Digital transformation spurred US investment in India amidst COVID 19, Japan lagged

By S. Majumder, Former Adviser, Japan External Trade Organization ( JETRO), New Delhi

OPINION: While American investors were upbeat in India, despite  Covid 19 ravaged the economy, Japanese investors slipped into a coma. Both are among the five top foreign investors in India.  US investment in India surged by 297.2 percent in 2020 over the preceding year and  Japanese investment fell by 59.4 percent during the same period.

In 2019, investment from both the USA and Japan were neck to neck, with a marginal increase of USA investment  over the Japanese investment

The truth behind this paradox lies with the USA  challenging India’s new age economy, which is driven by the digital economy. Japan trailed behind because it was not sufficiently experienced in digital transformation even in its own economy. India announced 1 trillion of the economic value of the digital market by 2025. That lured American investors. Japanese were not responsive.

India emerged as the second biggest internet connection in the world, next to China. With nearly half a billion internet connections and the second-biggest smartphone users, India emerged as the global leader for digital solutions.

In 2020, the USA was the second biggest foreign investor in India, next to Singapore. More than one-third of total USA  investment in India flowed into the digital economy. Google was a behemoth to trigger USA investment in the digital economy. More than 90 percent of investment in the digital economy was made by Google.

Digital transformation is a new challenge to low labour costs in the production process. It reaps more benefits to the investors, according to Dr. Thie B Peterson. With digital technology increasingly used in the economy, the production process will be more capital and technology-intensive in the economy. It signifies a major impact on international competitiveness. Initially, these production processes are cost burdens. But, over the period,  the cost becomes competitive in terms of productivity. When human labour is replaced by robots, computers, and machines, the advantage of cheap labour loses competitiveness, according to Dr. Peterson.

The massive investment in COVID induced pandemic and widespread lockdown leveraged digital transformation in India, which ensured business continuity in the country, according to a Swiss report by Fanny Von Heland, Office of Science and Technology, Sweden. India is the second-largest digitized economy in the world. With half a billion internet connections, India emerged as an upcoming leader in digital solutions. This movement attracted US investors, notwithstanding  Indian economy swung into downturn during the Covid 19 period

The digital impact on productivity, the key to sustained economic growth, is visible on the ground. Many governments, including India, are moving services online to make them transparent and less vulnerable to corruption.

Digital India is the flagship programme of the government. The government’s effort to introduce Aadhar, the national biometric digital identity programme, is a case in point. It is the first gigantic attempt at the digital transformation of India to enroll 1.2 billion Indians since it was introduced in 2009. Likewise, the GST network, established in 2013, brought all transactions of about 10.3 million indirect tax payments in one digital platform, ensuring a major leg up for Ease of Doing Business.

Another significant outcome of digitization was the narrowing down between the rich and poor states. A state like Uttar Pradesh and Jharkhand are expanding their internet infrastructures.

Japan missed the bus.

Paranoid by the sharp fall in the economy due to the unabated  COVID 19 pandemic and India’s withdrawal from RCEP ( Regional Cooperation of Economic Partnership), Japan withheld its investment in India. Automobile continued to be the principal sector for Japanese investment. Crippled by an edge in digital transformation, Japan lagged to respond to India’s new age economy. Japan could hardly gauge India’s structural dynamism and competitiveness in the economy, catalyzed by digital transformation.  Japan failed to map  out  India’s potential for US $ 1 trillion markets of the digital economy by 2025

Notwithstanding, India being a global leader in digital transformation,   India has plenty of room to grow. Offshoot is visible in rapid growth in digital banking. Although India is the second-fastest digital adopter among 17 major digital eco9nomies and many had adopted digital banking,    90 percent of all retail transactions are made in cash. E-Commerce revenue is growing more than 25-30 percent a year. Yet, only 5 percent of the trade-in India is done online.

Japan is the third biggest economy and technology giant in the world. Notwithstanding, it is embroiled in serious disadvantage of laggard digital transformation.  It is behind the USA, China, EU, South Korea, and even India in terms of rate of increase in digital transformation in the economy, according to a Mckinsey report “ Using digital transformation to thrive in Japan’s new normal: An urgent imperative”. This led Japan to a serious disadvantage in investment overseas, including India, which plank increasingly on digital transformation in the economy. For example, COVID 19 induced lockdown increased the demand for digitization in services in India to reduce human contacts, such as in-home online entertainment, food delivery, pick-up services, online meetings, online fitness, telemedicine, and others. Few Japanese investors came forward in these services after the lockdown.

Japanese business leaders understand that digital transformation is the next opportunity for global business operation. At the same time, they feel that they are not sufficiently prepared to adapt to the digital transformation. One reason could be their traditional managerial culture and business practices. Traditional Japanese companies are rarely inclined to external talents since the seniority basis promotion and lifelong employment act disincentive to foreign talents, according to the Mckinsey survey.

The Mckinsey survey revealed that traditional Japanese companies lack in-house digital talent.  They generally outsourced their IT operations. Compared to the USA, where companies use 65 percent of in-house IT engineers and outsourced 35 percent, Japan has only 28 percent in–house IT employees and 72 percent are outsourced.

Given the rapid growth of digital transformation, which has proven more cost-effective in the longer run, India should revisit its FDI policy to attract foreign investment to uptick its digital economy.

About the author: S. Majumder, has been an Advisor with the Japan External Trade Organization (JETRO), New Delhi (under the Ministry of Economy, Trade, and Industry, Government of Japan) for over four decades in the research department. He retired from JETRO on March 31, 2021. He is a regular contributor to national media and foreign online media, such as Eurasia Review, USA, and One News, UK.  

(The views expressed in the article are personal of the author and do not necessarily reflect the point of view of the Asian Community News Network.)