Estonia has lessons for India’s digital economy
India must resist a regulatory culture that is suspicious of foreign competitors and believes that success must be indigenous
In the next three years, India will add more than 300 million new mobile subscribers—and, by 2025, it is highly likely that the country will be the largest mobile market in the world. Like other countries in Asia, India is developing a “mobile-first” digital culture, with smartphones fuelling a boom in e-commerce and other forms of business. It is countries like South Korea that today lead the world’s move into online entertainment, but these countries may soon be surpassed by India. With a rapidly growing middle class, and a young, tech-savvy population, online personal services are about to take a big jump and international companies are ready to radically increase their investment in India’s digital economy. Just as many Indian information technology (IT) service companies have become global leaders, there is a good chance that the next decades will see new Indian entrepreneurs shaking up the global digital economy.
None of this will happen by default, however. For India to reach its digital potential, two things are necessary. First, it is vital that the digital revolution be widely diffused. Digitization will boost the economy if it includes communities and regions that may have previously been distant from the information and communication technology (ICT) advancement. Now, India trails peers like Indonesia and Thailand in its network readiness. Mumbai and Delhi are among the 40 most networked cities in the world, but they still rank behind Asian cities such as Jakarta and Manila. Improved telecom infrastructure as well as new affordable smartphones now give everyone the opportunity to benefit from mobile digital technologies. And that is helping to spur a revolution in how people can access services such as banking and retail that so far have been closed to them. Just imagine the business potential these services bring. India has about three million companies that are owned by women, and the lion’s share of those are micro-enterprises whose No.1 barrier to growth is lack of access to formal financial services.
Second, it is equally important that sectors be opened up to new digital business models through reductions in regulatory restrictiveness. Despite improvements, India has among the most restrictive regulations for product markets in the Asia-Pacific region. But for countries to reap the digital dividend, there must be space in the economy for new digital competition, experimentation and entrepreneurship—especially in traditionally non-digital sectors. All the economic growth that can be sparked by digitization will remain a promise if regulators aim to protect incumbent firms from digital competitors, rather than removing red tape that burdens digital entrepreneurs with unnecessary costs or adopting an embracing attitude to every actor, local or foreign.
Europe’s experience with the digital economy is an interesting example. Take a country like Estonia. A quarter-century ago, it was a poor outpost in the Soviet Union, but now it is Europe’s digital leader. For sure, the country has ploughed a lot of capital into building high-tech infrastructure, but the success of the country is equally about a regulatory culture that encouraged new digital competition.
And contrast the example of Estonia with several countries on the European continent that are struggling to compete in the new digital world—despite having access to world-class digital infrastructure. Europe has several digital protectionists that have protected markets from digitization because they have feared new competition. That has been the reaction from European policymakers partly because they have thought about digitization as a race between young American software firms and old European champions.
But that misconception has blocked the arteries of economic renewal in many European countries. With ideas about preventive restrictions on new technological platforms like Amazon or Uber, or regulators that chase companies for competing too successfully, the digital dividend has shrunk. Europe’s poor rate of growth in productivity is a consequence of its digital protectionism. Unlike other comparable economies, countries like France and Germany have not experienced the quick spread of new digital technologies in many companies and sectors. Small- and medium-size firms in countries like Italy and Spain get bruised because they are blocked from having easy access to the digital technologies and services they need in order to compete. While these European countries have invested substantial resources in building up technological capacities for digital success, the restrictive regulatory environment has lowered the economic pay-off of all that investment.
India should adopt policies that serve the interest of the entire economy and avoid repeating the mistakes of some European countries. Just like other countries that are growing their digital economy fast, India should aspire to have full and open competition between different business models. India has great opportunities to prosper as a digital economy, but those opportunities will diminish if it gets trapped in a regulatory culture that is suspicious of foreign competitors and that champions the view that success must be indigenous. Technological innovation is a boon for India—and the great thing about innovation is that the only thing that matters is how much it is allowed to change the economy, not where it comes from.
Fredrik Erixon is an economist in Europe and author of the best-selling book Innovation Illusion—How So Little Is Created By So Many Working So Hard.
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