India at the crossroads of disruption—a tipping point for growth

The coronavirus pandemic that’s whipsawed markets this year has hit many emerging markets hard, as investors react to everything from infection rates to hopes of a vaccine. Beneath the surface, however, the pandemic is causing more lasting change by accelerating disruptive forces that have been at work for years, namely digitisation and a reconfiguration of—if not retreat from—globalisation.

India stands at the nexus of these two accelerating trends and will likely be one of Asia’s greatest beneficiaries. In our view, India’s formalisation through a growing digital economy and its reinvestment in manufacturing will be the key drivers of growth.

Digital transformation is public policy in India

The foundation of 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.¹

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, thanks to fast, reliable, and cheap 4G services. In fact, higher private investment in India’s telecom network has been a backbone of the country’s digital journey, and by March 2019, 4G coverage reached ~90%—among the highest coverage rates in the world.²

Critically, the JAM trinity leveraged India’s emerging telecom infrastructure to bring thousands of businesses into the formal banking channel. This move coincided with the increasing availability of smartphones and led to explosive growth. 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 2019.³ As new e-commerce business models emerged, India’s internet economy attracted significant capital from the likes of Walmart, Amazon, and Facebook.

A long runway for growth

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%.⁴

The chart illustrates the potential of e-commerce in India by showing a high degree of smartphone penetration (65%) but a low percentage of e-commerce as a percentage of retail (3%).

As capital has poured in, we’ve seen new business models emerging that leverage the mobile internet. In many cases, they’ve created a digital platform that connects formal-ready merchants with their dispersed customer bases. Large platforms have emerged in areas in which the markets are fragmented, such as in personal services (UrbanClap), transportation (Uber and Ola), food delivery (Zomato and Swiggy), and hospitality (Oyo). For India, this is transformational change, particularly for small businesses, as they rapidly digitise and formalise under these platforms.

India’s grocery market will be the next frontier of such transformation. At roughly US$400 billion, it’s the largest component of India’s retail market, yet e-commerce penetration in grocery is miniscule, at 0.2%, versus 8.0% in China and 4.0% in the United States.⁵ India’s grocery market is also highly fragmented, driven by a maximum retail price labelling law that prevents retailers from passing on the costs of rent and other expenses through higher product prices. The resulting extremely low margins in food and grocery have meant that mostly unorganised small-format retail stores in India are operated by small businesses with low-cost and usually family-owned real estate. Today’s digital transformation has the potential to unlock huge value creation, and not just by connecting merchants and customers. The entire chain—from sourcing and digitisation of merchants in inventory and logistics to billing and fulfillment—can benefit from a large aggregator’s presence focused on improving productivity of merchants and offering more choice to customers.

Today’s digital transformation has the potential to unlock huge value creation, and not just by connecting merchants and customers. The entire chain—from sourcing and digitisation of merchants in inventory and logistics to billing and fulfillment—can benefit from a large aggregator’s presence focused on improving productivity of merchants and offering more choice to customers.

Recently, we’ve seen JioMart, owned by Jio Platforms (Facebook has taken a 9.9% stake in this entity), make ambitious strides to bring this segment online by launching their grocery online-to-offline service in 200 cities. This is the first such attempt at this vast scale in India and, if successful, has the potential to benefit everyone in the chain. Small retailers can benefit from better inventory planning, working capital, product basket, and customer reach by leveraging the platform’s digital and physical infrastructure; they could also access formal financing channels by being part of the platform. The customer also benefits with more choice, as many brands don’t have the reach in India’s smaller towns. Brands can gain by increasing their offering through a more formal, better capitalised distribution channel and drive premiumisation. This market is so vast it’s challenging to bring so many merchants and customers together. Towards this, Facebook hasn’t just provided capital: JioMart has also integrated its communication and engagement with WhatsApp, which has 400 million users in India.

We note that formalisation, which has helped the digital economy grow, has now reached an inflection point; in turn, the digital economy is also pushing formalisation. We believe this virtuous cycle will lead to more than just further growth of the digital economy and its main platforms, but that it will also improve productivity of small and medium-sized businesses. A truly transformational journey is under way.

Domestic manufacturing stands to gain from today’s disruption in global trade

A slowdown in globalisation and global trade is generally not seen as ideal for emerging markets, yet that’s precisely what we’ve seen in recent years, catalysed by escalating trade tensions between China and the United States and accelerated by the COVID-19 pandemic. 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. These measures include technical barriers to trade, sanitary and phytosanitary regulations, antidumping duties, export subsidies, quantitative restrictions, tariff rate quotas, and countervailing duties. The result has been an overall decline in exports as a percentage of GDP.

Against this negative macro backdrop, there can be bright spots for emerging markets to attract global capital that fuels domestic growth and manufacturing. We believe India is one such market and that it stands to benefit from a number of converging trends: formalisation reforms, investment in infrastructure, policy support for domestic manufacturing, import substitution, and growing exports at a time when global corporations are looking to diversify their supply chains beyond China.

As a starting point, India has globally competitive manufacturing wages and is a young country with a large labour force. In fact, India is the youngest country among major economies with a median age of ~28 years and will make the largest addition to the world’s workforce in the next decade.⁶

The chart shows how, at $2,400 annually, India’s labor costs are among the lowest in Asia.

The current 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.⁷

We believe 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.⁸

The chart uses air conditioners, refrigerators, and washing machines to show that ownership of these items in the average Indian household is relatively low compared with other Asian countries.

Indeed, we’ve seen early success of focused policies in mobile phone production, electronic components, and air conditioners. India’s electronics production has grown from US$29 billion in 2014 to US$70 billion in 2019, and within that, mobile phone production was up ~8x, from US$3 billion in 2015 to US$24 billion in 2019. India is now the third-largest smartphone market by volume, and until a few years ago, most of the domestic consumption was met through imports. After the scale-up of domestic manufacturing, India is now the second-largest mobile phone producer globally by volume and has turned into a net exporter in 2020. Large producers such as Foxconn, Samsung, and Xiaomi have committed investments worth US$6 billion in various manufacturing sites over the past four years.⁹

After the scale-up of domestic manufacturing, India is now the second-largest mobile phone producer globally by volume and has turned into a net exporter in 2020.

In air conditioners, we’ve seen imports fall from roughly 50% of domestic demand to 33% due to increasing indigenisation. Despite these early successes, there remains a long runway of growth, in our estimation, as overall value addition is still low and India is still importing electronic goods worth US$57 billion.¹⁰ As value addition increases, it should drive additional growth and investment in domestic manufacturing and help increase net exports.

India’s also seeing 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. We find that 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 in the list of preferred locations.¹¹ We believe 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.

The chart shows how the trends of formalization and digitization in India reinforce one another, just as with the trends of reinvesting in manufacturing and import substitution. Both of these virtuous loops result in better infrastructure and better jobs.

A tipping point for growth in India—hastened by the pandemic

We believe these two powerful themes—India’s formalisation through a digital economy and its reinvestment in manufacturing—can serve as primary tailwinds for growth potential over the medium term. They can also feed off each other to create the kind of virtuous cycle we’ve seen in China and other East Asian economies. 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. We believe manufacturing growth is also at an inflection point; with a large amount of investment already committed by global firms and a supportive policy environment at home, 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.

While the COVID-19 pandemic has severely affected India’s economic growth in 2020, alongside most other countries, it’s also accelerating India’s growth trends. Companies are investing more to strengthen their digital investments, while new customers flock to digital channels as physical channels remain disrupted. Similarly, the global manufacturing shift to alternate destinations may get a boost as global companies diversify their highly concentrated supply chains.



1 Confederation of Indian Industry, October 2014. 2, The State of Mobile Experience, May 2019. 3 Individual company reports of Idea, Vodafone and Reliance Jio, J. P. Morgan, 2016-2019. 4 Euromonitor, Morgan Stanley research, 2019. 5 Euromonitor, J. P. Morgan, June 2020. 6 ILO, China Statistical Yearbook, Credit Suisse research, October 2019, Median Age statistics from CIA 2018 Factbook. 7 World Bank, 2020. 8 IMF, Media articles, Companies, Investec Securities research, January 2018. Note: Consumer durables includes the estimated market of air conditioners, refrigerators, and washing machines. 9 ICEA, quoting KPMG and Frost & Sullivan, Credit Suisse research, October 2019. 10 Ministry of Commerce, Credit Suisse Research, data as on March 2020. 11 Credit Suisse corporate survey, October 2019.

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Rana Gupta

Rana Gupta, 

Senior Portfolio Manager, Asia ex-Japan Equity

Manulife Investment Management

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Koushik Pal

Koushik Pal, 

Director, India Equities Research

Manulife Investment Management

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