India’s Economy at the Crossroads?

The coronavirus pandemic has impacted many emerging markets hard. Beneath the surface, however, the pandemic is causing lasting change by accelerating disruptive forces. Two accelerating trends are likely to benefit India - a growing digital economy and its reinvestment in manufacturing.

Source: Asia Insurance Review

India’s digital economic potential was laid in 2014 when the country’s government began the process of formalisation (bringing its largely small-scale, cash-based economy into a more accountable, modern infrastructure). It was a necessary step, as India’s informal sector—which employed 90% of its workforce but contributed only 50% of GDP—significantly dragged down overall productivity.

Digitisation was central to the formalisation process. Under formalisation, every adult in India was given a bank account (Jan Dhan) and a 12-digit unique identity number (Aadhar) linked to a mobile phone number. Called the JAM trinity, it empowered people to conduct cashless, paperless, and presenceless transactions through formal channels.

The formalisation agenda coincided with the onset of 4G telecom networks, rising internet penetration, and the availability of online products and services. Digital adoption was evolving in India. The launch of Jio’s 4G network in September 2016 led to a significant growth in data usage.

The penetration of 4G jumped from 8% in 2016 to 49% in 2019, and average mobile data usage jumped 8x, to 11.2 GB per user, per month, between 2016 and 2019. As new e-commerce business models emerged, India’s internet economy attracted significant capital from the likes of Walmart, Amazon, and Facebook.

Despite the strong growth in user base and revenue, India’s penetration across digital opportunities remains far behind that of the United States and China. The events of the past five years have made India’s small businesses ready for e-commerce, but penetration in these small businesses has just begun. On one hand, smartphone penetration has grown considerably—to 65% as availability of data and devices has grown—and stands much closer to the United States and China. On the other hand, e-commerce penetration still lags far behind and presents a tremendous growth opportunity; India’s total addressable market is estimated at ~US$900 billion, with e-commerce penetration at just ~3%.

Governments across the world are turning more protectionist as they grapple with higher unemployment and falling domestic growth. Apart from announcements of rising tariffs on imports, which often make headlines, non-tariff trade barriers have also been rising. The current Indian administration has made it a priority to support growth in domestic manufacturing since coming to power in 2014 by making significant investments in roads, power, and telecom networks and by deepening the market for labour, goods, and services. In September 2019, the administration also announced tax reforms that incentivised corporate investment in new manufacturing capacities and encouraged global companies to reinvest in India’s manufacturing. Five years of such reforms have culminated in India showing the most improvement in the World Bank’s rankings for ease of doing business.

India can increase import substitution in products in which the domestic market size has reached critical mass and the share of import components as a percentage of total domestic consumption is still high. The country’s large market size makes it viable for global brands to set up shop and start developing the ecosystem to increase value addition over the medium term. In consumer durables, India’s domestic market size is second only to China within Asia, but penetration is much lower—an ideal condition for new investments.

India’s also sees strong interest as an alternative sourcing base as global supply chains reorganise themselves away from China due to trade tensions, rising environmental compliance risks, and demographic shifts. India is high on the list of preferred countries in shifting production away from China in various surveys. In one such survey, India was second only to Vietnam. India will benefit from this trend in products—such as specialty chemicals and engineering goods—as the country already has a sizeable manufacturing base and established export presence.

India’s formalisation through a digital economy and its reinvestment in manufacturing can serve as primary tailwinds for growth potential over the medium term. On one hand, formalisation is driving growth of a massive digital economy. On the other, the digital economy itself is driving the formalisation process by boosting productivity. India should continue to attract global capital to realise this potential. As manufacturing grows, there will be more formal jobs created, driving income growth and consumption and unleashing another virtuous cycle of growth.

Reference:

India at the crossroads of disruption – a tipping point for growth, Rana Gupta, Koushik Pal, July 24, 2020 (www.manulifeim.com)