Global Market Commentary

September 22, 2016

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India’s Masses Get Ready for the Digital Revolution

As global investors, we try to position ourselves in front of powerful secular trends — social, economic, and technological changes powerful enough to transform the societies in which they occur and reward the innovators who enable those changes.  One of the most significant such trends is the rise of India’s digital economy.  

India Moves Into the Digital Age At Full Speed

Source:  Government of India Ministry of Communications and Information Technology

Despite its large population and its culture of education and entrepreneurialism, India has lagged behind its developing Asian peers in the growth of its economy over the past generation.  The roots of the problem are political.  Both China and India struggle with corruption, but China’s strong central authority permitted economic reforms to take root in the 1980s, which resulted in decades of growth while India languished.

India’s Prime Minister, Narendra Modi, has taken on the task of reforming India to allow it to achieve more of its potential.  His most significant goals and achievements so far have been in the creation of streamlined national systems in place of the patchwork disharmony that has made it so difficult to conduct business across India’s states.  Recently he had a significant victory in the implementation of a national sales tax to replace a welter of local taxes that made shipping and logistics a nightmare for many Indian businesses. 

One of Modi’s most important initiatives is called “Digital India.” Launched in July, 2015, it’s an initiative intimately linked to his plans to improve government’s transparency and accessibility to all Indians, to streamline government services, and to use digital access and service delivery as a means to clean up corruption. 

In order to achieve these goals, the Digital India initiative put government policy in support of a trend that was already in place and accelerating: the connection of India’s population to the internet.  The first principle of the initiative is “digital infrastructure as a core utility to every citizen.”  Of course, without the physical infrastructure, the government’s goals — such as having a secure, lifelong digital identity for every citizen with easy access to an online locker of essential documents — couldn’t be reached.  The first thing necessary is the connection of India’s people — particularly India’s poor and rural citizens.

The infrastructure put in place for this purpose will have profound effects on India’s society and economy — indeed, the same infrastructure used to reduce corruption in government services and make government accessible and accountable to citizens would also enable a cascade of other effects on everything from e-commerce, to financial services, to education.  Of course, this is also part of the vision behind Digital India.

Modi’s Digital Motivation:  Clean, Transparent, Accessible Government

Source:  Government of India Ministry of Communications and Information Technology

Even before Modi’s election and the launch of the Digital India, the development was underway organically.  Back in 2003, prior to the smartphone era, a company called Reliance Industries made waves when it offered a 2G handset with cheap calls for $10.  The offer turned out to have a lot of small print, but that didn’t stop 10 million customers from signing up in the first year.  The company had trouble coping with the rapid volume growth, and in 2005, was split between two brothers, Anil and Mukesh Ambani.  The telecom portion spun off and went to Anil as Reliance Communications.  

However, Mukesh Ambani’s Reliance Industries returned to the project of wireless broadband expansion in India in 2010, investing $10 billion to acquire Infotel Broadband (which was renamed Reliance Jio) and additional spectrum resources.  In 2013, the company announced its intention to roll out complete 4G coverage of India by 2018.  Modi’s election was certainly a boon for the company’s ambitions, because until the Digital India initiative was launched, analysts were skeptical about whether such an ambitious project could succeed in India’s heavily regulated telecom sector.

The project is coming to fruition: Reliance Jio launched its 4G services at the end of August, having installed 90,000 towers connected by optical fiber.  The service is ultra-low-cost, offering all services at no charge through the end of the year.  (Obviously, this is an intelligent marketing move to potentially retain all the customers who will be experiencing the internet for the first time.)  After the free period, the service will undercut its major rivals in price, offering unlimited free voice and 300 MB of data for only a few rupees more than other providers charge for much more limited services.  Fitch notes that Reliance Jio’s fees are effectively 25% to 30% lower than their competition, and the company anticipates acquiring 100 million subscribers in the first year.

These subscribers will be different than the current demographic mix of Indians with internet access, which skews towards men, urban dwellers, the young, and the well-off.  The new users will include more poor, rural Indians, and more women.  Reliance Jio’s push will help the population of connected Indians grow at about a 25% CAGR through 2020 — largely with direct 4G adoption by users who never had a 2G phone.  By then, the internet will account for some 4% of Indian GDP, parallel to developed markets such as the U.S., the E.U., and Japan.

Internet access boosts productivity in countless ways — facilitating transactions; easing entrepreneurial development; enabling financing; and providing education opportunities.  In Reliance Jio’s rollout, we see an indication that Modi’s reforms are bearing fruit and encouraging a synergistic response from India’s private sector.  

Reliance Jio is spearheading the expansion, but ultimately it will benefit all the actors in the ecosystem of Indian internet, particularly those with exposure to SMAC (social, mobile, analytics, and cloud).  Besides Indian companies such as Infosys [NYSE: INFY] and Wipro [NYSE:  WIT], beneficiaries could also include U.S. social, cloud, and e-commerce giants, particularly Facebook [NASDAQ:  FB] and Amazon [NASDAQ:  AMZN]. 

Investment implications:  Ambitious telecoms have long sought to bring broadband wireless internet to India’s masses, leapfrogging 2G and putting smartphones in the hands of Indians, both in the cities and in the countryside.  Telecom mogul Mukesh Ambani’s Reliance Jio has been investing in preparations for a huge 4G rollout for many years, and has now launched its service with an attractive bundle of services at a price that undercuts its competition.  By offering free service through the end of the year, it may attract subscribers from among the millions it expects to expose to the internet for the first time.  Prime Minister Narendra Modi’s Digital India initiative, combined with billions in private investment, will give a powerful growth impetus to the entire ecosystem of the Indian internet as the population of connected Indians grows at a 25% annual rate through 2020.  Particularly attractive are companies with exposure to the themes of SMAC — social, mobile, analytics, and cloud — as well as e-commerce and education.