Unlocking New Growth Frontiers in the Digital Age1
I. Introduction
This year's Nobel Prize in physics celebrated the role of artificial
intelligence (AI) in revolutionising the way we work and live. It is widely
believed that AI and robotics will usher in a new wave of secular
innovation, much like past breakthroughs in steam power and personal
computers.2 Silently, new technologies are offering a way out of the cross
currents of diverging macroeconomic and policy pathways, geopolitical
tensions, geoeconomic fragmentation and climate change in which the
global economy is transfixed. Accordingly, these technologies are
heralding a brighter future, arguably holding the key for many emerging
and developing economies to escape the middle-income trap.3 It is
estimated that generative AI itself could increase global GDP by $7-10
trillion over the next three years.4 Large language models are estimated
to increase the productivity levels of workers by 8 to 36 per cent.5
1
Inaugural address delivered by Michael Debabrata Patra, Deputy Governor, Reserve
Bank of India (RBI) at the DEPR Conference on 'Digital Technology, Productivity and
Economic Growth in India' on November 13, 2024 at Jaipur. Valuable comments
received from Sakshi Awasthy, Sreerupa Sengupta, Ashish Khobragade, Himani
Sekhar, Akshara Awasthi, Swastik Yadav, Rajib Das and editorial help from Vineet
Kumar Srivastava are gratefully acknowledged.
2
Brynjolfsson, E., and McAfee, A. (2014). The Second Machine Age: Work, Progress,
and Prosperity in a Time of Brilliant Technologies. WW Norton & Company; Haldane,
A. (2017). Productivity Puzzles. Speech at the London School of Economics.
3
World Bank. (2024). The Middle-Income Trap. World Development Report.
4
JP Morgan. (2024). Is Generative AI a Game Changer?
5
Kalyani and Hogan. (2024). AI and Productivity Growth: Evidence from Historical
Developments in Other Technologies. Federal Reserve Bank of St. Louis.
Over the past three decades, the digital revolution has been transforming
the world, eclipsing all past revolutions. It is estimated that the global
digital economy accounts for more than 15 per cent of global GDP6. Digital
technologies are reshaping our lives through their impact on economic
growth, employment, consumer welfare and living standards. These
technologies are democratising innovation and entrepreneurship, being
less costly than conventional technologies to scale up and are seen as
transfiguring innovators into entrepreneurs.7
India is at the forefront of the digital revolution. Financial technology
(FinTech) is speeding up digital payments. The India Stack is expanding
financial inclusion, galvanising banking infrastructure and public finance
management systems covering both direct benefit transfers and tax
collections. Vibrant e-markets are springing up and expanding their reach.
It is estimated that the digital economy currently accounts for a tenth of
India's GDP; going by growth rates observed over the past decade, it is
poised to constitute a fifth of GDP by 2026.8
India is uniquely positioned to unlock new growth avenues and optimise
existing ones with its digital public infrastructure (DPI), a vibrant
information technology (IT) sector and a burgeoning youth population,
including one of the largest AI talent bases. Forecasts suggest that
Generative AI will contribute $359-438 billion to India's GDP by 2029-30.9
Indian firms' integration of AI into production processes has increased
from 8 percent in 2023 to 25 percent in 2024.10 India has also committed
Rs. 1.25 trillion towards its semiconductor industry development.11
Yet, new technologies also involve challenges: disruptions in respect of
traditional technologies and the labour market; resource-intensity -
demanding substantial investment in technology, learning, and
infrastructure; potential cyber threats and data breaches; ethical
concerns, data privacy and potential malicious use.
It is in this context of these opportunities and challenges that I have
chosen 'Unlocking New Growth Frontiers in the Digital Age' as the theme
of my address.
II. Digitalisation and Productivity: Navigating the Paradox
The contribution of digitalisation to growth should be reflected through its
impact on productivity. This nexus has, however, sparked an animated
debate. There is a view that tangible gains from technological innovations
remain elusive; as Robert Solow said, "You can see the computer age
everywhere but in the productivity statistics."12 This paradox may not be
confined to just measurement issues, but may extend beyond to
demographic trends and slower diffusion. The "realist" view acknowledges
that technology alone cannot drive productivity and progress; rather, what
matters is its integration into the real economy. A heterodox approach with
appropriate policies for skilling and job creation, supported by progressive
institutions, would probably be the right way to head towards the future.
Productivity patterns are likely to be increasingly shaped by the growing
role of digital services and intangible capital. Business spending on digital
technologies is surging13. Prices of digital assets (including information
and communication technology or ICT) have continued to decline rapidly,
which has enabled businesses to operate more efficiently, allowing them
to offer competitive products and services. Technological innovations are
raising productivity through financial intermediation in terms of expanding
financial products and services, efficiency gains in service delivery, and
using digital innovations to mitigate risks. Digitalisation also has the
potential to improve cross-border financial flows by reducing the cost of
sending remittances while enhancing speed and transparency.
The KLEMS framework would help capturing the effects of digitalisation
by measuring its contribution to improvements in the quality of labour and
capital, in addition to its direct contribution to value added and total factor
productivity. Aggregated capital and labour will have to be disaggregated
into ICT capital, human capital, and other complementary investments in
which digitally enabled investments and services form inputs of
production. This disentanglement can prove to be challenging, including
due to the non-availability of comprehensive information.
Applying the KLEMS growth accounting decomposition, the share
of the ICT sector in India's total gross value added (GVA) has increased
over time, especially for ICT-using services. The contribution of ICT
capital to output growth, which was 5.0 per cent during 1981-91,
registered a sharp increase to about 16.0 per cent during 1992-2000. ICT
capital's contribution to GVA moderated to 14.3 per cent during 2001-
2010 and further to 10.3 per cent during 2011-2023. New digital
technologies also influence labour productivity growth within the KLEMS
framework. The share of ICT investment per person in labour productivity
growth in India was 8.4 per cent in 1981-90, which increased to 20.8 per
cent during 1992-2000 but moderated to 17.4 per cent during 2001-2010
and 11.3 per cent during 2011-2314 indicating some evidence of Solow's
productivity paradox for the post-GFC period, which is broadly consistent
with similar trends globally.
Since the end of the technology boom period of the early 2000s, global
total factor productivity (TFP) growth has remained relatively modest,
averaging around 0.2 per cent per annum during 2010-2024.15 The
weakness in global productivity growth is mostly confined to mature
economies, mainly Europe, whereas emerging economies have fared
better, particularly in Asia. Multiple interlinked factors have accentuated
the productivity slowdown ranging from ageing societies, all-time-high
debt levels, decline in business dynamism especially among smaller firms
and the scarring effects of the COVID-19 pandemic.16 New headwinds -
weak investment; supply chain and logistics disruptions; trade and
investment fragmentation - may also act against gains in allocative
efficiency, constituting risks to the global productivity outlook.
For India, average labour productivity growth from 2021 to 2024 is
estimated at 5.2 per cent as against 2.1 per cent among emerging markets
and developing peers and 0.6 per cent among mature economies.17 India
has witnessed rapid progress in digitalisation, drawing on its foundational
strength in ICT services. What began as streams of IT services has now
swelled into powerful currents, with model enablers like the Digital Public
Infrastructure (DPI) and digital platforms like the Unified Payments
Interface (UPI) acting as bridges. Global Capability Centers (GCCs) are
already exploiting India's technological progress and expanding India's
footprint in global trade in services. The productivity growth of the ICT
sector, both ICT-producing and ICT-using industries, consistently
outperformed the non-ICT sector during 1980 to 2020. The influence of
ICT on productivity, however, was most significant from 1980 to 2010.18
In the following decade, i.e., from 2010 to 2020, the productivity gap
between ICT and non-ICT sectors narrowed considerably, mirroring the
widespread productivity slowdown across the globe after the global
financial crisis (GFC). These findings require deeper investigation, but
they do underscore the changing dynamics of digital technologies and
raise important questions about how we might renew productivity growth
in an increasingly digital world.
III. Digitalisation of Indian Finance
Micro-level evidence from surveys of Indian banks shows that while all of
them have implemented mobile and internet banking, 75 per cent offer
online account opening, digital KYC, and digitally enabled doorstep
banking. Additionally, 60 per cent provide digital lending, 50 per cent offer
payment aggregator services, 41 per cent use chatbots, 24 per cent have
adopted open banking, and 10 per cent have integrated Internet of Things
(IoT) technology.19 Private sector banks are leading this technology
adoption.
An AI-assisted review of the latest annual reports of Indian banks reveals
various instances of productivity gains by SCBs from digitalisation.
Examples include monthly savings of 14,500 person-days, 25-30 per cent
decline in customer acquisition costs, reduction of the use of 84 tons of
paper, saving of four lakh litres of fuel in commutes to banks by customers,
40 per cent reduction in customer wait times at branches, 50 per cent
reduction in the compliance monitoring time and shortening account
opening time to less than a day.20 Aadhaar - India's unique identification
number - has halved the cost of conducting the Know Your Customer
process in India21.
The Unified Payments Interface (UPI) hit a milestone of 16.6 billion
transactions in a month in October 2024, with improvements in
its capabilities like successful instant debit reversals at 86 per cent (77
per cent in the same month last year). Innovations in the digital credit
landscape such as Account Aggregators, OCEN22, and financial services
on ONDC23 have also contributed to productivity gains. As of March 2024,
ONDC operates in over 720 cities, with orders at 49.72 million24. The
Trade Receivables Discounting System (TReDS) addresses the credit
gap of MSMEs estimated at around ₹52.2 trillion by connecting them with
banks, and clients, with a reduction in funding costs up to 2.5 percentage
points25. The value of invoices financed through TReDS have surged
more than 23 times. As of October 2024, around 5,000 active FinTechs
are involved in providing various financial and technical solutions to
businesses, including MSMEs, helping businesses better manage their
operations and improve supply chain finance26.
Around 40 per cent of the rural population and 78 per cent in the 20-30
years age group in the overall population use internet in India, with
approximately one-third of households engaging in online purchases of
consumables and services, one-fourth in buying of consumer durables,
and nearly one-tenth in food purchases27. The rising importance of
embedded financing is reflected in its share in FinTech funding, which has
grown from two per cent in 2020 to nine per cent in 2024.28 The global
market for embedded finance is estimated at USD 66.8 billion in 2022 and
is projected to experience a CAGR of 25.4 per cent from 2023 to 203229.
Digitalisation is transforming the efficiency of public services. In 2024, the
average number of daily e-transactions to access public services has
increased by 56 per cent (y-o-y)30. During 2023-24, ₹6.9 lakh crore has
been transferred through the digitally powered Direct Benefit Transfers
(DBT) under 314 schemes benefiting 176 crore beneficiaries. Over the
years, these DBTs have resulted in estimated cumulative cost savings of
₹3.5 lakh crore up to March 202331.
IV. Digitalisation and the Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) has been at the forefront of digitalisation,
aiming to leverage technology for productivity and efficiency gains across
the financial ecosystem. Some of the critical milestones in digital
payments are the introduction of Real Time Gross Settlement (RTGS) and
National Electronic Funds Transfer (NEFT) in 2004 and 2005, respectively
- which now operate 365*24*7 - followed by the establishment of the
National Payments Corporation of India (NPCI) in 2008.
The launch of the UPI in 2016 is a significant milestone with positive
externalities that are transcending our national borders. In recent years,
the Reserve Bank has continued to foster financial innovation by
introducing Central Bank Digital Currency (CBDC) pilots and setting up
the Reserve Bank Innovation Hub (RBIH). The Reserve Bank has also
announced a new technology platform called the Unified Lending Interface
(ULI) which is set to transform the lending landscape in India by making
credit more accessible to underserved populations such as small
businesses and rural borrowers through reducing documentation
requirements and simplifying the loan application process.
India is also closely involved with international organisations that are
exploring the linkage of open finance API-based frameworks of different
countries in a multilateral construct through initiatives like Project Nexus
and mBridge. Under India's G20 Presidency, the Global Digital Public
Infrastructure Repository has been mooted as a resource base for key
lessons and knowledge available from the actual experiences of G20
members and guest countries.
The overall approach has been to balance risk mitigation and financial
innovation, maintaining clear communication with stakeholders, and
adapting supervisory processes.32 Five policy priorities drive the Reserve
Bank's engagement: digital financial inclusion; digital public infrastructure
(DPI); customer protection and cyber security; sustainable finance; and
global integration and cooperation.33
V. Conclusion
The interaction of digitalisation with economic growth and productivity is a
complex one, yet to be unravelled fully. There is no doubt, however, that
digital technologies can generate TFP gains by streamlining processes,
enhancing the synergy between workers and capital, and driving
automation. The potential for digital technology to drive productivity gains
could be far greater if supported by robust institutions, policies, and skills
that support innovation and facilitate technology adoption. Exploiting the
growth-enhancing potential of digitalisation and new technologies will
involve judiciousness and a skilful balancing of risks and rewards so as to
enhance the gains while minimising disruptions.
Complementary policies will play a key role in unlocking new growth
energies by reaping the productivity gains offered by digital technologies.
They will involve setting priorities like (i) expanding the knowledge frontier
by improving within firm technical and managerial capabilities; (ii)
promoting competition to reduce market concentration; and (iii) efficient
resource reallocation.34 As Paul Krugman aptly noted, "Productivity isn't
everything, but in the long run it is almost everything."35
Thank you.
34
OECD, E. (2019). Digitalisation and Productivity: A Story of Complementarities.
35
Krugman, P. R. (1997). The Age of Diminished Expectations: US Economic Policy
in the 1990s. MIT Press.