What is ‘phygital’ infrastructure and how can it impact growth in developing economies?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Chirag Chopra, Piyush Gupta, Project Specialist, World Economic Forum

• “Phygital” infrastructure combines physical and digital factors and features to create smart solutions that can drive forward economic growth and societal progress.
• Examples include smart agriculture, logistics management, and e-governance to optimize resource allocation, streamline processes, and reduce transaction costs.
• Deploying such solutions in emerging economies can lead to major economic gains, with countries like India leading the way.

‘Phygital’ infrastructure – an amalgamation of physical and digital elements – has emerged as a pivotal driver of economic growth and societal progress in the digital age.

By seamlessly integrating physical assets with digital technologies, phygital infrastructure offers a holistic approach to address the evolving needs of both citizens and businesses. In the context of developing economies, where infrastructure gaps and digital divides pose significant challenges, the adoption of phygital solutions can foster inclusive development and ensure progress.

Successes in India

India is rapidly transitioning towards a digital-first society, and this transformation is seeping into the realm of public infrastructure. The concept of phygital infrastructure is gaining traction in the country, offering innovative solutions to age-old challenges.

India is undergoing a major transformation in its public infrastructure as physical spaces are being integrated with digital technologies to create phygital environments. Public transportation now utilizes digital payments, sensors monitor traffic patterns in smart cities, and government services leverage online portals for efficiency. Healthcare clinics in rural areas use telemedicine to consult doctors in urban hospitals. Educational institutions provide blended learning with online components. Digital kiosks in public spaces offer access to government programs and services.

India is overcoming developmental challenges by bridging physical and virtual worlds through inclusive, convenient and responsive public systems. Spearheaded by initiatives like Digital India and Aadhaar, the country has witnessed a remarkable convergence of physical and digital ecosystems across various sectors. The proliferation of smartphones, widespread internet connectivity, and the digitization of government services have laid a robust foundation for the expansion of phygital infrastructure.

A noteworthy example of India’s progress is the Aadhaar-enabled Direct Benefit Transfer (DBT) system. By leveraging Aadhaar, India’s biometric identity system, the government has streamlined the delivery of subsidies and welfare benefits directly to the bank accounts of beneficiaries. This phygital solution has not only reduced leakages and corruption but has also enhanced transparency and accountability in governance, thereby empowering millions of citizens.

An era of e-citizens

Case studies from around the world highlight the transformative impact of phygital infrastructure on public service delivery. Estonia’s e-Residency program, for instance, allows individuals to establish and manage businesses online, irrespective of their geographical location. This innovative initiative has not only attracted foreign investment but has also empowered entrepreneurs to easily access global markets, thereby driving economic growth and innovation.

In India, the Unified Payments Interface (UPI) has revolutionized digital payments by providing a seamless and interoperable platform for instant fund transfers. With over 117.6 billion transactions valued at more than $2 trillion in 2023, UPI has emerged as one of the world’s leading digital payment systems. Its impact includes fostering financial inclusion and reducing the reliance on cash transactions.

The National Highways Authority of India (NHAI) FasTag initiative exemplifies the successful integration of phygital infrastructure to optimize public services and infrastructure management.

FasTag, a radio frequency identification (RFID) technology-based electronic toll collection system, has streamlined toll collection on highways, reducing congestion and travel time for commuters. With over 96% of toll transactions now occurring through FasTag, India has witnessed a paradigm shift in toll management, underscoring the efficacy of phygital solutions in enhancing efficiency and transparency.

FasTag has revolutionized toll collection in India. Since its introduction, the FasTag payment system has notably slashed waiting times at toll plazas, resulting in substantial fuel cost savings for Indian citizens, estimated at around $9 billion. This represents approximately 81% of the nation’s fuel expenditure since 2021. Remarkably, it accounts for roughly 1.5% of India’s foreign exchange reserves. Furthermore, the implementation of FasTag has contributed significantly to reducing India’s reliance on fuel imports, thereby positively impacting the nation’s balance of payments.

Impact on developing economies

Developing economies face unique challenges in their quest for economic growth and social progress. Traditional infrastructure development, while crucial, often falls short in addressing the specific needs and complexities of these nations. This is where the concept of phygital infrastructure emerges as a powerful tool to drive inclusive and sustainable growth.

Some of the impacts of phygital infrastructure includes:

• Enhanced efficiency: Phygital solutions streamline processes, reduce manual work, and improve data collection and analysis. For instance, smart grids in energy distribution can optimize resource allocation and minimize waste, while e-governance platforms expedite service delivery and reduce corruption.
• Financial inclusion: By integrating digital payment systems into public services and businesses, phygital infrastructure empowers marginalized communities previously excluded from formal financial systems. This facilitates access to credit, promotes micro-entrepreneurship, and stimulates economic participation.
• Improved access and delivery of services: Phygital solutions bridge the physical gap between citizens and services, especially in remote areas. Telemedicine allows healthcare access in underserved communities, while e-learning platforms provide educational opportunities beyond geographical limitations.
• Boosting innovation and entrepreneurship: Phygital infrastructure fosters a vibrant digital ecosystem that attracts investment, encourages local innovation, and supports the growth of startups. Open data platforms and digital accelerators can connect entrepreneurs with resources and opportunities.
• Empowering citizens: By providing access to information, communication tools, and digital government services, phygital infrastructure empowers citizens to participate actively in their communities and hold authorities accountable. This promotes transparency, fosters civic engagement, and strengthens governance.

Phygital infrastructure also has a definite impact on growth:

• Increased productivity: By streamlining processes and optimizing resource allocation, phygital infrastructure leads to increased productivity in various sectors, from agriculture to manufacturing, ultimately contributing to economic growth.
• Enhanced competitiveness: By improving access to information, technology, and financial resources, phygital solutions enable businesses and individuals to compete effectively in the global market, attracting investment and boosting export potential.
• Job creation: The development and deployment of phygital infrastructure creates new job opportunities in various fields, from data analysis to software development, contributing to employment growth and poverty reduction.
• Improved social development: By bridging the digital divide and providing access to essential services, phygital infrastructure promotes social development by improving healthcare, education, and financial inclusion, ultimately leading to a more equitable society.

As developing economies strive to navigate the complexities of the digital era, the adoption of phygital infrastructure emerges as a strategic imperative to drive inclusive growth and ensure sustainable development.

Phygital infrastructure empowers governments, businesses, and citizens to unlock new opportunities, overcome traditional barriers, and realize their full potential. As nations continue to harness the transformative power of phygital solutions, they are poised to embark on a journey of prosperity and progress, shaping a brighter tomorrow for future generations.