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Digital Shock: India’s Challenges are its Opportunity to Lead in Tech

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The Sign of the Time’s Leader from October 2017, ‘Digital Shock: How the World is Being Transformed’, explored how digital technology – and the torrent of data that it is unleashing – is changing the world and transforming societies, economies and political systems.  This global shift from the industrial age to the information age is accelerating exponentially and has already proven to be highly disruptive, particularly in developed economies where the levelling effect of technology is threatening standards of living and old economy jobs, exacerbating socio-economic inequality.  While this is true to an extent for developing economies as well, overall, digitization and data is more of an opportunity than the threat for these nations, particularly for those emerging markets that lack a scaled industrial power base (a key incentive to resist digitization) but have masses of people who are waiting to participate in the economy.  Over the past two decades, India has emerged as a market leader in providing information technology services to the world, and will likely maintain this position in the coming years.  More importantly, the coming decades will also see India apply digital technology to solve various issues it is facing, potentially leapfrogging older western models with new low-cost ones that are fit for a mass population, thereby providing its 1.3 billion people with access to an increased quality of life and opportunity without needing to over-build physical infrastructure.  While at this stage the domestic market may not be as large or profitable for India’s IT companies as western markets, eventually the scale and scope of opportunities in India will attract not only these companies to return home, but new entrepreneurs and global technology and data players as well to help digitize India.  While the developed world struggles to transition from an industrial economy supported by digital, India has the opportunity to jump development curves directly to a digital economy supported by a modernised industrial base.  This month’s Sign, the second in our Digital Shock series, examines both the opportunity and imperative for India to leverage emerging digital technologies and data science to address its challenges and transform the country.

The global transition to the digital age, with over 3 billion people securing access to the internet since 2000, is proving to be both painful and exciting.  As the world’s population walks around 24/7 with a computer, telephone and television in their hands (in the form of a smartphone), their whole expectations of life are being transformed.  The implications Quote 1of this are becoming clearer: over the next decade or so with shops and malls will be displaced by online retailers, newspaper readership overwhelmed by online news, physical banks will remain empty while people bank online, political campaigns driven by online media wars waged by armies of trolls and bots, schooling will go digital with virtual reality technologies augmenting presence, (not without a fight, no doubt), and ultimately more and more manufacturing and traditional service jobs will be replaced by technology and people developing and using technology.  While this will help tear down the socio-economic old order in the West and the rest of the developed world, with all the conflict that implies, the East and the developing world will on the whole rush to embrace their opportunity to participate.  India stands to be one of the foremost beneficiaries as both a supplier and a customer of technology.

Over the past two decades, India has become the preferred hub for providing outsourced global IT services, with the sector growing to c.US$165bn in revenues (with 55% share of the global IT outsourcing market) and creating over four million technology jobs, which, despite being only 0.3% of the countries nearly 1.3 billion population, drives nearly 8% of the country’s GDP[1].  Since 2000, India’s internet user base has grown from 6m in 2000 to 460m currently,[2] in turn driving the rapid growth of e-commerce in India into a US$15bn revenue industry[3] and creating technologies that are set to disrupt sectors across the board.  There is no single policy or initiative which has helped India build this leadership position.  Instead, India seems to have established a position as one of the recognised leaders in IT services and one of the emerging leaders in digital and data technologies as a result of the multiple factors:

I. Production of Low Cost Engineering Skills in High Volume. India currently produces approximately 2.6 million science, technology, engineering and mathematics (STEM)[4] graduates each year, almost twice as many as the US, Russia and Japan combined (see chart).  India has over 10,000 certified engineering institutions, including the world class Indian Institutes of Technology[5] which have produced a disproportionate number of technology company founders and CEOs both in India and abroad, and is mass-producing engineers whose cost is 85% and 93% lower than Chinese and American engineers, respectively, giving it the ability to supply engineering talent for both its own requirements as well as the world’s.

Tabl1 1

II. The Loss of Engineers to Silicon Valley Turning into an Advantage. Indians[8] have been at the forefront of some of the most significant technological developments of our time, founding iconic technology companies and penetrating the top ranks of technology giants including Google, Microsoft, and Adobe to name a few[9]. Indians not only dominate the ranks of tech founders, they also make up a disproportionate share of the engineering talent that is powering Silicon Valley and the digital revolution: although only 6% of the population of Silicon Valley (Santa Clara County) is of Indian origin, 30% of its tech companies have been founded by Indians (see chart below).

 Table 2

III. Entrepreneurial Culture Creating the Largest Global Hub for Outsourced IT.  India’s outsourced IT services industry has grown to US$165bn of revenue, accounting for c.7% of global IT spend, and c.55% of total IT outsourcing spend, making India by far the leading destination for outsourcing IT, R&D, product development, engineering, digital transformation, and data analytics.  Global technology companies[11] have also set up captive offshore delivery centres in India, while Indian companies have started venturing to other countries, setting up over 1,000 global delivery centres across 200+ cities worldwide.  India’s IT sector is expected to grow to US$200-250bn by 2025 with emerging digital solutions (including cloud computing, data analytics internet-of-things (IoT), virtual and augmented reality, and artificial intelligence, amongst others) driving growth and increasing their share from 14% of India’s IT exports currently to c.38% by 2025[12].

Table 3

IV. Mass Population, Creating One of the Largest Internet User Bases in the World. India now has 460m internet users (already the largest user base after China’s 720m, and one that is “open” and free of the government restrictions Chinese users face) and is expected to add another c.390m users by 2025[14], driven by the rapid build-out of 3G/4G mobile data networks and the penetration of low-cost smartphones. Indeed, given its ability to help the masses access information and participate in the formal economy the smartphone is now considered an indispensable consumption item (along with food, shelter and energy).  As a result, India’s e-commerce market is growing rapidly, from US$15bn currently to US$200bn by 2026[15], and Indians are also starting to use their devices to socialise and communicate, consume media and content, pursue education, access healthcare and manage their finances, amongst many other use cases.

Table 4

V. A Proactive Government Implementing Bold Digitization Initiatives. The Modi government, having recognised the potential to accelerate various structural changes by enabling rapid and widespread digitization, launched a series of far ranging policy reforms, most significantly in the area of financial technology, where the government has implemented four key programs: (i) completing the Unique Identification card program (Aadhaar) which created a biometric database of every Indian citizen; (ii) the financial inclusion program (Jan Dhan Yojana) which has resulted in bank accounts for over 300m unbanked Indians; (iii) the demonetisation of 84% of currency in circulation which resulted dealt a blow to India’s cash economy; and (iv) a Unified Payments Interface to enable digital transactions.  The combination of these reforms, and India’s large and growing internet user base, has provided the necessary boost to rapidly formalise and digitise financial transactions.

Table 5

Clearly, with a massive internet user base, market leadership in IT services, a diaspora which is driving key technology developments globally and a proactive government at home, India by all accounts should be extremely well-positioned, relative to other emerging markets, to accelerate its own digital transformation and drive economic growth.  However, these strengths also reveal a major weakness: India, and Indians, have been far more successful in developing and commercialising digital technology outside of India than in India itself, and many successful technology entrepreneurs and professionals have found it easier (and more lucrative) to emigrate to Silicon Valley to start and build businesses rather than building these businesses in at home.  Addressing this major weakness unfortunately is not easy, it is based on a wide range of structural issues which are both holding back India’s economy and preventing it from digitizing at an even more accelerated pace.  While some of India’s technology talent abroad will surely come back and/or invest to make a difference in India, the question for Indian policymakers should predominantly not be to try and bring back lost talent, but rather to determine how to re-position India as a ‘platform’ on which technology can flourish.  This will provide the entrepreneurial opportunity to commercialise new digital technologies in one of the biggest populations in the world and help ensure that the current and next generation of India’s technology talent never leaves in droves in the first place.

The Next Technological Leap Forward and the Opportunity for India

The adoption of digital technology and data analytics has accelerated exponentially in the last two decades and appears to now be reaching a major inflection point.  The shape of the technology landscape for the next two to three decades is now becoming apparent (although these may be famous last words, since the technology will no doubt breed new technology at some point).

The future looks to be one far beyond the smartphone apps and predictive algorithms that powered this last wave of technology development and commercialisation.  In many respects, technology is now set to touch virtually every aspect of our lives, reducing the gap between man and machine, and will again change how we go about everyday activities, how we transact, how we work and how we consume. Five key technology themes stand out as drivers of the future of digital technology and data analytics, and which India (as well as other countries) will need to find how to leverage to drive their respective societies and economies:

  1. Artificial Intelligence (AI). AI technology is advancing at a rapid pace with computers developing capabilities to perform tasks that would otherwise require human intelligence (e.g. speech recognition, decision-making, emotional and visual perception, etc.).  With computers developing the capability to learn and perform human tasks, without the associated human error factor, a vast number of economic activities are potentially at risk of automation.
  2. Virtual and Augmented Reality (VR/AR). While VR/AR technology has been around for a while in the form of simulators, expensive hardware and computing requirements made it inaccessible for most mass use cases.  With the development of low(er) cost hardware including nominal cost headsets which can convert smartphones into VR devices – combined with the generation of VR/AR content at scale, affordably – VR/AR has the potential to displace the ‘screen’ and become the new computing platform and the preferred medium through which humans will interface with machines (vs. computers and mobile phones currently).
  3. The Internet of Things (IoT). The new generation of everyday physical objects – including industrial and infrastructure equipment, vehicles and home devices – are being embedded with sensors and networked to the internet so they can become a ‘smart’ devices capable of generating and exchanging data and given instructions automatically (without human intervention), which, when combined with developments in AI and ‘machine learning’, will further enable the automation of physical objects and many erstwhile manual activities and tasks.
  4. Digital Vehicles and Energy Storage. The rapid development and commercialisation of electric vehicles powered by next-generation lithium-ion batteries and automation technologies has changed the paradigm in the transportation sector and may well lead to the phasing out of the internal combustion engine.  In a world where the majority of the world population will be living in urban centres, this, combined with the ride sharing enabled by Uber and others, has the potential to create an entirely new model for how humans transport themselves and cargo from one place to another.
  5. Digital Medical Technologies. The healthcare industry – in addition to making rapid advances in biotechnology, genetics and nanotechnology to find solutions for complex diseases[19] – has also started leveraging digital technology and data to drive down healthcare costs and develop more effective therapies for everyday issues, thereby enabling quality healthcare for underserved population segments.  This includes everything from providing high-quality health content, remote diagnostics and next-generation telemedicine to treat patients in faraway places, and leveraging all types of health data from fitness devices (‘wearables’), location technology and other sources to devise more effective solutions.

Taken together, these themes of the future will further hasten the emergence of the knowledge-based society, presenting a unique and significant opportunity for India.  While the Indian government is looking to address many of the issues impeding India’s growth, the sheer scale of the challenges means that India is already running against the clock to educate and train its workforce, create urban infrastructure and provide healthcare for the masses.  India’s core challenge is not just creating the capability to do this, but also to augment its existing capacity considerably, and most importantly, to do both within an extremely compressed timeframe.  Despite its best intentions, and capital and policy support, India is still well behind the required pace and will simply run out of time.  The only way for India to recoup lost time is by accelerating the pace of adoption and leveraging the digital technologies highlighted above to ‘hack’ new ways to address both the existing shortfalls and meet future demands.  Doing this will not only help India address its major structural issues, it will also make India the knowledge society of the future and a model for other emerging nations, thereby securing India’s position as one of the key hubs of this civilisation’s common digital future.

Deep Structural Issues Represent India’s Unique Opportunity to Leapfrog to the Next Generation

Since India lacks the encumbrance of legacy infrastructure, it has the opportunity to use emerging technologies to create a much more efficient and effective set of solutions for its society, ranging from banking to education.  This will need to be the focus of India’s leaders in the private and public sectors for the next decade.  The intersection of issues and technology has the potential to also create enormous value for individuals, drawing them into the system in a far more participatory manner and creating value for the entrepreneurs and investors that enable this.  Recent years have demonstrated that this can indeed be done, with significant progress made in three critical areas as a result of leveraging digital technology and data, leaving four more areas to address.

Table 1 Financial conclusion

Table 2. Governance

Table 3 Retail and e-commerce

The progress on the three issues outlined above – financial services, governance and commerce – demonstrates that with focused efforts, policy support and disruptive entrepreneurship, India can indeed tackle big structural issues in a compressed timeframe by leveraging technology.  The problem was not the democracy but the willingness, competence and corruption.  However, while progress in these areas is now well underway, there are still four critical remaining areas, where India is not yet fully leveraging technology to address critical problems.  In many ways, emerging technologies including AI, VR/AR and IoT offer new opportunities to hack solutions to these problems as well.  Addressing these four areas – education, healthcare, agriculture, urban infrastructure – will be transformational for large swathes of the country, including those who have not fully benefitted from India’s digital transformation to date.

Table 4 Education and skills

Table 5 Agriculture

Table 6 Healthcare

Table 7 Urban development

 

The US$1.2 Trillion Opportunity: Projecting India’s IT/Software and E-Commerce Industries Over the Next Decade Based the US and Chinese Precedents[46]

 Table 6

 

Key Conclusions

It is a fact of the digital and information age that wealth, power and success will accrue to knowledge and data-driven societies.  The West, despite being the driving force behind many of the technological innovations of our time, is nevertheless struggling to adapt to this new paradigm and address the many issues that technology and automation creates for their incumbent industrial groups with vested interests which have dominated their political economies for the last two to three centuries.  Developing countries like India, which never fully industrialised in the first place, therefore have an opportunity in many Quote 2ways to leapfrog the West by developing digital models across sectors.  The US – despite having given birth to Google, Facebook, Amazon, Apple, Microsoft, Netflix and others technology trailblazers – appears to be regressing towards a more retrograde, anti-immigrant and anti-free trade mindset which will inevitably challenge its primacy in the race to be a technology leader.  It is unlikely that this more insular approach will prevail for more than a decade – the current “correction” process that seeks to reverse some of the excesses of what many in the Trump camp consider to be a too “open” approach will itself likely be corrected and the US revert to seeking global primacy – but much can happen in the intervening period given the pace of global change.  China, while it is rapidly creating engineers and building technology giants of its own, appears to be too focused on its internal priorities and also has to contend with its own over-built industrial base whose value is under threat from technology.  India, with its large base of engineers, its world-leading IT outsourcing sector, Silicon Valley connections and its proactive government is potentially the best positioned amongst emerging markets to emerge as the paradigm of a successful information age society.

That is not to say of course that this transition will be easy for India.  Thusfar, its best and brightest technological talent, both in terms of entrepreneurs and companies, have found far more success abroad than they have domestically.  That is primarily due to the significant structural hurdles that India faces in terms of corruption, education and skills, healthcare, urban infrastructure and other areas.  However, technology has now advanced to a point where it can actually solve these problems in ways that were not previously possible, and India’s challenge now, is therefore how to unleash the power of technology to address these problems at scale.

In his address to the World Economic Forum in Davos, Switzerland this month, Prime Minister Modi outlined his vision of an India which is solving its own and the world’s problems with renewed vigour, and helping move the world towards a more peaceful and prosperous future.  Achieving this vision, however, will require applying the same vigour that his government has to some of the low-hanging fruit in terms of financial services, e-commerce and governance, to even more difficult challenges of education, healthcare, urban infrastructure and agriculture.  There is not a single nation in the world which is not being impacted by the developments in digital technology and data outlined above, and each faces its own unique struggles in terms of how to cope with automation and the impact on jobs, the impact of cyberwarfare on our political systems, and the winner-takes-all nature of the information economy.  No country has yet figured out how to manage this transition effectively.  Therefore, there is a unique opportunity for India to seize the moment, and emerge as a leading superpower in the information age.

Risk | India | Risk-Adjusted Returns | Structural Reforms | Rebalancing | Investment Allocation | Capital Flows

1 Sources: National Association of Software and Services Companies (NASSCOM), India IT-BPM Strategic Review 2017; India Brand Equity Foundation (IBEF)
2 Sources: Internet and Mobile Association of India (IAMAI)
3 Source: Morgan Stanley Research, India’s Digital Leap – The Multi Trillion Dollar Opportunity, October 2017
4 Science, Technology, Engineering and Mathematics; Source: World Economic Forum, Forbes
5 There are 23 Indian Institutes of Technology (IITs) across India
6 Sources World Economic Forum, Forbes
7 Source: Payscale.com
8 Including people of Indian origin (i.e. Indian Americans)
9 Indians have been the most prolific entrepreneurs in Silicon Valley, founding industry leaders like Sun Microsystems, Excelan, Hotmail, Cirrus Logic (amongst others), and 15% of all Silicon Valley start-ups, and 33% of all immigrant founded start-ups, more than next seven minority or immigrant groups combined (Source: The Kauffman Foundation, America’s New 10 Immigrant Entrepreneurs – Then and Now, October 2012)
11 Sources: Kauffman Foundation, Then and Now: America’s New Immigrant Entrepreneurs
12 Examples include IBM, Accenture, Cognizant and CapGemini who have all established their largest delivery centres in India
13 Sources: National Association of Software and Services Companies (NASSCOM), India IT-BPM Strategic Review 2017; India Brand Equity Foundation (IBEF) Source: NASSCOM
14 Sources: Internet and Mobile Association of India (IAMAI), Boston Consulting Group, Decoding Digital Consumers in India, Jul-17
15 Source: Morgan Stanley Research, India’s Digital Leap – The Multi Trillion Dollar Opportunity, October 2017
16 Sources: IMAI, ITU, BCG
17 Sources: PwC, Morgan Stanley
18 Source: Reserve Bank of India
19 These include Alzheimers, cancer, diabetes and substance addiction, amongst others
20 Source: Government of India
21 Source: Morgan Stanley
22 Source: Capital IQ,
23 Source: Various press articles
24 Source: CBRE
25 Source: BCG
26 Source: Morgan Stanley
27 Please refer to GPC’s February 2016 Sign of the Times, “Realising India’s Demographic Dividend: The People Determine the Success”
28 Source: Government of India
29 Source: Annual Status of Education Report
30 Source: National Council for Teachers Education
31 Source: BBC
32 Source: Various press articles
33 Refer to GPC’s October 2016 Sign of the Times, “The Enrichment of India’s Farming Community is Key to Adding US$4.3tn to India GDP”
34 Source: Government of India
35 Source: OECD
36 Source: Various press articles
37 Source: World Bank
38 eNam is an initiative by the Government of India that was launched in 2016. However, the platform has received limited traction to date due to a combination of technology (poor internet connectivity) and governance issues
39 Source: National Health Profile 2017
40 Source: World Bank
41 Source: Times of India
42 Source: Health of Nations State Report 2017
43 Source: Government of India
44 Source: World Economic Forum
45 Source: Various press articles
46 Sources: e-Marketer, US Bureau of Economic Analysis, UBS Equity Research, NASSCOM