IMF Working Paper on Digitisation and Productivity in India
Key Findings
- Digitising public administration is not solely about enhancing governance; it also boosts productivity.
- States that digitised tax filing, permits, inspections, dispute resolutions, and single-window systems experienced higher productivity growth in microenterprises.
- Digitisation helps narrow productivity gaps among firms, indicating improved resource allocation.
Structural Problems in India's Economy
A significant portion of small businesses in India remains unregistered, dominating employment and contributing to manufacturing output and exports. However, these businesses face challenges:
- High compliance costs and complex regulations discourage formalisation.
- Weak contract enforcement and bureaucratic discretion make staying informal a rational choice for small firms.
- The "missing middle" phenomenon exists due to firms hesitating to scale up, fearing increased regulatory burdens.
- Productivity is hampered by small firm sizes and misallocation of capital and labour.
Impact of Administrative Reforms and Digitisation
Administrative reforms through digitisation lower compliance costs and curb rent-seeking by:
- Moving processes online and standardising procedures.
- Limiting discretion and levelling the playing field for microenterprises.
- Enabling efficient firms to compete and grow, leading to average productivity gains and reduced productivity dispersion across firms.
- Facilitating better capital allocation and resource flow within the economy.
Implementation and Results
The push for ease of doing business, highlighted by the 98-point action plan launched in 2015 by the Department for Promotion of Industry and Internal Trade and the World Bank, has shown positive results:
- Significant improvements in state-business interactions have been observed.
- Diminishing returns are noted as reform intensity increases, indicating the highest benefits from early-stage digitisation.
- Priority should be given to lagging states and sectors with high administrative friction.
Conclusion
Administrative reform and digitisation can partially address structural issues such as low productivity, high informality, and firms' reluctance to scale up.
