In an exclusive interaction with The Policy Times, Dr. Berenice Voets, Director of Public Affairs and Policy, Hinrich Foundation talks about the potential and future of Digital Trade on the sidelines of Report Launch on Digital Trade jointly commissioned by All India Management Association and Hinrich Foundation.
- Why did Hinrich Foundation commission the Digital Trade report?
As a Foundation, we are committed to promoting sustainable trade. We have seen the many contributions that trade has made to growth, development and poverty alleviation in Asian economies, and to create mutual understanding and positive engagement between participants.
This has driven us to research the conditions for improving the practice of trade – making it more sustainable and mutually beneficial – so that trade can retain its positive value proposition for all of its participants.
Digital trade holds important promises for growth in Asia, and with the right policies in place, we think that it can become a driver of more inclusive and sustainable growth.
We saw that traditional economic measures failed to adequately capture the value and qualitative contribution of digital trade to export and domestic growth in India, which created a risk that this value would not be fully appreciated and taken into account when formulating policy.
Our objective with this project was, therefore, to document that contribution and identify ways to further enable the export capacity of smaller firms through digital trade, for making it an even stronger contributor to inclusive growth and social equity.
The report will provide an information base for policymakers, business leaders and other stakeholders in India to discuss ways to harness the benefits and manage the potential risks related to digital trade.
- How will digital trade impact the Indian economy?
The report looks at the impacts of digital trade on the domestic economy, particularly in terms of how it facilitates productivity improvements, contributes to innovation and also helps enhance India’s competitiveness. It also looks at the contribution of digital exports to growth.
In terms of the contribution of digital trade to domestic growth, the report shows that benefits are already significant. Today, the economic value of digital trade-enabled benefits to the Indian economy is estimated to be worth up to ₹226 thousand crores (US$35 billion). The report estimates that the future contribution could grow 14-times and reach ₹3,331 thousand crores (US$512 billion) by 2030, in an open digital environment i.e. with open cross-border data flows.
The contribution of digital exports to growth is also important. Digital exports now represent the second-largest export sector for India. The export value of virtual goods and services enabled by the digital economy, such as e-commerce, account for ₹379 thousand crores (US$58 billion) today. If India maintains an open environment for cross border data exchanges, it is estimated that this value could grow by 238 percent from today’s levels and reach ₹12.81 lakh crore (US$197 billion) by 2030.
- Which sectors present the biggest opportunity for India?
The contribution of digital trade is already important in a number of sectors and can grow significantly, in a more open digital environment. A few examples are discussed below and more are included in our report.
In the financial services sector, digital technologies and mobile banking services have helped double India’s financial inclusion rate from 40 percent in 2011 to 80 percent in 2018.
In the agriculture sector, digital technologies and the aggregation of data from multiple countries are supporting critical production planning and productivity improvements. Precision farming technologies, in particular, have helped increase crop yields by up to 80%. Our report discusses the example of Indian company MyCrop which collects data from farms in Indonesia, Vietnam, Philippines, India, and Thailand and uses machine learning to produce crop-specific farming advice and also help local farmers forecast demand and crop prices.
In the food processing sector, cross border data exchanges help increase traceability, improve food safety and reduce food waste. Our report shows the example of CropIn which uses QR codes to allow overseas customers to trace in the more cost-effective way products (e.g., a box of grapes) in their supply chains, in line with new international food safety requirements. According to a recent UBS report, the food processing sector could be the second biggest beneficiary from supply chain relocations outside of China. Enabling a free flow of data will be a precondition to attract more FDI in this sector.
In the manufacturing sector, productivity increases and improvements in supply chain management supported by digital technology and an analysis of large data series including cross border data will be an important element for achieving the goals of the Made In India strategy. Online job platforms can also increase the mobility of labor and the efficiency of job matching for attracting manufacturing.
The contribution per sector is outlined in the chart below:
- What will be the contribution of SME’s in harnessing the opportunity presented by digital trade?
Micro, Small and Medium Enterprises (MSMEs) and Small-and-Medium Enterprises (SMEs) make a significant contribution to India’s growth and employment.
Digitalization and digital trade are further supporting the growth of SME and MSME revenues. In 2018, India’s MSME revenues grew 60% related to online trading and mobile applications. Full digital adoption remains low suggesting a significant potential for further improvements.
This contribution of digital trade to MSME revenue and profit growth happens in four ways:
- Digitalization has eased access to credit at affordable interest rates, including in tier-2 and tier-3 cities where traditional financial institutions have limited coverage.
- Search engines and online platforms have increased access to domestic and overseas markets and lowered transaction costs essentially by removing the need to go through agents and intermediaries.
- E-commerce is also providing direct access to previously unavailable information about export markets and prices. This enables MSMEs to improve their levels of service, increase their export competitiveness, and grow their sales and profits.
- Technology applications are increasing the efficiency and decreasing the cost of daily operations such as the filing of taxes, storage of inventory data, supplier payments.
- What are the key policy recommendations in the report that will help boost India’s economy?
The unprecedented growth of cross border data flows and digital transactions raises new and legitimate questions related to data privacy, taxation approaches, and the best ways to empower domestic firms to participate in the global economy.
Our report suggests that these questions should be addressed in a way that continues to stimulate domestic innovation and doesn’t adversely affect the ability of domestic firms, particularly SME’s to participate in global trade.
The report formulates a number of suggestions, for further discussion:
- Improve regulatory harmonization: better harmonizing international regulatory frameworks in areas related to data security, storage, and the transfer will help lower the compliance costs for exporting SME’s who do not have the human capacity, technical know-how and financial means to comply with complex, onerous and inconsistent international rules. The report also suggests harmonizing the different domestic data protection rules and clarifying the requirements relating to transferring “sensitive” personal data abroad.
- Reduce cross border frictions: reviewing local establishment and other registration requirements, reducing de-minimis thresholds and eliminating other sources of cross-border friction would lower transaction costs for SME’s operating across geographies.
- Strengthen IP protection: requirements to share algorithms and other source codes could be construed as a form of forced technology transfer and this could create trade frictions of the kind that we are currently seeing between China and the United States.
- Allow more open cross border data flows. SME’s require access to overseas data for decision making and to export. Access to cloud storage and other cross border digital services also enhances their competitiveness and facilitates their participation in the global economy. For the larger firms, exchanging international data enables the innovation, productivity, and supply chain management improvements required to support the Made In India and Startup India program.