By Subrata Majumder
While American investors were upbeat in India, despite Covid 19 ravaged the economy, Japanese investors slipped into coma. Both are among five top foreign investors in India. US investment in India surged by 297.2 per cent in 2020 over the preceding year and Japanese investment fell by 59.4 per cent during the same period. In 2019, investment from both USA and Japan were neck to neck, with marginal increase of USA investment over the Japanese investment.
The truth behind this paradox lies with USA challenging India’s new age economy, which is driven by digital economy. Japan trailed behind because it was not sufficiently experienced to digital transformation even in its own economy. India announced 1 trillion of economic value of digital market by 2025. That lured American investors. Japanese were not responsive.
India emerged the second biggest internet connections in the world, next to China. With nearly half a billion internet connections and second biggest smart phone users, India emerged the global leader for digital solution.
In 2020, USA was the second biggest foreign investor in India, next to Singapore. More than one third of total USA investment in India flowed in digital economy. Google was behemoth to trigger USA investment in digital economy. More than 90 per cent of investment in digital economy was made by Google.
Digital transformation is a new challenge to low labour cost in production process. It reaps more benefits to the investors, according to Dr Thie B Peterson. With digital technology increasingly used in the economy, production process will be more capital and technology intensive in the economy. It signifies a major impact on international competitiveness. Initially, these production process are cost burden. But, over the period, the costs become competitive in terms of productivity. When human labour is replaced by robots, computer and machines, the advantage of cheap labour loses competitiveness, according to Dr Peterson.
The massive investment in COVID induced pandemic and widespread lockdown leveraged digital transformation in India, which ensured business continuity in the country, according to a Swiss report by Fanny Von Heland, Office of Science and Technology, Sweden. India is the second largest digitized economy in the world. With half a billion internet connection, India emerged an upcoming leader in digital solutions. This movement attracted the US investors, notwithstanding Indian economy swung into downturn during the Covid 19 period.
The digital impact on productivity, the key to the sustained economic growth, is visible on the ground. Many governments, including India, are moving services online to make them transparent and less vulnerable to corruptions.
Digital India is the flagship programme of the government. Government’s effort to introduce Aadhaar, the national biometric digital identity programme, is a case in point. It is the first gigantic attempt of digital transformation of India to enroll 1.2 billion Indians since it was introduced in 2009. Likewise, GST network, established in 2013, brought all transactions of about 10.3 million indirect tax payments in one digital platform, ensuring a major leg up for Ease of Doing Business.
Another significant outcome of the digitization was the narrowing down between the rich and poor states. State like Uttar Pradesh and Jharkhand are expanding their internet infrastructures.
Japan missed the bus. Paranoid by the sharp fall in the economy due to unabated COVID 19 pandemic and India’s withdrawal from RCEP (Regional Cooperation of Economic Partnership), Japan withheld its investment in India. Automobile continued to be the principal sector for Japanese investment. Crippled by an edge in digital transformation, Japan lagged to respond to India’s new age economy. Japan could hardly gauge India’s structural dynamism and competitiveness in the economy, catalyzed by digital transformation. Japan failed to map out India’s potential for US $ 1 trillion market of digital economy by 2025.
Notwithstanding, India being a global leader in digital transformation, India has plenty room to grow. Offshoot is visible in rapid growth in digital banking. Although India is the second fastest digital adopter among 17 major digital economies and many had adopted digital banking, 90 per cent of all retail transactions are made in cash. E-Commerce revenue is growing more than 25-30 per cent a year. Yet, only 5 per cent of the trade in India is done online.
Japan is the third biggest economy and technology giant in the world. Notwithstanding, it is embroiled in serious disadvantage of laggard digital transformation. It is behind USA, China, EU , South Korea and even India in terms of rate of increase in digital transformation in the economy, according to a McKinsey report “ Using digital transformation to thrive in Japan’s new normal: An urgent imperative” . This led Japan into a serious disadvantage in investment in overseas, including India, which plank increasingly on digitally transformation in the economy. For example, COVID 19 induced lock down increased the demand for digitization in services in India to reduce human contact, such as in-home online entertainment, food delivery, pick-up services, online meetings, online fitness, telemedicine and others. Few Japanese investors came forward in these services after the lockdown.
Japanese business leaders understand that digital transformation is the next opportunity for global business operation. At the same time, they feel that they are not sufficiently prepared to adapt to the digital transformation. One reason could be their traditional managerial culture and business practices. Traditional Japanese companies are rarely inclined to external talents since the seniority basis promotion and lifelong employment act disincentive to foreign talents, according to the McKinsey survey.
The McKinsey survey revealed that traditional Japanese companies lack in-house digital talent. They generally outsourced for their IT operations. Compared to USA, where companies use 65 per cent in-house IT engineers and outsourced 35 per cent, Japan has only 28 per cent in-house IT employees and 72 per cent are outsourced.
Given the rapid growth of digital transformation, which has proven more cost effective in the longer run, India should revisit its FDI policy to attract foreign investment to uptick its digital economy.