How Should India Shape Its Service Revolution?
India’s digitisation process is the second fastest in the world, second only to China. Last year, Indians downloaded more than 12 billion apps, and they spent an average of 17 hours per week, more than Americans.
India has become home to major outsourcing companies in IT administration, business processes, and customer service. The future of the digital economy is bright.
Services and manufacturing sectors are growing differently in India. Large manufacturing plants are deurbanising and moving away from the urban core to the rural periphery around larger cities. But they remain concentrated within 100 km of big-3 cities.
Services growth is not tied to being close to the big-3 cities. There have been significant jumps in the service sector in districts located far away from big cities. The dispersion in spatial locations of manufacturing and service enterprises can be explained by the role played by physical and human infrastructure.
While physical infrastructure has a significant effect on manufacturing output, human infrastructure is more strongly associated with service activity. But the manufacturing and services sectors are friends and not foes.
Friend or Foe?
While the importance of services for development is widely recognized, the sector’s role in urbanization, job creation and structural transformation is generally less understood.
There are concerns that India’s premature de-industrialisation will negatively affect future growth. A key policy issue has growth in service activity complemented or crowded out manufacturing activity.
Hard empirical evidence shows that the two sectors complement each other, and they certainly do not crowd out the other. The correlation between manufacturing and services distributions across states is extremely high, with states with a high share in manufacturing also holding a high share of services.
Tamil Nadu and Andhra Pradesh which capture close to 10 per cent of plant share in manufacturing are steadily increasing their share in services. In total, the six states of West Bengal, Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Gujarat, and Maharashtra capture close to 60 per cent of all plant counts in both manufacturing and services. India has shown a high spatial correlation between manufacturing and services activity.
The spatial development patterns of manufacturing and services sectors, however, differ. While both manufacturing and services are highly concentrated in just a few states, this tendency is much stronger in manufacturing vis-à vis services.
For instance, services output is only half as likely to be clustered around big-3 cities relative to that of manufacturing. The spread of the service sector has been helped by the fourth industrial revolution, and digital technologies that have boosted growth expanded opportunities, and improved service delivery. This shifting fortune of spatial development has impacted jobs and also contributed to a spatial divide.
States and cities with better infrastructure and with better access to markets have gained, while others have been left behind. Overcoming the spatial and digital divide is central to India’s future economic growth and job creation.
Reducing the digital divide will accelerate growth, as it directly affects activity as well as traceability, both domestically and internationally, because new services, which can be delivered via the Internet, can now be traded almost costless.
Although reducing the digital divide will have a greater impact on services relative to manufacturing, digitisation affects both services and manufacturing in an analogous manner.
Future of Service Growth
India stands to gain a lot from the fourth industrial revolution. It will also be more inclusive, as service growth in India is not tied to locating near big cities, like in the manufacturing sector.
This opens the possibility that India’s future economic growth will also be more inclusive in driving employment and economic growth in secondary cities. A strong link already exists between services, job growth and the rise of middle-ranked cities.
A key driver of India’s future economic growth will be scaling up public and private partnerships (PPPs) in digital infrastructure investments. PPPs can accelerate infrastructure development by tapping the private sector’s financial resources and skills in delivering infrastructure effectively and efficiently on a whole lifecycle-cost basis.
Scaling up PPPs will link new technology with urbanization, productivity, job growth, entrepreneurship, and a faster pace of structural transformation.
Several still needs to be done to improve the digital ecosystems—the ease with which people can connect, collaborate, transact, and share information. There is a transition from a market-based approach to a more regulated approach—how data can be collected, stored, and processed.
Drawing the line between self-certification and regulation remains a key challenge, as private enterprises explore internal ethics boards and external audits, and governance frameworks. Global regulatory frameworks on cybersecurity, AI, digital trade, and more are still evolving. The key to future growth will be that regulations do not impede the nature and pace of innovation.
The future of digital growth will be more inclusive, as improvements in digital infrastructure improve the productivity of farmers, who lack data on soil, weather, storage, logistics and digital land records that enable them to borrow loans and access crop insurance.
It will help with the expansion of telemedicine which can reduce the shortage of medical professionals in rural areas and smaller towns. Digital technology will also play a key role in improving access to the education system. Online learning has skyrocketed globally during the Covid-19 pandemic, but most of the digitally connected children live outside India.
The global multilateral institutions—the OECD, the World Bank, the IMF, and the WTO—will also need to expand their resources devoted to digital development, as this will help achieve sustainable development goals at a faster pace.
A global digital revolution will benefit when all countries collaborate, and do not look inwards, or distance themselves from each other. Increased global digital cooperation is turning out to be more important and more challenging compared to global cooperation in goods trade, given the intangible nature of digital assets.
The importance of global digital collaboration has become greater following Covid-19, which has shown how interconnected we have become as a global society.
