On almost the exact 25th anniversary of the reform budget of 1991, prime minister Narendra Modi met with the NITI Aayog and provided a directive for transformational rather than incremental change. This was in the context of creating a vision document for not just the next 15 years, but also laying the foundation of India’s development over the rest of the 21st century. Naturally, in addition to several areas of the economy that need attention, the PM emphasised technology and innovation as drivers of change. In my last two columns, I have highlighted the need for organisational innovation as much as that based on technology. Indeed, the PM also noted the importance of using technology to improve information flows and governance.
But the linked roles of technological and institutional innovation deserve greater attention. If we think about types of technology, one class involves biological products, another involves inorganic materials, and a third class is information technology (IT), which has been built on mastery of certain kinds of material science for hardware, but also on mathematical reasoning, for software. As software becomes more sophisticated, giving reality to the idea of artificial intelligence, IT will drive much of the next century of economic growth. From this perspective, IT becomes a crucial focal point for transformational change.
The government has recognised some of this in its Digital India initiative, but as I have argued in past columns, the conceptual framework over-emphasises some aspects of digital technology, such as providing government services, without giving adequate attention to the challenges of building a full-scale digital infrastructure that can truly be transformative, in how markets work, and how organisations—both businesses and governments—function.
Evidence from the adoption of digital technology in advanced countries suggests that these institutional changes are prerequisites for successful IT applications, as well as outcomes. Using IT for budgeting, for example, requires different organisational routines to be implemented, and different skill sets for employees, and once in place, it changes how expenditures are monitored and the subsequent budgeting that takes place.
In discussions with Dr Shekhar Shah of NCAER, he has also suggested that initiatives such as Digital India provide organising principles for prioritising economic reforms. Rather than thinking about economic reforms for accelerating growth, one can instead focus on the more immediate goal of identifying which set of policy reforms will support the achievement of the goals of a specific initiative. If IT is truly going to be the transformative force for change in economic organisation and activity in the coming century, then the link from the success of Digital India (if properly conceived and focused, rather than in its initial incarnation) to faster economic growth can be assumed to be strong.
The idea of using existing government initiatives to coordinate and prioritise economic reforms applies more broadly than Digital India. For example, Startup India, which focuses on innovative, dynamic firms, a category which can encompass enterprises in areas such as biotech, renewable energy, and more, not just IT, lends itself even more clearly to identifying a set of economic reforms that will promote successful new enterprises in areas of high innovation potential. Note that this does not have to involve basic science—many innovations in IT have to do with new ways of organising information and economic transactions, using existing hardware; the hardware itself may rely on some underlying basic science (such as with touch screens for smartphones), but that innovation was at several removes. In the case of Startup India, it is easy to identify reforms needed in tax treatment and financing options for new and growing young enterprises, as the Narayana Murthy committee has done. And if one recognises the importance of successful new firms in creating jobs, again the link from initiative to aggregate growth is plausible.
This kind of thinking can also be brought to a more conventional initiative such as Make-in-India, which aims to make Indian manufacturing more dynamic. Arguably, modern services such as those enabled by IT are as important to develop as manufacturing, but the latter can provide more jobs at lower skill levels. For Make-in-India, the full range of economic reforms comes into play, more so than for Digital India or Startup India—everything that is needed for increasing the ease of doing business. In this context, the push by the vice chairman of NITI Aayog for larger Coastal Economic Zones to achieve economies of scale and agglomeration makes sense. When a large set of politically challenging economic reforms have to be introduced, circumscribing them geographically can make the process manageable. Startup India, on the other hand, needs no prespecified geographic zones, although innovation clusters near universities or existing large, successful firms are natural to expect.
If India is going to follow a transformative economic path, then it makes sense to think about transformative technologies such as IT, and the mechanics of economic dynamism, through the creation and rapid growth of innovative new firms. Perhaps this way of thinking can provide an alternative to the sectoral reforms approach which has dominated the last quarter century, and contribute to a higher rate of sustained economic growth over the next decades.
The author is professor of economics, University of California, Santa Cruz
