India: The Perils of Digital Transformation

For India’s Prime Minister Narendra Modi, 2017 began with a disappointment: Both the International Monetary Fund (IMF) and the World Bank corrected their economic outlook for India – in one case from projected 7.6% of GDP growth to 6.6%, in the other from 7.6% to 7%.

Demonetization hits the economy

The institutes justified the downgrades with the aftershocks of demonetization. Prime Minister Modi’s surprise decision of November 8 to invalidate 86% of the nation’s currency temporarily put India’s cash-dependent economy on the skids.

His move aimed at fighting black money and corruption, but it also sparked a mini-recession. Only gradually have financial transactions returned to normal.

Modi past half point

Three years ago, Narendra Modi won a huge majority on the promise to lead India into a new era of modernity and development. Today, many plans remain work in progress.

The “Make in India” campaign aims at attracting foreign investment and is one of the prime minister’s pet projects. Modi has crisscrossed the globe and hardly missed a chance to promote the plan.

While foreign direct investment has gone up for the past three years compared to the stagnation the country experienced on that score before Modi took control, the inflow that he has been able to generate has failed to translate into large-scale job-creation.

India moved up one notch in the Ease of Doing Business index (from rank 131 to 130). However, in a list of 190 nations, the country remains stuck in the lower midfield of the global table.

A raucous democracy

The Modi government argues that India’s at times raucous democratic process slows down reforms. A case in point is the Goods and Services Tax (GST) which after seemingly endless debates looks set to become reality later this year.

Celebrated as the biggest reform measure since India’s economy began to be opened a quarter of a century ago, the GST aims to transform India’s domestic market into one joint economic zone removing internal borders and taxes.

Once in place, a unified tax system should improve India’s ranking in the Ease of Doing Business reports. The hope is that it may well attract more foreign investors keen on making money in a market of 1.3 billion people.

Job creation is what matters

In the end, Modi’s economic performance will be judged by how many jobs will be created while he is in office. Here, India is no different than other democracies. The challenges are formidable, and the interim balance all but rosy.

Every year, more than twelve million young Indians enter the workforce. This estimate is often referred to as the Indian government actually has yet to produce reliable job data.

According to the Confederation of Indian Industry (CII), the country’s top business association, only 3.6 million jobs have been created annually in the past years. That means that three-fourths of the working-age population are left outside the official labor force.

As an indication of the immensity of the challenge, economists use the term “jobless growth” to characterize a development in which the number of new jobs is not commensurate with the growth of the economy.

Labor market policy debates in India often exclude the fate of a huge majority of the people economically active. Ninety percent of the country’s work force earns a living in the informal sector.

Out of an estimated total of 50 million companies in India, less than ten million are registered. Comprising the informal sector are the armies of street vendors, Riksha-drivers and the many uncounted others who strive to earn what is usually a meager income at their own peril.

The informal sector remains the lifeline of the economy. In India, integrating the informal with the formal economy may be termed a project of the century. It is a task that has gained urgency as millions of Indians migrate from the countryside to urban centers, creating huge problems for the unprepared municipalities.

New Delhi has rolled out the Smart Cities Mission, a plan aimed at transforming major cities into modern settlements with modern amenities and infrastructure. The futuristic vision will only succeed with massive private investment.

Digital India beyond the hype

“Digital India” is the catch phrase of yet another pet project of the prime minister. It aims at catapulting the emerging market nation into a new economic and technological era.

Visits to Bangalore, Hyderabad or Gurgaon, to name only three Indian IT hubs of international acclaim, show the country has covered considerable distance on the path to the future.

However, the euphoria has subsided amid reports about job losses and dwindling profits in the IT-economy. For many Indians, this is a rude awakening as they have long considered all things related to the Internet as crisis-proof.

Automation beckons

The main cause for the new anxiety is the rise of automation. In India, as in other parts of the world, machines with artificial intelligence are increasingly pushing humans out of the workforce.

In better times, the discharged IT experts could have sought a lucrative professional career abroad. America’s Silicon Valley, over the years, has become a stomping ground for Indian IT specialists, many of whom advancing to top positions in leading firms.

The rise of economic nationalism in the United States of America (as well as markets like Australia and Singapore) has made access more difficult for talents from India.

The bad news is that the worst may still lie ahead. According to the International Labor Organization (ILO), an estimated 137 million Asian workers could lose their jobs to robots in the coming 20 years.

As India’s business daily MINT reports, India is losing 550 jobs daily – and the newspaper goes on: “The World Bank predicts that a whopping 69% of jobs in India could potentially be automated.”

Should this gloomy scenario come true, many Indians could drop into the informal sector – where they would join the big majority of their fellow countrymen who are struggling to make ends meet.