India: The Path to Economic Recovery (And what it means to us in the venture ecosystem)
A lot has been written and said about the impact of the novel coronavirus which erupted in China last year and since then has plunged the whole world into a deep health, economic and sentiment crisis. There is no precedence of an event like this causing such a broad and deep impact on the Indian economy (Well, also rest of the world, but our analysis focuses on India) in the last century or even more.
As it always happens during a large economic crisis, various agencies, industry bodies and the government have started seeking and pointing out green shoots of recovery. As we chalk out our strategy to navigate the crisis and decide on our course of action during and post the pandemic period, we set about crystal-balling where the economic recovery might start from.
- India Rural Sector
Fortunately for India, rainfall has been abundant and a few flood-impacted states aside, the agricultural growth has been strong on the back of healthy kharif sowing. On the basis of advanced estimates from the agricultural ministry, food-grain production is likely to be over 291 million tonnes this year, a record level of production. Healthy produce coupled with government support through rural employment schemes and a lower impact of the on-and-off lockdowns have meant that rural demand and consumption levels will stay robust for rest of the year and perhaps into the next year. This is reflecting in the strong demand for tractors, two-wheelers, FMCG and consumer durables coming out of the rural markets as reported by various pan-India brands.
2. Digital Economy
From the anecdotal grandpa who’s made his first digital money transfer to the reluctant schoolteacher who’s had to learn to deliver content and instructions to her pupils online, India has gone through yet another paradigm shift in digital adoption owing to government imposed lockdowns where outdoor movements have been nigh on impossible and all communications and transactions have shrunk to a laptop or mobile. Consider these -
1.5 billion UPI transactions completed in July 2020 worth nearly $40 billion, an 80% increase in the number of transactions and 100% increase in value transacted.
Jio, Airtel and Vodafone — India’s top 3 telcos reported a respective YoY increase of 30%, 40% and 73% in data consumption by their customers in the quarter ended June ‘20.
CDSL reported 830k new demat accounts opened in the month of June ’20, their highest in history and around 2 million for the quarter ended June ’20. In fact, of the 43 million demat accounts in the country, nearly 9% were opened in the last 6 months, you guessed it, mostly digitally.
Zoom grew its user base by a staggering 67X in India between January and April 2020. More importantly, the government and large conglomerates have vowed to popularize indigenous variants of group video calling software to promote “Aatmanirbhar Bharat” (Self-reliant India)
Education, both formal and informal, has officially moved online from schools to “coding-for-kids” to yoga classes to dance and drama sessions all having figured out a digital way to stay in touch and continue to instruct students in the times of “stay-home-stay-safe”. The spectacular growth and cash acquisition by Byju’s (reported $300M enterprise value) of coding-for-kids startup Whitehat Junior will stay etched in the minds of ed-tech followers for a long time, incorporation to acquisition taking just about 2 years, and is undoubtedly the result of the unprecedented tailwind for online education in the times of Covid-19.
Online grocery, one of the biggest benefactors of the current crisis is likely to hit a $3B mark this year, a 76% increase over the previous year. In fact, expecting this trend to continue over the next 5 years, analysts expect this e-commerce segment to touch nearly $30 billion accounting for almost 30% of the overall e-commerce pie. Jio’s nascent grocery delivery service Jiomart is reported to have touched 400k orders delivered in a day while meat delivery startup Licious has increased its volume multi-fold between pre-covid and in-covid times.
3. Indigenization of Production
On 12th May 2020, as part of a series of addresses to the nation, Prime Minister Narendra Modi announced the “Aatmanirbhar Bharat Abhiyaan”, roughly translated to a campaign to make India self-reliant. In the following weeks and months, the government machinery and various ministries have announced various measures and policies which will have a far-reaching impact on the industrial production and potential economic output of the country –
In early June, the government announced through a notification, restricted tyre imports across categories of pneumatics and radials used in buses and motorcycles. This move was aimed at curbing imports and boosting domestic tyre manufacturers in the wake of slumping demand in the automobile industry.
Post the late June ban on 59 popular Chinese apps including Tiktok, Wechat, Helo etc., the government launched the AatmaNirbhar Bharat App Innovation Challenge hackathon to identify the best Indian apps that are already being used by citizens and have the potential to scale and become world class apps in their respective categories. Many of the digital India leaders of the future may come out from the recently announced list of winners of this challenge
On 9th August The Ministry of defense announced an import ban on over 100 items of military equipment to allow Indian state-run and private companies to increase domestic production of weapons and making the country more self-reliant in weapons manufacturing. The items covered under this ban constitute nearly $47 billion worth of imports into the country over the previous 5 years. It is estimated that contracts worth almost $54 billion will be placed with domestic manufacturers within the next 7 years.
Indian contract manufacturers have already reported a surge in interest from brands to make products like televisions, air-conditioners, microwave ovens, shoes, speakers, set-top boxes and apparel in the country as companies prepare an alternative sourcing strategy in the wake of deteriorating relations with China and an active intent to move sourcing out of China progressively. 6 global electronics majors including Samsung, LG, Pegatron among others are in discussions to set up or expand new units for India production under the government’s recently announced Production-Linked-Incentive scheme and entailing up to a billion dollars each of fresh investment. While this may be a slow process, it could be a decisive step towards making India a strong electronics manufacturing hub with a global relevance. According to the Ministry of Electronics and IT, 22 domestic and global manufacturers are expected to produce products worth over $150 billion in India over the next 5 years, also resulting in exports worth over $90 billion and creating fresh employment for hundreds of thousands of local employees.
This Make in India initiative could be a giant flywheel that, although slow to set in motion initially, could fire up the economic engine of the country like never before and fuel growth of economic output for the next few decades.
4. Infrastructure as a growth multiplier
When Franklin Roosevelt assumed office as the 32nd president of the USA, the economy was in the aftermath of the great depression — the GDP having slid nearly 30% since the start of the depression and the unemployment rate at an abysmal 25%. Among the first policy announcements made by him was the “New Deal”, an enormous federally funded series of Infrastructure and improvement projects across the country, creating jobs for workers and profits for businesses. Economists often credit the New Deal being highly effective in shortening the duration and impact of the depression in the US.
Whether or not the Indian government is inspired by the Roosevelt administration, the recent announcement of push for construction and infrastructure projects has the same intent of kick-starting the economy’s engines post the body-blow dealt by the Covid-19 pandemic. In July 2020, the RBI advocated for stepping up investments in the infrastructure sector and suggested a cumulative investment quantum of $4.5 trillion needed in the country by 2030. Following this, the government is in the process of creating a DFI (Development Finance Institution) as a nodal body to promote infrastructure projects worth $1.5 trillion over the next 5 years. Over the next decade projects including high speed rail corridors, metro railways, highways, affordable housing projects etc. could provide the fillip the economy needs through the virtuous cycle of job creation, increased industrial production, higher productivity and even higher consumption spend as a derivative outcome.
With construction sector contributing nearly 9% of the country’s GDP, this policy push could be a real needle-mover in India’s road to recovery. We believe there is space and scope for technology intervention in this space improving logistics, financing, procurement and project management of these mega-scale projects and we expect a number of startups to create meaningful businesses in this space over the next decade.
The New Normal
By now, many or indeed most of us have developed a healthy dislike for this term. For what it is worth, the term does hold significance and defines how things have changed economically, physically and behaviorally and in many cases, perhaps permanently.
India’s real GDP in FY20 was reported at $2.06 trillion (at constant 2011–2012 prices). Consensus suggests that FY21 is likely to be a 5–7% drop over the last year. It may take the economy another couple of years to get back to the same levels but what is a given is that the components contributing to the economy may change dramatically in their proportion once the dust has fallen over this world-order-changing pandemic. Physical retail giving up some of its share to online retail permanently could be one. Manufacturing sector which has been a long-term laggard behind the services sector could reclaim its position as a growth driver. And so on.
As a time-shrunk case study for this “redistribution in the economy” we analyzed the weightage of various sectors in India’s bellwether stock market Index, the Nifty 50, at the end of February 2020 and July 2020. Interestingly, at both times the value of the Index was almost the same (11,201 / 11,073) but the components have changed fairly significantly given the short period of time.
Whether such a dramatic re-shuffle occurs in the broad economy is out in the future, but as India sets sail on the path of economic recovery, the next few months and years promise to bring about a host of changes and disruptions from the pre-corona world and with it a whole host of opportunities for the technology-first venture ecosystem.