India: growing gains from internet-based economy – McKinsey

Already the third-largest online user base in the world, India has the potential to double its economic contribution from the internet in the next three years.

India could see a surge in the internet’s role in the economy from 1.6 per cent of the country’s GDP in 2011, to up to 3.3 per cent in 2015, putting it near developed countries on this measure, according to a McKinsey report.

That would increase the internet’s contribution to India’s gross domestic product from $30bn in 2011 to nearly $100bn in 2015 and make the country’s internet-related economy larger than its education sector and as large as the healthcare sector in terms of share of GDP, the consulting company said.

A direct result of that rise would be that it could create an additional 16m jobs, according to the report. Small and medium-sized enterprises in India that have a high usage of web-based technologies report almost double the revenue growth of those that do not use the Internet.

India is adopting the internet at a more rapid pace than advanced economies and many developing economies, but only 10 per cent of its population is connected. With the costs of internet access and mobile devices falling, India is “on the verge of an Internet boom,” the report said.

In the world as a whole, the internet’s one billion users already contribute an estimated $1.7tn to the global economy, or just below 3 per cent of global GDP in 2010. By 2015, McKinsey forecasts that developed countries will be generating 3.4 per cent of their GDP from internet-linked activities. India could hit 2.8 per cent at its current rate of internet development and 3.3 per cent with accelerated development.

The report said India’s information and community technology exports are the most significant component of the internet’s impact on its GDP. But it said private consumption, private investment and public investment have greater potential to grow in future.

Today, India’s measurable consumer surplus from the internet is estimated at $9 per user per month, well below the range for developed countries ($18 to $28). Even by 2015, with overall internet penetration likely to reach 28 per cent, rural penetration is likely to be just 9 per cent.

However, the report also said that in recent years, India’s rate of growth of Internet users has been faster than many. For instance, India’s internet user base grew more than 5 times from 2005 to 2011, while Malaysia’s grew 1.8 times, and South Africa 1.9 times.

But India still faces challenges given the limited availability of internet infrastructure, high costs of access and usage, and relatively low digital literacy. On most indicators of the strength of the internet’s foundations, which are the preconditions for future growth, India ranks at the bottom quartile of McKinsey’s set of 57 countries.

Further reading:
YouTube reaches billion users milestone, FT
Guest column: Sizing the Internet economy in emerging countries, FT