7 minute read 25 Apr 2023
Digitalization of India’s economy

How digital transformation will help India accelerate its growth in the coming years

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

7 minute read 25 Apr 2023
Related topics Tax COVID-19

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According to the European Commission, the pace of digitalization in India was the fastest among most major economies between 2011 and 2019.

In brief

  • Between 2011 and 2019, digitalization in India grew neck to neck with China at 11%.
  • Digitalization in India has been progressing steadily, first covering large urban areas, followed by smaller urban areas and rural areas.
  • Digital growth in India is getting a further fillip now and would become a major factor in sustaining India’s long-term growth story.

What is digital economy?

First coined in the 1990s, the term digital economy has expanded in consonance with the transforming nature of technology to include digital technologies, products and services across a wide spectrum of sectors. Digitalization is by nature multidimensional. It requires a broad definition to cover all activities that use digitized data as a part of the digital economy (IMF, 2018). Joint collaborative research by Huawei and Oxford Economics pegged the size of the global digital economy to be around US$11 trillion i.e., 15.5% of global gross domestic product (GDP) in 20161, which is expected to reach US$23 trillion (24.3% of global GDP) by 2025.

Backward and forward linkages

The ADB (2021) framework for measuring digital economy identifies backward and forward linkages associated with core digital economy. According to this framework, core digital products are classified into five product groups namely: (a) hardware, (b) software publishing, (c) web publishing, (d) telecommunications services, and (e) specialized and support services. It defines digital economy as the contribution of economic transactions that involve both digital products and digital industries to GDP (or Gross Value Added (GVA)). 

Digital products are the goods and services that primarily generate, process, and/or store digitized data. ADB’s framework makes a distinction between the core digital economy with digitally enabling and digitally enabled products. Digitally enabling products reflect backward linkages of the core digital economy while digitally enabled products capture forward linkages. Examples of digitally enabling products include semiconductors used for electrical conductivity that are integral components of computer manufacturing but, by themselves, do not have a direct function in relation to digitized data2. Examples of digitally enabled products include car manufacturing, which uses digital components into the vehicles such as in-car entertainment, vehicle systems management, self-driving capabilities etc. Digitally enabled sectors also include media content and retail sales.

As per RBI, industries with the highest forward linkages in India from the aggregate core digital economy in 2019 were construction (6.1%), renting of machinery and equipment (4.2%), food beverages and tobacco (3.8%), textiles and textile products (3.6%), and electrical and optical equipment (3.5%)2

Quantifying India’s digital leap: overall impact of the Digital India movement

Both the value and volume of digital payments in India have grown at a fast pace in recent months, including the COVID-19 affected months covering the period from November 2019 to January 2023, as shown in Chart 1. The number of digital transactions increased more than three times from 300 crores in November 2019 to 1,052 crores by January 2023. 

The value of total digital payments relative to nominal GDP was 8.7 times the nominal GDP in FY19. Although it fell during the COVID-19 year, this multiple is rising again.

In July 2015, the GoI launched the ‘Digital India’ initiative to improve online infrastructure and increase internet accessibility for citizens, empowering them to become more digitally advanced. This initiative encompasses three key dimensions namely, a) establishing a secure digital infrastructure, b) delivering digital services and c) ensuring that every citizen has access to the Internet. GoI’s persistent effort to digitalize the Indian economy and make India’s population at large participate in it is already showing results. It has considerably reduced the distance between government and citizens by enabling the delivery of substantial services directly to the beneficiary in a transparent and corruption-free manner. In fact, India has emerged as one of the pre-eminent nations of the world to use technology to transform the lives of its citizens3. Further, the digitalization drive has also led to a faster formalization of the economy4.

Size of digital economy in India

As per the RBI,the share of India’s core digital economy6 increased from 5.4% of GVA in 2014 to 8.5% in 2019. In US dollar terms, India’s digital economy exhibited a growth rate of 15.6% over the period 2014 to 2019, which was 2.4 times the growth of the Indian economy. Further, the share of digitally dependent economy (digitally enabled sectors) is estimated at 22.4% in 2019.

RBI has also decomposed the overall output multiplier into digital and non-digital output multipliers. The output multiplier is defined as capturing the direct and indirect impact of a unit change in final demand covering digital and non-digital sectors on the economy’s total output. The RBI then estimated separately the digital and non-digital output multipliers for 2014 and 2019. It is shown that while the non-digital output multiplier fell from 1.68 to 1.57 during this period, the digital multiplier increased from 1.34 to 1.50.

A recent study by MeiTY (2019) has estimated the size of India’s digital economy at US$200 billion in 2019, which is expected to rise to US$500 billion by 2025 in their ‘business as usual’ scenario. However, they also point out that potentially, the size of India’s digital economy can be increased up to US$1 trillion by following a set of policy initiatives covering 30 digital themes under 9 national goals: (1) 21st-century IT infrastructure and software capabilities, (2) E-governance of the future, (3) Healthcare for all, (4) Quality education for all, (5) Energy for all, (6) Next-generation financial services, (7) Doubling farmers’ income, (8) Make in digital India, make for India, make for the world and (9) Jobs and skills of the future.

Impact on employment and growth

The RBI report points out that employment in the digital sectors of the Indian economy is still quite limited. Based on India’s current population (2022) and the worker population ratio in 2019-20 as per Periodic Labour Force Survey (at 38.2%), the total employed workers in the core digital economy were estimated at 4.9 million. Among the digital sectors, the highest share of employment at 59.8% is for the computer programming consultancy and related activities followed by telecommunication services at 15.2%.

India’s explosive growth of the digital economy is itself going to serve as a significant enabler of India’s overall economic growth. As compared to developed countries, India’s pace of digitalization has been very high in recent years, particularly over the period from 2011 to 2019 (Table 1). The pace of digitalization as measured by CAGR in the Information and Communication Technology (ICT) sector during this period has been as high as 10.6% with only China exceeding India’s growth marginally. With the advent of 5G and the setting up of semiconductor industries in the country, India is expected to accelerate further its pace of digitalization in the next few decades.

According to a recent study published by ACI Worldwide in collaboration with GlobalData, India is way ahead even in comparison with China in terms of the number of digital payments. According to this source, the number of real time payments in 2021 were at 48.6 billion in India as compared to 18.5 billion in China and 8.7 billion in Brazil. This is indicative of the ease with which the Indian population has adopted digital platforms for making payments even if the average value of such payments may be rather low.

Digitalization as a growth enabler

India is projected to become one of the largest economies by the middle of this century in market exchange rate terms. This has been highlighted in EY’s recent publication titled India@100: realizing the potential of US$26 trillion economy. In this growth journey, digitalization is expected to play a key role.

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The growing digitalization of India’s economy may itself serve as a major factor for sustaining a robust growth over a long period of time. Thus, digitalization is a critical and distinguishing feature of India’s unfolding growth story in the 21st century.

About this article

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

Related topics Tax COVID-19