India's Digital Future


Organisation:  Forbes

India's economy is poised to leapfrog from its current seventh-place position to the third-largest economy by 2027

Posted On:  07 Nov . 2017
India's Digital Future
 

Buoyed by demographics, reforms and globalization, India was already on its way to growing at a brisk pace over the next decade. Now, a new report from Morgan Stanley Research finds that two major initiatives—digitizing its predominantly cash-based economy and reforming its archaic tax system—have the potential to amplify India's expansion, making it one of the world's fastest-growing large economies over the next 10 years.

“The country was already on a strong trajectory, but digitization puts India's nominal GDP growth on track to compound annually by more than 10% in U.S. dollar terms over the coming decade," says Anil Agarwal, Head of Asian Financial Research at Morgan Stanley. “The result could be a multi-trillion-dollar opportunity."

Although the country faces near-term teething issues, investors can expect to see visible shifts in economic activity beginning in 2018. All told, India's economy is poised to leapfrog from its current seventh-place position to the third-largest economy by 2027 with $6 trillion gross domestic product. Its equity market, now tenth in the world, could jump to fifth, with financial services and consumer discretionary stocks leading the way.

While companies in India are the most direct beneficiaries, the global implications are wide reaching. “The associated increase in e-commerce, consumption growth, financial products and investments could make India a significant market for corporations worldwide," adds Agarwal. “Most importantly, if India succeeds, it will become the template for other emerging nations. In fact, there may be lessons for developed countries too."

Biometrics and Bank Accounts

The beginning of India's digital revolution was the 2010 launch of a biometric identification program called Aadhaar, which assigns everyone a unique 12-digit number that can be verified by fingerprint or iris scan. The project is nearly complete, with most of India's 1.3 billion people now registered in the government's digital database.

While Aadhaar, which is Hindi for “foundation," is not without controversy, it has paved the way for another program, called Jan Dhan, aimed at ensuring that every household in India has a bank account—and easy access to those accounts. Since this financial inclusion initiative began in 2014, Indians have opened some 285 million bank accounts.

In a recent Morgan Stanley AlphaWise survey of 1,500 businesses in India, 59% of all transactions were recently conducted in cash. Among that group, nearly a third of businesses reported that cash transactions were 75% of their business. This could change quickly.

Prior to Jan Dhan, an estimated 35% of Indian households did not have a bank account. Morgan Stanley estimates that most households now have access to a bank account, while the surge of mobile phone usage makes it easier for Indians to manage their accounts and conduct cashless transactions using their phones.

Currently, India has around 800 million unique mobile users, and about 430 million have Internet access—a third of India's population. “We believe Internet access will double in the next 10 years and we estimate that 915 million Indians will be on the Internet by 2026,” says Ridham Desai, Head of India Research. Further, the government is further nudging the country toward cashless payments by restricting values of cash transaction and incentivizing digital payments; its target is to increase digital transactions six-fold this year.

Yet another boost to digitization is demographics. India has among the highest numbers of young people entering the work force over the next two decades. “These individuals are not attached to old banking habits and they will have access to mobile phones and smartphones," says Desai. “We would expect them to adopt digital banking much more quickly than past generations."

When Cash Isn't King

As a proportion of total personal consumption expenditures, digital transactions in India were recently just 8%, well below those of other emerging market countries such as Brazil (30%), South Africa (27%) and Russia (16%). “Given all the changes afoot, in our base case we expect this to increase to about 20% of GDP by 2027, which would take digital transactions as a percentage of PCE to about 36%," says Agarwal.

Moving Indians from cash-based transactions to digital transactions, whether through bank debit cards, credit cards or mobile wallets, is a major catalyst for economic growth. Cash transactions hinder economic growth by, among other things, making it easy for businesses to evade taxes, limiting e-commerce and, finally, making it impossible for consumers and small enterprises to establish credit.While the move to digital is a key catalyst for overall economic expansion, direct beneficiaries will likely include consumer discretionary companies and financial services. The world's two largest credit card networks stand to benefit, but they are likely to give up market share. “We expect new avenues, such as UPI, Mobile Wallets and Rupay Cards—a domestic card payment gateway launched three years ago—to quickly account for two-thirds of the digital payments market by 2027," Desai adds.

Tax System Upgrade

At the same time the growth of digital payments is helping to formalize financial services in India, the country's new Goods and Services Tax (GST) that launched in July also has the potential to improve India's overall outlook. India's ratio of tax revenues to GDP is lower than the average for emerging markets, which is a key reason why its fiscal deficit has been relatively high. High fiscal deficits are often a red flag for foreign investors.

Specifically, India is moving from an archaic and complicated tax system to a unified and completely digital system. “GST completely alters the way government finances are managed in India," says Derrick Kam, India Economist, adding that it is the country's most important reform since the early 1990s. “It will significantly expand India's tax net, a shift that, in our view, will provide a major boost to Indian government finances."

India was already positioned for strong long-term growth, but the combination of demographics, digitization and tax reform creates a powerful story. The bottom line: “We expect India to continue to be among the world's best-performing markets, with a potential 24% CAGR in U.S.-dollar returns over the coming five years."

 

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