India has a problem at hand. The country needs to create 80 million new jobs over the next decade, double the number over the previous 10 years, to keep up with a growing population looking for work. This is not a time for business as usual.

The only other country with a similar challenge has been China. But when China confronted this issue in the three decades starting in the late 1970s, it was at the outset of rapid global trade growth to which China contributed and from which China gained. Through a staggering transformation from agriculture to manufacturing (largely for exports), China’s annual growth averaged 10% for those 30 years.

But it is unlikely that China’s winning formula can be replicated by India. For both economic and political reasons, the world today may not be able to absorb another exporting power house. For the first time in decades, global trade growth is running lower than global economic growth. India may have to rely more heavily on domestic demand.

However, prospects at home are not encouraging. Agriculture is a low-productivity sector, but employs half the labour force. Sectors such as financial services are highly productive, but only employ a modicum of the labour force (see chart 1). Over the last decade or so, labour has been exiting agriculture as it has in similar transitions elsewhere, but it is only going to construction and unregistered manufacturing, which are not markedly better jobs. Services, where labour tends to be most productive, are not generating the additional jobs the country needs.

But that could change. Lagging behind China by seven years in terms of Internet penetration and online purchases, e-commerce in India could experience a similar take-off (see chart 2). The comparison with China is important because of structural similarities. E-commerce helped overcome China’s lack of organized retail, accelerating its adoption. India’s glaring lack of organized retail (at under 10% of total retail activity) suggests that its experience could be closer to China’s.

A young population more open to new technology, the spurt in Internet-enabled mobile telephony, the plummeting cost of smartphones and the ongoing digital payments revolution which may get a shot in the arm following demonetization, will also support e-commerce. And these will be better jobs. We find that e-commerce jobs, which are primarily in retail trade and transport services, are more productive than the kind India is currently creating.

But will e-commerce in India grow to meaningful levels? Local media is currently flush with stories on failing e-commerce ventures. And that is precisely why it is important to put things in context. Globally, a large majority of e-commerce businesses fail, and “creative destruction" is a vital part of that ecosystem because those that succeed become exceptionally large, often changing consumption patterns in economies.

How many new jobs? We estimate that the combination of higher wages (on the back of rising economic growth) and the convenience of buying online can increase online sales 20-fold over the next decade. Using such measures as average transaction value, parcels delivered per day, customer care per order and IT support ratios, online sales can be converted into jobs. Data suggest that e-commerce could create 20 million “gross" jobs at different skill levels—logistics and delivery (70%), and customer care, IT and management (30%). Alas, some jobs will be lost in brick-and-mortar businesses. But modelling carefully (by taking the difference between the “with" and “without" e-commerce scenarios), it is estimated that e-commerce could create 12 million net new jobs. Put another way, for every job lost over the next decade, 2.5 jobs will be created—a ratio consistent with experience elsewhere.

It is generally argued that e-commerce is less labour-intensive than traditional brick-and-mortar retail because higher economies of scale require far fewer labour inputs. As such, e-commerce is bad for job growth. The first part of this argument is valid. The second part is not correct. Estimates show that the rise in consumption due to the convenience factor of buying online can in itself enlarge the pie and require a larger labour force to service.

How helpful will these 12 million jobs be? As we have pointed out, India needs to create 80 million jobs over 10 years. Business-as-usual estimates suggest that India could have a shortfall of 24 million jobs. E-commerce could basically fill half that gap.

So far, we have only focused on urban India. But e-commerce can also bring huge benefits to the countryside. In China, with the formation of Taobao villages (digital market places where villagers can set up “digital shops"), e-commerce spread to rural areas. A similar revolution in India, it is estimated, could engage five million village merchants and create many livelihood opportunities over 10 years. Benefits range from access to larger markets to easing the pressure on crowded cities.

So far, it seems that the stars have aligned in support of e-commerce. But building India’s physical and digital infrastructure is a necessary condition for enabling e-commerce networks to spread and raise wages that boost consumption demand. Equally important is the success of the Make In India campaign, without which e-commerce could grow at the cost of a rising trade deficit and macro instability. In short, e-commerce will only succeed if other parts of the economy rise in tandem.

The next obvious question is: if e-commerce can fill half of India’s “missing jobs" over the next decade, where will the other half come from? The source will probably have to be domestic. India is seriously wanting in health and education service providers. Reforms in the industry and necessary training initiatives are critical for producing the required personnel. We believe that in health and education lie India’s next 12 million “missing jobs".

Pranjul Bhandari is chief India economist at HSBC Securities and Capital Markets (India).

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