Digitization Drives Transformation of Key Sectors in Indian Economy
Digitization in banking and retail comes in the wake of a massive cellular network rollout, creating attractive investment opportunities in India.
One of the world’s most coronavirus-ravaged countries is India. Although the MSCI India Index has rebounded 24% since a March bottom, running slightly ahead of the MSCI Emerging Markets Index, it’s still down around 25% in U.S. dollar terms so far this year, badly lagging the broad equity market benchmark.
If investors are unimpressed with New Delhi’s recently announced monetary and fiscal stimulus package, which amounts to about 10% of GDP, they might consider the potential of India’s bid to become an alternative destination for global manufacturers looking to diversify away from the world’s current factory floor in China. While there are plenty of challenges, one should keep in mind the quantum leaps India has made in its digital transformation over the last half decade.
In the latest edition of Thornburg’s Away from the Noise podcast, Josh Rubin, who co-pilots Thornburg’s emerging markets equity strategies, details the way in which a handful of social, tax, and monetary initiatives, along with a massive rollout of cellular network infrastructure, have dovetailed to create one the world’s fastest-growing digital ecosystems.
It started with the creation of a biometric-based national ID card that people could use to open bank accounts, which the government aggressively promoted in the form of a 2014 “Financial Inclusion” program. India’s “banked” population has since skyrocketed to comprise more than 80% of adults. An ID and a bank account allow credit profiles to be created, loans made, financial products such as life insurance and pension investments contracted, direct salary deposits enabled, and even government welfare benefits to flow directly to qualified recipients, cutting out erstwhile middlemen. More than 850 million debit cards are now in use in India.
Then, in late 2016, came “Demonetization,” in which the government suddenly invalidated and subsequently replaced about 85% of Indian currency in circulation in a bid to reduce a large grey-market economy by forcing more recorded economic transactions. That endeavor was further promoted less than a year later with a historic tax reform that supplanted thickets of varying state and federal taxes with a streamlined code, ultimately allowing for much smoother inter-state commerce. Incentives were thereby created for businesses to modernize with much reduced friction in the flow of money through India’s economy. While still very low by developed country standards, India’s tax-to-GDP ratio has risen over the last six years.
Meanwhile, breath-taking development of the country’s 3G-4G cellular networks has led smart phone penetration to spread like wildfire. Heading into the Global Financial Crisis, Rubin points out, India had around 40 million landlines and some 400 million cell phones. Today, the country, with a population of 1.4 billion, has more than 1 billion mobile subscribers, and only about 20 million land lines are still in use. Most Indian adults are now connected to the internet, allowing for the rise of ecommerce, digital payments, remote/online learning, and more.
Tune into the podcast to hear more about India’s astounding digital transformation, as well as its advantages and challenges in becoming a bigger link in the global manufacturing supply chain. For long-term investors who can look beyond the current COVID-19 challenges, the opportunities to invest in fast-evolving, dynamic businesses at attractive prices in the world’s seventh-largest economy and sixth-biggest stock market by capitalization are quite compelling.