Increasing Tech Intensity – a Productivity Boost to the Economy!

What’s the Point?

India has seen a significant rise in the share of digital applications in the overall economy, now constituting ~5% of the overall economy. Recent reports suggest that by 2030, the technology sector could grow to US$1.5tn, constituting ~12-13% of the overall economy. This presents significant opportunities for both traditional IT services and the emerging internet economy, with potential for rising profit pools in the listed space. A working paper titled “New Digital Economy and the Paradox of Productivity” published in the RBI Bulletin theorized that the rise of the digital economy has long-term gains on productivity for both labor and capital, i.e., increasing output from both humans and invested capital. Therefore, significant investment in digital public infrastructure and the rising adoption of digitization bode well for the economy and the industry.

Rising Tech Intensity and Outlook

India’s technology sector is expected to outpace the overall economic growth, leading to significant increase in the share of the sector within the economy.

Source: Google, Temasek and Bain, India e-Conomy Report 2023, GDP growth estimates from S&P Global Intelligence, E = Estimates

It is important to note that both the traditional IT sector and the internet economy are poised for significant growth. Various factors propel growth – see table below:

Productivity gains from the digital economy – what’s the productivity paradox?

The RBI paper mentioned above (link here) shows that digitization clearly boosts productivity. It stated, “the ICT sector’s productivity performance, which includes both ICT-producing and ICT-using sectors, is higher than the non-ICT for the entire period 1980-2020” (ICT – Information and Communication Technology). The paper referenced an interesting concept put forth by economist Robert Solow in 1987 who noted that despite the widespread adoption of computers, there was no significant improvement in productivity statistics. The paradox was attributed to factors such as the time lag between technology adoption and productivity gains, mismeasurement of productivity, and the need for complementary investments in skills and organizational changes. In this study, authors from the Department of Economic and Policy Research, RBI, demonstrate that the digital economy has positively impacted the productivity of India’s manpower and capital, thereby refuting this paradox for India.

In fact, the rising use of artificial intelligence could offer additional scope for productivity improvement in the decade ahead. On the manufacturing side, Indian companies are also using these tools to improve factory output by reducing downtime and optimizing schedules – refer our detailed note here.

Investment case for India’s digital sector

Increasing productivity leads to significant economic benefits, and research like the one highlighted above strengthens India’s case as an investment destination. India has invested in digital public infrastructure, which has enabled the rise of various public and commercial applications.

India is likely to see significant growth in the digital sector, both in traditional IT services and the new-age internet economy. Applications such as e-commerce, quick commerce, digital financial services, and communications are changing the way India functions. In traditional IT, India continues to grow stronger, backed by a large pool of high-quality tech talent and displaying high levels of adaptability to the everchanging world of technology, thereby increasing its share in global IT revenue pools. Investors can therefore consider taking exposure to both the bluechips of the Indian IT industry, as well as several E-Commerce, Fintech companies etc., by investing in the HDFC Nifty India Digital Index Fund. However, investors should note that the Scheme being sectoral in nature carries higher risks versus diversified equity mutual funds on account of concentration and sector specific risks. Thus, investors could take controlled exposure to such a fund. The NFO for the HDFC Nifty India Digital Index Fund is open from November 22 to December 6, 2024. Refer to our detailed presentation and more details on the product page on our website (link)

Sources: Reserve Bank of India and other publicly available information

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