This edition of the State of Finance in India report has India’s digital economy and its impact as its special theme. The term ‘infrastructure’ conjures up images of large projects made of steel and concrete, to provide services varying from those offered by dams and power plants to those offered by roads, highways, ports and airports. But in recent years, the term ‘digital infrastructure’, has attracted much attention. While leveraging the hardware residing in traditional infrastructure, especially telecommunications facilities, the digital infrastructure frame is built largely with ‘lighter’ hardware and mainly with software that digitizes information and manipulates it to realise desired ends.
The technological components that fall within the ambit of digital infrastructure are in the nature of digital technologies, which have the ability to transform operations in preexisting sectors and industries as well as provide opportunities for the emergence of new sectors and industries. Their deployment therefore alters the way in which production, work, distribution and marketing are organized in a range of areas. In the process, they restructure economic activity in ways that raise productivity and facilitate investment and growth. This also has consequences that can intensify existing sectoral, class and gender inequalities. In some areas, that transformation can be positive. But the case that digitization is only positive and delivers increases in productivity and output through means that are clean and environmentally friendly leaves much that is unsaid. These are some of the issues examined in the report.
India has seen rapid advance of its digital infrastructure framework, assisted in its early growth by the nationwide telecommunications backbone created within the public sector. The National Telecom Policy of 1994 opened the doors to private players as a means of expanding the telecommunications network. Private participation in the wireless telephony area was allowed through auction of parcels of scarce spectrum. Sensing an opportunity, private players made bids of excessively high value based on irrational calculations of profit. When it became clear that these sunk costs could not be easily recouped, some who had established capacity incurred losses and had to exit, and others who held licences but had not installed capacity chose to sell those licences for profit.
Initially, exploiting their oligopolistic position deriving from their control over scarce spectrum, bidders turned operators set call charges at exceptionally high levels. Yet, the regulator did not intervene to rein in prices. Rather, it was argued that ensuring competition by bringing in private players involved a cost that the consumer had to bear. Needless to say, this did not work, because the subscriber base remained low. When repeated auctions of tranches of spectrum were initiated, the number of providers, capacities and competition increased, forcing prices down in the search for a subscriber base. With lower prices, the telecom service providers of that period discovered that they could not operate profitably if they were actually required to pay the amounts they had bid to obtain their licences. At that point, the government lent a helping hand. It allowed incumbent and new operators to migrate to a revenue sharing regime. away from the one based on a specific licence fee, allowing them to turn a profit.
But that was help too little and too late for many operators. The industry went through repeated “shakeouts” that have reduced the number of operators to essentially three— Airtel, Vodafone-Idea and Reliance Jio. Expansion to acquire and/or retain market share has required large resources, even as competition to woo subscribers has kept the average revenue per user extremely low. The result has been a long-term squeeze on margins. That trend was aggravated by the aggressive price war launched by late entrant Jio, which left the main competitors bleeding and steeped in debt. The result has been consolidation of an
oligopoly in which public sector BSNL and MTNL have become marginal players. The trend to concentration was facilitated by repeated changes in the terms and tenure of licencing arrangements, involving implicit or explicit transfers to private firms to keep them in operation. In this way, the government as part of its programme of liberalization and reform not only transferred an industry that was earlier a government monopoly over to the private sector but also facilitated oligopolization of the digital infrastructure space. However, the government still remains crucial in providing both hardware support through public data communication networks and national data centres, which host the information needed for establishing nationwide digital networking, and the software systems such as the digital “unique” identity system Aadhaar and the public Unified Payment Interface (UPI) system.
Meanwhile, the low call and data costs and government programmes like Aadhaar and the UPI have resulted in a huge increase in the degree of digitization, albeit with the persistence of a significant digital divide. The number of mobile subscribers in India is estimated by the Telecom Regulatory Authority of India at around 1.15 billion in December 2024, including many people with multiple subscriptions. With smart phone costs in decline, the spread of mobile use has been accompanied by an increase in mobile based internet access. About a billion users are estimated by Statista to have accessed the internet via their mobile phones. In the event, internet penetration rate in India is estimated to have risen from about 14 per cent in 2014 to 52 per cent in 2024. Utilisation of the digital infrastructure has also been increasing. As of 2023, the average data consumption per user per month in India was estimated at 24.1 gigabytes, with e-commerce, online education, and higher OTT viewership contributing to the growth in data traffic. This was partly because, even by March 2021, broadband data costs in India had fallen to $0.68 per gigabyte (GB) of data, well below the global average of $4.21.
