Digital India: Technology to transform a connected nation

By Noshir Kaka, Anu Madgavkar, Alok Kshirsagar, Rajat Gupta, James Manyika, Kushe Bahl

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With more than half a billion internet subscribers, India is one of the largest and fastest-growing markets for digital consumers, but adoption is uneven among businesses. As digital capabilities improve and connectivity becomes omnipresent, technology is poised to quickly and radically change nearly every sector of India’s economy. That is likely to both create significant economic value and change the nature of work for tens of millions of Indians.

In Digital India: Technology to transform a connected nation (PDF–3MB), the McKinsey Global Institute highlights the rapid spread of digital technologies and their potential value to the Indian economy by 2025 if government and the private sector work together to create new digital ecosystems.

Section 1

India's consumers are taking a digital leap

By many measures, India is well on its way to becoming a digitally advanced country. Propelled by the falling cost and rising availability of smartphones and high-speed connectivity, India is already home to one of the world’s largest and fastest-growing bases of digital consumers and is digitizing faster than many mature and emerging economies.

India had 560 million internet subscribers in September 2018, second only to China. Digital services are growing in parallel (Exhibit 1). Indians download more apps—12.3 billion in 2018—than any country except China and spend more time on social media—an average of 17 hours a week—than social media users in China and the United States. The share of Indian adults with at least one digital financial account has more than doubled since 2011, to 80 percent, thanks in large part to the government’s mass financial-inclusion program, Jan-Dhan Yojana.

Exhibit 1

To put this digital growth in context, we analyzed 17 mature and emerging economies across 30 dimensions of digital adoption since 2014 and found that India is digitizing faster than all but one other country in the study, Indonesia. Our Country Digital Adoption Index covers three elements: digital foundation (cost, speed, and reliability of internet service); digital reach (number of mobile devices, app downloads, and data consumption), and digital value, (how much consumers engage online by chatting, tweeting, shopping, or streaming). India’s score rose by 90 percent since 2014 (Exhibit 2). In absolute terms, its score is low—32 on a scale of 100—so there remains ample room to grow.

Exhibit 2

Public- and private-sector actions have driven digital growth so far

The public sector has been a strong catalyst for India’s rapid digitization. The government’s efforts to ramp up Aadhaar, the national biometric digital identity program, has played a major role. Aadhaar has enrolled 1.2 billion people since it was introduced in 2009, making it the single largest digital ID program in the world, hastening the spread of other digital services. For example, almost 870 million bank accounts were linked to Aadhaar by February 2018, compared with 399 million in April 2017 and 56 million in January 2014. Likewise, the Goods and Services Tax Network, established in 2013, brings all transactions of about 10.3 million indirect tax-paying businesses onto one digital platform, creating a powerful incentive for businesses to digitize their operations.

At the same time, private sector innovation has helped bring internet-enabled services to millions of consumers and made online usage more accessible. For example, Reliance Jio’s strategy of bundling virtually free smartphones with mobile-service subscriptions has spurred innovation and competitive pricing. Data costs have plummeted by more than 95 percent since 2013 and fixed-line download speeds quadrupled between 2014 and 2017. As a result, mobile data consumption per user grew by 152 percent annually—more than twice the rates in the United States and China (Exhibit 3).

Exhibit 3

Global and local digital businesses have recognized the opportunity in India and are creating services tailored to its consumers and unique operating conditions. Media companies are making content available in India’s 22 official languages, for example. And by tailoring its mobile payments and commerce platform to India’s market, Alibaba-backed Paytm has registered more than 100 million electronic “Know Your Customer”-compliant mobile wallet users and nine million merchants.

The pace of growth is helping India’s poorer states to narrow the digital gap with wealthier states. Lower-income states like Uttar Pradesh and Jharkhand are expanding internet infrastructure such as base tower stations and increasing the penetration of internet services to new customers faster than wealthier states. Uttar Pradesh alone added close to 36 million internet subscribers between 2014 and 2018. Ordinary Indians in many parts of the country—including small towns and rural areas—can now read the news online, order food delivery via a phone app, video chat with a friend (Indians log 50 million video-calling minutes a day on WhatsApp), shop at a virtual retailer, send money to a family member using their phone, or watch a movie streamed to a handheld device.

Despite these advances, India has plenty of room to grow. Only about 40 percent of the populace has an internet subscription. While many people have digital bank accounts, 90 percent of all retail transactions in India, by volume, are still made with cash. E-commerce revenue is growing by more than 25 to 30 percent per year, yet only 5 percent of trade in India is done online, compared with 15 percent in China in 2015. Looking ahead, India’s digital consumers are poised for robust growth.

Section 2

Uneven adoption among India's businesses has opened a digital gap

We surveyed more than 600 large and small companies in India to gauge the level of digitization in various sectors as well as the underlying traits, activities, and mind-sets that drive digitization at the firm level. We used each company’s answers to score its level of digitization and then ranked them in the MGI India Firm Digitization Index. Companies in the top quartile, which we characterize as digital leaders, had an average score of 58.2 (relative to a maximum potential value of 100), while those in the bottom quartile, the digital laggards, averaged 33.2. The median score was 46.2. A higher score indicates that the company is using digital in its day-to-day operations more extensively (implementing CRM systems, accepting digital modes of payments, etc.) and in a more organized manner (having separate analytics team, centralized digital organization, etc.) than the ones with lower scores.

Our survey found that, on average, leaders outscored others by 70 percent on strategy, 40 percent on organization, and 31 percent on capabilities (Exhibit 4).

Exhibit 4

Differences within sectors are higher than those across sectors. While some sectors have more digital leaders than others, top-quartile companies are found in all sectors—even those considered resistant to technology, such as farming or construction. Conversely, sectors with more leaders, such as information and communication technology, still have companies in the bottom quartile.

However, India’s digital leaders generally do share common traits in terms of the following areas:

Digital strategy: Leaders are 30 percent more likely than bottom-quartile companies to fully integrate digital and global strategies and 2.3 times more likely to sell on e-commerce platforms. Leaders are 3.5 times more likely to say digital disruptions led them to change core operations and 40 percent more likely to say digital is a top priority for investment.

Digital organization: Leaders are 14.5 times more likely than bottom-quartile companies to centralize digital management, and five times more likely to have a stand-alone, properly staffed analytics team. Top-quartile firms are also 70 percent more likely than bottom-quartile firms to say their CEO is “supportive and directly engaged” in digital initiatives.

Digital capabilities: Leaders are 2.6 times more likely than bottom-quartile firms to use digital tools to manage customer relationships and 2.5 times more likely to use digital tools to coordinate the management of their core business operations.

The gap between digital leaders and other firms is not insurmountable. In some cases, even when the gap is large, lagging companies may be able to begin closing it by digitizing in small, relatively simple ways. Social media marketing is a good example. While bottom-quartile firms are much less likely than leaders to use social media, e-commerce, or listing platforms, each of these channels is cheap and easily accessible and there is little to stop a business owner with a high-speed internet connection and a smartphone from taking advantage of them.

For now, large companies (defined in our survey as having revenue greater than 5 billion rupees, or about $70 million) are more likely to have the financial resources and expertise needed to invest in some advanced technologies, such as artificial intelligence and the Internet of Things. But growing high-speed internet connectivity and falling data costs may soon make some of these technologies available to small-business owners and even sole proprietors.

Indeed, our survey found small businesses are ahead of big companies in terms of accepting digital payments: 94 percent accept payment by debit or credit card, compared with only 79 percent of big companies; for digital wallets the difference was 78 percent versus 49 percent.

Our survey found 70 percent of small businesses use their own websites to reach clients, compared with 82 percent of big companies. Small businesses are less likely than big companies to buy display ads on the web (37 percent versus 66 percent), but they are ahead of big companies in connecting with customers via social media, and more likely to use search-engine optimization. More than 60 percent of the small firms surveyed use LinkedIn to hire talent, and about half believe that most of their employees today need basic digital skills. While only 51 percent of smaller firms said they “extensively” sell goods and services on their websites (compared with 73 percent of big businesses), small businesses use e-commerce platforms and other digital sales channels just as much as large firms and are equally likely to receive orders through digital means like WhatsApp.

Section 3

Measuring the potential economic impact of digital applications in 2025

Companies that innovate and digitize rapidly will be better placed to take advantage of India’s large, connected market, which could include up to 700 million smartphone users and 840 million internet users by 2023. In the context of rapidly improving technology and falling data costs, technology-enabled business models could become pervasive over the next decade. That will likely create significant economic value.

We consider economic impact in three broad areas. First are core digital sectors, such as IT-BPM, digital communications, and electronics manufacturing. Second are newly digitizing sectors such as financial services, agriculture, healthcare, logistics, and manufacturing, which are not traditionally considered part of India’s digital economy but have the potential to rapidly adopt new technologies. Third are government services and labor markets, which can use digital technologies in new ways.

India’s core digital sectors accounted for about $170 billion—or 7 percent—of GDP in 2017–18. This comprises value added from core digital sectors: $115 billion from IT-BPM, $45 billion from digital communications, and $10 billion from electronics manufacturing. Based on industry revenue, cost structures, and growth trends, we estimate these sectors could grow significantly faster than GDP: value-added contribution in 2025 could range from $205 billion to $250 billion for IT-BPM, from $100 billion to $130 billion for electronics manufacturing, and $50 billion to $55 billion for digital communications. The total, between $355 billion and $435 billion, may account for 8 to 10 percent of India’s 2025 GDP.

Newly digitizing sectors are already creating added value

Alongside these already digitized sectors, India stands to create more value if it can nurture new and emerging digital ecosystems in sectors such as agriculture, education, energy, financial services, healthcare, and logistics. The benefits of digital applications in each of these newly digitizing sectors are already visible. For example, in logistics, tracking vehicles in real time has enabled shippers to reduce fleet turnaround time by 50 to 70 percent. Similarly, digitized supply chains help companies reduce their inventory by up to 20 percent. Farmers can cut the cost of growing crops by 15 to 20 percent using data on soil conditions that enables them to minimize the use of fertilizers and other inputs.

Digital can improve government services and the efficiency of India’s job market

Digital technologies can also create significant value in areas such as government services and the job market. Moving government subsidy transfers, procurement, and other transactions online can enhance public-sector efficiency and productivity, while creating online labor marketplaces could considerably improve the efficiency of India’s fragmented and largely informal job market.

To unlock this value will require widespread adoption and implementation. The economic value will be proportionate to the extent digital applications permeate production processes, from supply chains to delivery channels. Our estimates of potential economic value depend on each sector’s digital adoption rate by 2025; where the readiness of India’s firms and government agencies is low and significant effort will be required to catalyze broad-based digitization, adoption may be low, between 20 to 40 percent of the potential. Where private-sector readiness is high and government policy already supports large-scale digitization, adoption could be as high as 60 to 80 percent.

In all, we estimate that India’s newly digitizing sectors have the potential to create sizable economic value by 2025: from $130 billion to $170 billion in financial services, including digital payments; $50 billion to $65 billion in agriculture; $25 billion to $35 billion each in retail and e-commerce, logistics and transportation; and $10 billion in energy and healthcare (Exhibit 5). Digitizing more government services and benefit transfers could yield economic value of $20 billion to $40 billion, while digital skill-training and job-market platforms could yield up to $70 billion. While these ranges underscore large potential value, realization of this value is not guaranteed: losing momentum on government policies that enable the digital economy would mean India could realize less than half of the potential value by 2025.

Exhibit 5

Digital can create jobs but will require new skills and some labor redeployment

Changes brought by digital adoption will disrupt India’s labor force as well as its industries. We estimate that as many as 60 million to 65 million new jobs could be created from the direct and indirect impact of productivity-boosting digital applications. These jobs could be enabled in industries as diverse as construction and manufacturing, agriculture, trade and hotels, IT-BPM, finance, media and telecom, and transport and logistics.

However, some work will be automated or rendered obsolete. We estimate that all or parts of 40 million to 45 million existing jobs could be affected by 2025. These include data-entry operators, bank tellers, clerks, and insurance claims- and policy-processing staff. Millions of people who currently hold these positions will need to be retrained and redeployed.

Jobs of the future will be more skill-intensive. Along with rising demand for skills in emerging digital technologies (such as the Internet of Things, artificial intelligence, and 3-D printing), demand for higher cognitive, social, and emotional skills, such as creativity, unstructured problem solving, teamwork, and communication, will also increase. These are skills that machines, for now, are unable to master. As the technology evolves and develops, individuals will need to constantly learn and relearn marketable skills throughout their lifetime. India will need to create affordable and effective education and training programs at scale, not just for new job market entrants but also for midcareer workers.

Section 4

Building digital ecosystems that connect, automate, and analyze

To capture the potential economic value that we size at a macro level, businesses will need to deliver digital technologies at a micro level: that is, how they use digital technologies to fundamentally alter day-to-day activities.

Three digital forces will drive these shifts: One is the greater ease with which people can connect, collaborate, transact, and share information; another is the opportunity for companies to increase productivity by automating routine tasks; the third is the greater ease with which organizations can analyze data to make insights and improve decision making.

The interplay of these forces will create new data ecosystems, which in turn will spur new products, services, and channels in virtually every business sector, and create economic value for consumers as well as those members of the ecosystem that best adapt their business models.

To highlight the kinds of business model changes that companies should predict and prepare for, we examine how this connect-automate-analyze trio can play out across four sectors: agriculture, healthcare, retail, and logistics.

Digital agriculture

India’s farms are small, averaging a little more than one hectare in size, with yields ranging from 50 to 90 percent of those in Brazil, China, and other developing economies. Many factors contribute to this. Indian farmers have a dearth of farm machinery and relatively little data on soil, weather, and other variables. Poor storage and logistics allows produce to go to waste before reaching consumers—$15 billion worth in 2013.

Digital technology can alter this ecosystem in several ways. Precision advisory services—using real-time granular data to optimize inputs such as fertilizer and pesticides—can increase yields by 15 percent or more. After harvest, farmers could use online marketplaces to transact with a larger pool of potential buyers. One such platform, the government’s electronic National Agriculture Market, has helped farmers increase revenue by up to 15 percent. Furthermore, online banking can provide the financial data farmers need to qualify for cheaper bank credit. Digital land records can make crop insurance more available. These and other digital innovations in Indian agriculture can help add $50 billion to $65 billion of economic value by 2025.

Digital healthcare

India has too few doctors, not enough hospital beds, and a low share of state spending on healthcare relative to GDP. While life expectancy has risen to 68.3 years from 37 in 1951, the country still ranks 125th among all nations on this parameter. Indian women are three times as likely to die in childbirth as women in Brazil, Russia, China, and South Africa—and ten times as likely as women in the United States.

Digital solutions can help alleviate the shortage of medical professionals by making doctors and nurses more productive. Telemedicine, for example, enables doctors to consult with patients over a digital voice or video link rather in person; this could allow them to see more patients overall and permit doctors in cities to serve patients in rural areas. Telemedicine could also be more cost effective: in trials and pilots, it cut consultation costs by about 30 percent. If telemedicine replaced 30 to 40 percent of in-person outpatient consultations, coupled with digitization in overall healthcare industry, India could save up to $10 billion in 2025.

Digital retail

More than 80 percent of all retail outlets in India—most of them sole proprietors or mom-and-pop shops—operate in the cash-driven informal economy. These businesses do not generate the financial records needed to apply for bank loans, limiting their growth potential. Large retailers have their own sets of challenges. Their reliance on manual store operations and high inventory levels is capital heavy. In many cases, their marketing practices are ineffective, and their prices are static regardless of inventory or demand.

Digital solutions could reshape much of the sector. E-commerce enables retailers to expand without capital-intensive physical stores. Some do not even bother with their own website, relying instead on third-party sites such as Amazon, which offer large, ready pools of shoppers along with logistics, inventory, and payment services, and customer data analytics. E-commerce creates financial records that attest to the creditworthiness of both buyers and sellers, making it cheaper to borrow. Digital marketing can inexpensively engage customers and build brand loyalty. We estimate e-commerce in India will grow faster than sales at brick-and-mortar outlets, allowing digital retail to increase its share of trade from 5 percent now to about 15 percent by 2025.

Digital logistics

India’s economy has grown by at least 6.5 percent annually for the last 20 years. Continuing at that pace of growth would challenge India’s logistics network, which already suffers from a fragmented trucking industry, inadequate railways infrastructure, and a shortage of warehousing. India spends about 14 percent of GDP on logistics, compared with 8 percent in the United States, according to McKinsey estimates.

Digital technology can disrupt even this traditional, physical sector. The government is creating a transactional e-marketplace, the National Logistics Platform, to connect shipping agencies, inland container depots, port authorities, banks, insurers, customs officials, and railways managers. By letting stakeholders share information and coordinate plans, the platform may speed up deliveries, reduce inventory requirements, and smooth order processing. At the same time, private firms are using digital technologies to streamline operations by moving freight booking online, automating customer service, installing tracking devices to monitor cargo movements, using real-time weather and traffic data to map efficient routes, and equipping trucks with internet-linked sensors to alert dispatchers when a vehicle needs servicing. According to McKinsey estimates, digital interventions that result in higher system efficiency and better asset utilization can reduce logistics cost by 15 to 25 percent.

Section 5

What are the implications for companies, policy makers, and individuals?

For India to reap the full benefits of digitization—and minimize the pain of transitioning to a digital economy—business leaders, government officials, and individual citizens will need to play distinct roles while also working together.

Business

Business leaders will need to assess how and where digital may disrupt their company and industry and set priorities for how to adapt. Potential disruptions and benefits may be particularly large in India because of its scale, the rapid pace of digitization, and its relatively low productivity in many sectors. To benefit from these changes, companies need to act quickly and decisively to both adapt existing business models and to digitize internal operations. In this context, four imperatives stand out.

First, companies will need to take smart risks as they adapt current business models and adopt new, disruptive ones. Only 46 percent of Indian companies in our survey have an organization-wide plan to change their core operations to react to large-scale disruption.

Second, digital should be front of mind as executives plan. Customers are more digitally literate and have come to expect the convenience and speed of digital, whether shopping online or questioning a bill, but many companies have not reacted. In our survey, 80 percent of firms cite digital as a “top priority,” but only 41 percent say their digital strategy is fully integrated with their overall strategy.

Indian companies will need to invest in building digital capabilities, especially hiring people with the skills needed to start and accelerate a digital transformation.

Third, Indian companies will need to invest in building digital capabilities, especially hiring people with the skills needed to start and accelerate a digital transformation. That is challenging because many of India’s most talented workers emigrate. Companies could work with universities to recruit and develop skilled workers, beginning with digital natives who are currently in universities or have recently finished their studies. Companies also need to build deeper technology understanding and capabilities at all levels, including in the C-suite.

Finally, firms will need to be agile and think of themselves as digital-first organizations. This may need a new attitude that starts with a “test and learn” mind-set that encourages rapid iteration and has a high tolerance for failure and redeployment.

Government

India’s government has done much to encourage digital progress, from rationalizing regulations to improving infrastructure to launching Digital India, an ambitious initiative to double the size of the country’s digital economy. However, much needs to be done for India to realize its full potential.

National and state governments can help by partnering with the private sector to drive digitization, starting by putting the technology at the core of their operations. This helps by providing a market for digital solutions, which generates revenue for providers, encourages digital start-ups, and gives individuals more reasons to go online—whether to receive a cooking-gas subsidy, register a property purchase, or access any other government service.

Governments also can help by creating and administering public data sources that entrepreneurs can use to improve existing products and services and create new ones; by fostering a regulatory environment that supports digital adoption and protects citizens’ privacy; and by facilitating the evolution of labor markets in industries disrupted by automation.

Individuals

Individual Indians are already reaping the benefits of digitization as consumers, but they will need to be cognizant that its disruptive powers can affect their lives and work in other fundamental ways. For example, they will need to be aware of how digitally driven automation may change their work and what skills they will need to thrive in the future. Individuals will also need to become stewards of their personal data and skeptical consumers of information.

While India’s public and private sectors have propelled the country into the forefront of the world’s consumers of internet and digital applications over the past few years, its digitization story is far from over.