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India squanders its tech sector's economic potential

Digital businesses falter -- and fail to create quality jobs

Domestic consumption, a key pillar of the Indian economy, has slowed sharply in recent months.   © Reuters

The elephant is slowing its pace. Alas! It was not supposed to be like this.

India's gross domestic product grew only 5% year-on-year in the April-June quarter, the lowest in more than six years. "India is in the midst of a discernible slowdown with GDP growth down 200 basis points over the last three quarters," note economists at J.P. Morgan in Mumbai.

They added that the dramatic deceleration was not driven by any one-off, passing factors or simply an unfavorable comparison with earlier quarters.

Unlike many of Asia's emerging markets -- or others in the rest of the world, for that matter -- India does not have the luxury of blaming a dismal external environment, with trade wars and tariffs.

India was never a manufacturing hub; never a proxy on the global supply chain that lifted so many of its neighbors in the region. Nor could it rightly aspire to be so, given its woeful infrastructure.

The symbol of lost opportunity on the path to prosperity, India today looks like it has lost its way in the postindustrial world. This despite its hopes that services, on the back of the demographic dividend of its young people, would do for India what manufacturing has done for others in the region.

That failure may not be immediately obvious. Twenty years ago, India's information technology services companies were flourishing as many multinational companies, particularly in the U.S., outsourced their needs to Bangalore, where businesses such as Infosys were based on campuses reminiscent of Silicon Valley -- until one stepped outside them, anyhow.

For example, the threat of the Y2K tech bug at the turn of the millennium was one of the best things that ever happened to them.

India presented its economy to the world as one based on tomorrow rather than yesterday. Who needed roads or railroads or ports when its products could be sent to the rest of the world at the press of a button?

At an Asia Society meeting in Shanghai about two decades ago, Infosys founder Narayana Murthy, urged China's premier, Zhu Rongji, to invest in the sector. "Why would I do that?" Zhu replied, according to one Indian executive who was then in the room. "We in China will surpass you."

At the time it seemed an empty boast. Who outside the mainland itself had even heard of Alibaba or Huawei back then?

Since then, India's IT companies have failed to evolve, let alone serve as the catalyst to transform the economy and generate the jobs that can put India on a strong, lasting growth trajectory. Such service businesses cannot possibly generate the employment the country needs to absorb the 1 million young people who come onto the labor market every month.

Indeed, in the last five years India has created only about a tenth of the number it needs, according to Samiran Chakraborty, chief India economist at Citigroup in Mumbai. China, by contrast, even with its aging demographics, created at least 11 million jobs in 2018 alone.

Technology always has the potential both for desirable and disturbing developments. At the moment India seems to have a vibrant startup scene and has attracted some of the smartest strategic and financial investors in the world, from Alibaba and Tencent to Sequoia Capital and KKR.

But in the long run, it seems unlikely that -- despite all the benefits they bring -- they will generate enough of the high-quality jobs the country so desperately needs. Indian ride-sharing platform Ola has hundreds of thousands of drivers, but it will ultimately have to replace them with self-driving cars to make a profit.

Similarly, not long ago, India was the heart of the call center industry. Today, a combination of serious competition, notably from the Philippines, and progress in artificial intelligence means that the number of jobs that are being generated in that sphere are likely to shrink rather than swell in the near future.

Not only are many of the jobs India is generating today low-end -- they are also likely to prove transient and offer little opportunity for upward mobility in scale.

India, in other words, shows the limitation of what technology can do to transform an economy when its foundations are not strong.

The Indian story has always been local rather than global, relying on domestic rather than external demand. Precisely thanks to that dependence on only one engine, it is vulnerable, and today consumption has slowed sharply, in part because both jobs and income are not growing quickly enough.

"Private consumption has been the linchpin of India's growth over the last four years," add the J.P. Morgan economists. "No wonder then when consumption growth slowed to a five-year low of 3.1% in the April-June quarter, it created consternation among markets and policymakers. Income growth has not kept pace with consumption."

There has been an increase in household debt recently to compensate but now the credit machine is sputtering as well. Both supply of credit and demand for it are being constrained. "Ultimately consumption and income growth can only diverge for so long," the economists conclude.

In response the government slashed taxes for companies and the Reserve Bank of India cut rates yet again. The market rallied but only briefly. The country will need far more substantive reforms than such measures, though, if the elephant is to pick up its pace for any sustained period.

Henny Sender is the Financial Times' chief correspondent for international finance, based in Hong Kong, and contributes occasional columns to the Nikkei Asian Review.

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