Protection of Sensitive Personal Data (SPD) was sought to be ensured by Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules 2011 framed under the Information Technology Act, 2000. These Rules defined what sensitive personal data is and setting out the obligations of body corporates in collection, use and transfer of such personal data. There were no serious restrictions on the use of the personal data by the body corporates in the SPD Rules.

The Government constituted a Committee of Experts under the Chairmanship of Justice B N Srikrishna in July 2017 ‘to deliberate on a data protection framework for India’. While the preamble to the terms of reference of the Srikrishna Committee referred to the ‘need to ensure growth of the digital economy’, the ToRs were governed by the utmost importance of ‘keeping personal data of citizens secure and protected’. The two specific ToRs were also ‘to study various issues relating to data protection in India’ and ‘to make specific suggestions for consideration of the Central Government on principles to be considered for data protection in India and suggest a draft data protection bill.’

No wonder the Report of the Srikrishna Committee made not a single recommendation on how to seize the opportunity to digitalise Indian economy by using data as the critical advantage. All the recommendations related on how to define and deal with the personal data. The Committee also recommended a comprehensive Personal Data Protection Bill 2018.

The Bill recommended by the Srikrishna Committee was examined by the Government taking in consideration numerous comments received from people and institutions. The Government made certain changes and introduced the Personal Data Protection Bill 2019 in the Parliament for adoption. The 2019 Bill is far more restrictive in use of personal data than the 2018 Bill. The Bill is still under consideration of the Joint Select Committee of the Parliament, where it is still under consideration.

There are four major issues the way Indian Government has chosen to deal with the issue of data:

First, the world of data is being looked only from a very narrow lense of personal data. The larger world of data, which includes ‘non-personal data’ and also non-personal aspects of personal data is being given a short shrift.

Second, all the energy and efforts are focused only on protection of personal data at every stage- collection, storage and use- as a matter of privacy and as a private property. There is no thought and strategy for using data as a matter of critical advantage for building a competitive and rich digital economy for seizing the opportunity offered by digitalisation of production of goods and services.

Third, the fundamental construct of Constitution for protecting privacy of citizens from the Government, which is part of the fundamental rights, is being sought to be turned its head by seeking to exclude private businesses from use of personal data while giving overriding access to the government to not only personal data of persons but also non-personal data of businesses.

Fourth, in the virtual world of today, there are no national boundaries for storage and access to the stored data. The over nationalistic view about localisation of data would only hurt our interests.

The US does not restrict the use of personal data for businesses purposes, except where it is really a matter of privacy defined very precisely. The EU has also come up with extensive regulations to encourage free use of non-personal data. It is time India also considers a law for the use of data, including personal data, by businesses to provide competitive advantages to Indian businesses, in building the digital economy. Sensitive or critical personal data needs to be defined very narrowly, something the access to or use of which can cause real harm to the person concerned. There is nothing sensitive about a bank account number or caste or religion of a person. There is no need to define these as sensitive personal data.

The Bill propose a massive administrative machinery and elaborate procedures for obtaining consent/permission of ‘data principal’ for use of personal data. The bill, if enacted would usher in India a regime worse than the licence permit raj which destroyed private enterprise in industrialisation process of India. There should be more liberal and easier process of obtaining consent of person concerned for use of personal data. A willingly provided information while filling up an application or interacting otherwise should suffice and it should be required to obtain a consent which is ‘free, informed, specific, clear and capable of being withdrawn’. Misuse of privacy data must be as punishable as breach of privacy is today.

The whole exercise of enacting a personal data protection bill should be replaced by a holistic data use policy or law for facilitating digitalisation of Indian economy protecting legitimate privacy concerns from harm.

E-commerce Policy Proposal

Trade and Commerce is, like any other service sector- accounting and finance, banking, transportation etc.- is an economic service. Trade and Commerce is, like many other services- banking or accounting- extremely amenable to digitalisation. Trade and Commerce, transacted digitally- the e-commerce- has enormous advantages- cost, time, distance etc.- which is the world over, disrupting the traditional trade and commerce industry.

There is no legitimate rationale for having a separate law or policy for e-commerce as there is no legitimate rationale for having any separate law or policy for e-banking or e-accounting or business process outsourcing and the like. However, Indian policy makers have been sensitive to foreign companies selling the foreign products in India in traditional brick and mortar model or the e-commerce mode. Likewise, Indian policy makers have been quite sensitive about permitting foreign companies to invest in trade and commerce business segment in India, again both in brick and mortar Indian businesses and e-commerce.

The Department of Industrial Policy and Promotion (DIPP), renamed the Department of Promotion of Industry and Internal Trade (DPIIT), has been in charge of the Foreign Direct Investment (FDI) policy. India has evolved a restrictive FDI policy for trade and commerce sector over the years. There are distinctions in terms of wholesale trade and retail trade. There are distinctions in terms of multi-brand and single brand stores. There are distinctions in terms of brick and mortar trade and commerce and e-commerce. There are distinctions of platform e-commerce companies and own product inventory/direct selling e-commerce companies. There are also numerous conditionalities- on local content, minimum investment amount, export obligation, localities where it can be established, extent of foreign ownership and all. The policy is quite complex.

For no good reason, the DPIIT decided to take over the mantle of controlling digital aspects of e-commerce as well, most notably data. In Feb. 2019, it came up with a Draft National E-Commerce Policy with the theme ‘India’s Data for India’s Development’. The Policy is hardly an e-commerce policy. It is out and out a trade data control and regulation policy. It aims to ‘regulate cross-border data flow’, lays down ‘conditions to be adhered to by business entities which have access to sensitive data of Indian users stored abroad’, bans ‘sharing of such data with third party entities, even with customer consent, mandates ‘e-commerce companies to ensure that all product shipments from other countries are channelised through the Customs route’, proposes creation of industrial standards for smart devices and IoT equipment’ and so on.

The proposed e-commerce policy transgresses the domain of Ministry of Electronics and Information Technology (MeiTy) heavily as data regulation, irrespective of sector, is their domain. The policy is so excessively restrictively that it amounts to worst form of protectionism in trade and commerce which India had before 1990 in the industrial field and successfully demolished after 1991.

The inherent contractions and excessive protectionism proposed in the Draft e-commerce policy 2019 have not allowed it to progress much. The Government indicated that it was working on another draft and that alternative draft is still in works.

There is an absolutely no need for the Government to frame any e-commerce policy to regulate data and digitalisation of trade and commerce services. The policy draft should be simply scrapped.

CONCLUSION

Digital revolution, enabled by three key technological innovations of the chip, the code and the internet, is sweeping through the world currently, transforming every business. Services of various kinds- trade and commerce, accounting, banking, outsourced processing, entertainment, banking and so on- have got transformed massively already. Coronavirus has given further disruptive push to digitalisation and delivery-consumption of services digitally. It is fairly evident that many products would get transformed in services and would be digitally delivered.

Digital revolution is also transforming production and consumption of many agricultural and industrial goods. There is increasing use of chips and codes in the manufacture of physical goods to control and govern services which such physical goods- cars, refrigerators etc. deliver. With Internet of Things (IoT) also a reality now, connectedness of physical machines and equipment will further massively digitalise physical goods, machines and equipment.

Digital technologies- the chip, the code and the internet- have massive competitive advantage over industrial technologies and therefore the economies which advance beyond industrial age technologies to digital age technologies would be the winners in future. Those economies which ignores digital technologies or are inefficient converters would surely lose out.

India has not been very forward looking and successful in the technological advancement based on the two of the three critical technologies- the chip-making and the code-writing. This paper brings out poor progress which India has made in production of digital technological products and also basic software writing. Not a single Indian company figures in top 30 companies in digital technologies.

India, however, has taken very good advantage of evolution of internet and has been able to garner a share of more than 1/3^rd in Information Technology (IT) services. The production and delivery of business services using IT and Internet is the largest export earner for India. The IT services industry employs millions of Indians. IT services make sure that India’s current account does not go out of hand even while importing more than 80% of its crude oil consumption from abroad.

India has been flirting with very restrictive data control and management policies. The Draft Data Protection Law and Draft E-Commerce polies exemplify these starkly. These proposals make India an overly inward looking/protectionist and brings the hated licence permit raj in a worse form. To digitalise Indian economy and to wrest the best advantage in digital transformation of the World, India must scrap both these proposals and bring a modern liberal and facilitative law for data management and use, including personal data. Therein lies whether India will miss the digital revolution or capture it. India missed the industrial revolution by coming on to it very late after opposing it for many decades. The same mistake should not be repeated in case of the opportunity thrown in by the digital revolution.

SUBHASH CHANDRA GARG

NEW DELHI 19/07/2020