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Saurav Banerjee

The author is Venture Partner-Kalaari Capital, Formerly Co-CEO NDTV Group

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Dreams of Digital: India’s Tryst with Technology

Ambition has now triggered India’s innovation flywheel into motion. While all sectors will have to pull their weight towards this economic transformation, the digital economy is set to lead the way and disrupt the paradigm in which we operate forever.

Ambition is what drives countries and companies forward. It often translates itself into long term targets that then guide tactical execution. However, ambition often ends up being a double-edged sword as overly ambitious targets are usually stillborn. Underwhelming targets are often accomplished with little dissonance but fail to propel the organization into a new paradigm as the process of creative destruction and churn- a critical ingredient for innovation- is never set in motion.

Therefore, when the Honorable Finance Minister announced the target of transforming India into a $5T economy by 2025, she put forth a tantalizing compromise between an ambitious target and a socio-political aim. Accounting for an average 2% INR depreciation against the USD and inflation targets of <4%, Indian GDP will need to grow at 9% in real terms to achieve this target by 2025.

Given the sheer magnitude of what we are trying to achieve, ensuring that our capital efficiency as an economy increases is also critical. Globally, as economies develop, capital allocation becomes more effective and efficiency increases. A large part of it is driven by more information symmetry and increased use of technology. In fact, over the last two decades, we have seen technology emerge as a key lever of growth, not only enabling efficiency but also ensuring far-reaching distribution that has redefined our base-case assumptions around the scale.

Hence, we believe that the digital economy is going to play a huge role in India’s journey to becoming a $5T economy. We expect the Indian digital economy to jump from ~300B in 2018 to $1T in 2025. This means that roughly 30% of the incremental GDP is going to come from the digital sector. And the drivers for the same are already in place.

Just like 1991 was a watershed year in Indian history as we moved towards a more liberal economic model, 2016 will be remembered as the year that truly connected us and nudged us towards a digital future. The launch of Jio and the ensuing telecom war has benefitted the user as data costs have fallen below $0.1/GB. This has seen Indians across social classes get hooked onto digital services, ranging from food delivery and e-commerce to content and gaming. Similarly, affordable smartphones and the rapid development of IndiaStack (Aadhar, UPI, Digilocker) has enabled companies to scale up rapidly. As our disposable incomes increases, consumer spending is now expected to increase disproportionately as well. Currently, India stands on the precipice of that S-curve and by 2025 will be firmly placed in the upwards trajectory, with a 4X increase in per capita FMCG spending. At the same time, it is not just the quantum of our spending but also the nature of that spending that is expected to change. By 2025, millennials are expected to form ~60% of our workforce. The aspirations of and radical identity assertion by millennials, combined with their lifestyle and digital affinity, will change consumption trends in favour of several new themes such as the sharing economy, rentals, challenger brands, social commerce, subscription models, and entertainment.

India is likely to witness a unique golden era in the next decade, wherein the confluence of three megatrends - data penetration, millennial dominance, and a spurt in consumption expenditure - will exponentially drive digital consumption and will benefit companies that are either driving or leveraging digital innovation.

This dream of a $1T digital economy will require a contribution from three broad pillars to grow. First, the core digital sector, which includes IT-BPM (the likes of Infosys, TCS, WIPRO), communication, telecom services and electronic manufacturing, is expected to grow from ~$200B in 2018 to ~$400B in 2025. This sector has been the backbone of our current digital economy since the 90s, growing consistently on the back of services and labour arbitrage while serving the corporations in the west. However, as the world takes a more productized approach towards technology and software, the importance of cheap talent and labour arbitrage will go down. At the same time, as new technologies such as AI, ML firmly establish themselves across industries, these companies will need to significantly retool their business models to find new levers of growth. These businesses represent profit pools in the industry and are expected to generate healthy cash flows and profits for all stakeholders involved.

Second, the burgeoning startup economy will play a pivotal role in realizing this target. Over the last ten years, we have seen the first wave of Indian technology startups. This has mostly been led by first-time founders who have adopted technology to drive solutions primarily for the urban Indian audience. As startup innovation becomes broad-based, we expect ~$350B in total value created on the back of VC/PE investments worth $100B. E-commerce GMV, currently around $35B on the back of 100M shoppers, is expected to increase to ~$250B by 2025 as innovative models that serve the needs of shoppers beyond metros establish themselves. We are already seeing early signs of that with companies such as Meesho, Shop101 & Mall91 trying to differentiate themselves in the way they acquire and serve this new customer class that is now coming online. Similarly, non-consumption categories such as content and gaming too are expected to increase on the back of this massive user base. To put the magnitude of this user base in perspective, the recent India v New Zealand cricket match at the 2019 World Cup had more than 12M Indians watching it ONLY on Hotstar, while the entire population of New Zealand is less than 5M people!

Such innovations will continue as more Indians take up to entrepreneurship. We are seeing a large number of second-time founders who have already exited their first companies, starting up again. This cohort is scaling up companies much faster now, with a deep focus on unit economics as they already have the relevant experience. Similarly, key executives from large startups such as Flipkart, PayTM, Ola and Oyo are now breaking off to start their own companies. As an economy, we need to continue to support this entrepreneurial risk-taking as the rewards at the end of the rainbow are no smaller than the proverbial pots of gold. And a key driver for this is the voracious appetite these companies have for capital. PE/VC investment in 2019 is well on course to eclipse the total investment made between 2011-2017. Overall, as the low-interest-rate environment prevails globally, we expect more capital to flow into India as the country remains the only market that can provide high growth at such a scale. As domestic investors also warm up to the idea of value creation through technology, we believe foreign capital will be augmented with domestic institutional capital as well. 

What has been encouraging over the last one year is the pace and energy with which the startup ecosystem has continued to prance forward, even in the face of multiple macro headwinds such as the WeWork IPO, a general worsening of Indian macros and flight of FPIs. The difference between the sombre mood in Mumbai vs the exuberance of Bangalore is downright infectious and further motivates us to double down on the Indian startup story.

As the ecosystem expands and stakeholders find more ways of working closely with startups, we will see a clear integration of startups with the larger economy as they start working with closely with corporates and create definitive behavioural changes in the Indian consumer's life.

The final pillar in this trifecta is corporate innovation and global giants setting camps and investing more in the country. Tech giants such as Amazon, Walmart, Google and Microsoft have committed long term capital to India and as such, look in no hurry to take their money out. This is manifesting itself in employment generation, technology innovation and increased access to digital services on the back of their large distribution, reach and brand recall. 

Another aspect of this pillar is the digital transformation of traditional industries. Financial services present a glowing example of how private enterprise piggybacking on public digital infrastructure can lead to massive innovation and value creation. Initiatives such as UPI, Aadhar, e-KYC and Account Aggregators have now made India one of the top fintech innovators, globally. Apple is struggling with the payment infrastructure in the US while Indians now make payments as low as INR10 with QR codes. This sector has also presented a case study on how corporates can be nimble while working with startups. Indian banks adopted digibanking much before their global peers and have continued to create products that exceed market expectations, such as wealth management tools. We expect similar trends across a host of industries such as Agriculture, Healthcare, Logistics and Manufacturing & IoT.

As exemplified above, the government has warmed to the potential of such a digital transformation and has promoted entrepreneurship with initiatives such as Digital India, Startup India, setting up a fund of funds under SIDBI etc. However, a lot more needs to be done for the sector to realize its full potential. 

First, as a large part of it is predicated on attracting foreign capital across greenfield and brownfield projects, we need to ensure consistency while setting up policies across regimes. This will take the guesswork out of investing and make India even more attractive on a risk-adjusted basis. Second, we need to create a robust exit environment as the bulk of this investment is in privately held, illiquid assets. Even though they generate the highest returns, there is limited visibility on exit options in given time frames. This leads to sub-optimal returns and can subdue interest. Creating a framework to establish accessible and deep public markets that can support the scale of current Indian companies will ensure that value doesn’t migrate abroad when companies go public. Finally, investing in digital as well as physical infrastructure will ensure that pace of innovation is faster and its reach, wider. This will further create employment and take us closer to the promise of the elusive trickle-down economics. 

Ambition has now triggered India’s innovation flywheel into motion. While all sectors will have to pull their weight towards this economic transformation, the digital economy is set to lead the way and disrupt the paradigm in which we operate forever.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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