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India’s digital transformation...

International Business
Thu, 23 Nov 2017
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Excerpts from an article by Arvind Gupta and Philip Auerswald

On November 8, 2016, India’s government did something that no other government had attempted before at the same scale: It decided to remove 86 per cent of the country’s currency notes by value from circulation.

Over the months that followed, more than one billion people participated in a “reboot” of the country’s financial and monetary system.

An active debate has since ensued as to how the transition unfolded.

Some have seen calamity for the economy, while others, like us, see something quite different: a threshold moment in India’s digital transformation.

Consider, for example, a government payment system created in 2016 that was processing 100,000 transactions per month in October of that year, prior to the sudden demonetisation.

A year later, after demonetisation, the same system is processing 76 million transactions per month.

Meanwhile, according to India’s Ministry of Finance, the country’s economy is operating with $45 billion less cash than it did prior to demonisation.

India’s digital infrastructure is coming to life, with a combination of policy and technological innovation having played an important role.

The country is moving rapidly toward a digital-first economy.

Demonetisation isn’t the only high-profile economic act India’s government has undertaken recently.

It has also implemented what was arguably the largest-scale tax reform ever implemented at a single time: the replacement of a complex web of 17 different taxes with a single Goods and Services Tax (GST).

Once again, predictions of dire consequences preceded the move, and critiques of the implementation of the policy have followed since.

Yet the fact remains that, in the first month after the introduction of the GST, over one million businesses registered with the system.

In only the first few weeks after implementation, the increased transparency and digital data availability that are integral to the GST began to open up new sources of lending to small and medium-size enterprises (SMEs).

However haltingly, and with whatever inevitable difficulties occurring along the away, the bottom line is that a process of rationalisation of the tax code is, after decades of delay, under way at last.

Prior to the introduction of the GST, companies of any size in India had to keep track of no fewer than 17 different categories of taxes on sales and transactions, including state-level value-added taxes and levies on the interstate transportation of goods.

On July 1, 2017, all 17 of those taxes were subsumed into one tax: the GST.

The implication of this policy change meant an opaque and irrational system that had developed over decades, and that varied across states, was replaced by a simple, transparent system applicable nationwide.

For this reason, the slogan that the government of India adopted for the introduction of GST was “One nation, one tax.”

But as with other types of disruptive change, GST can be understood as the beginning of a long-term process. State governments must do their part to simplify and harmonise the tax code, rather than protecting treasured exceptions and localised benefits.

The central government must continually use feedback to ensure its online payment system is as easy to use as possible. And, yes, businesses will need to adjust to a new reality, which will be costly in the short term.

The reward will come when India truly sheds the antiquated and inefficient tax systems that built up during the first 70 years after independence, and replaces it with the 21st-century, digitally-enabled digital alternative to which the country is currently adapting.

The process of digital disruption – whether led by government or not – creates numerous significant social challenges. Rather than seeking to slow that process to reduce those challenges, India has taken the opposite approach: to not only embrace but accelerate digital disruption, to ensure its full potential for economic and social inclusion is realised.

India’s development was inequitable and inconsistent for far too long; the country still has a long way to go. The societal challenges created by digital disruption, challenges both expected and unintended, are real. They will be addressed only with a combination of administrative humility and entrepreneurial determination. But the long-term benefits are real.

The reality is that India is moving into the future at an unprecedented rate. And the path it is taking to get there is digital.