The promise of India

India’s GDP in 2021 stood at $2.65 trillion, making its economy the fifth largest in the world -only behind the U.S, China, Japan and Germany. With an annual GDP growth rate consistently between 7% and 10%, it will likely reach the third position by the end of this decade. India is also the third country in the world in number of unicorn start-ups and in the last two years it has been adding a new one roughly every week. Moreover, in recent years, India’s Foreign Direct Investment has been growing annually at a 20%-30% pace (though with a major hiccup last year) and the country is seen as a prime target for future investments by the vast majority of MNCs, with an important part of that investment coming from manufacturing supply chain relocations.

But it is equally easy to point at India’s well-known weaknesses. Very low GDP per capita, large parts of the population still in the process of satisfying basic needs, large infrastructure, healthcare and educational gaps, a complex legal and administrative environment, etc, etc. Those weaknesses usually lead to questions about when and how India will “catch up” to the developed economies. However, in those questions I often sense the underlying assumption that catching up means following the same steps and milestones that the U.S. and Europe and some Asian countries followed in past decades. I think that is a wrong assumption. It does not necessarily have to happen like that.

Take, for example, the physical infrastructure of the country. By typical standards India is way behind the other large economies. However, to believe that India requires the same level of infrastructure than, say, China in order to become a superpower is to assume that physical infrastructure will play the same role in the economy of the next decades as it played in the 1990s and 2000s. With the market valuation of today’s largest companies being driven (up to 80% according to some studies) by intangible assets, do we really believe that having less physical infrastructure is as big a disadvantage today as it was two, three or four decades ago?

And what intangible assets will drive the economy in the next decades? We would probably agree that digital infrastructure, data and knowledge are somewhere at the top of the list. And here is where India can catch up fast.

On digital infrastructure (a major topic for future posts in this blog), India is quickly building open frictionless national platforms for payments, e-commerce, identity authentication, healthcare and more. It also boasts one of the lowest cost of data in the world and a surprising 40% of the population with a smartphone.

On data, lower privacy restrictions and a country of 1.3 billion people offer boundless opportunities to achieve scale in data collection and analysis.

And on knowledge, despite very clear weaknessess in the education system (to be addressed in future posts), it is nonetheless true that India generates more than 30% of the STEM graduates in the world (interestingly, with a world-leading balance of 57%-43% male-female ratio of those graduates).

These factors help understand the concept of “leapfrogging”, as applied to the Indian economy.

Take, for example, consumer credit. Only 4% of Indians have a credit card, compared to percentages well above 40% for developed economies. One could think that for the consumer market to develop further, India needs to bring that percentage up by an order of magnitude… except that it does not have to. Buy-now-pay-later products, digital wallets loaded with credit and other credit instruments -all built on top of a unified payments digital platform with extremely low costs for consumers and merchants- are fueling consumption without the need to develop a (costlier) credit card infrastructure. That is leapfrogging.

Or take another example, the education sector. By many measures, India is still missing good education services for large swathes of its population. Is building more schools the solution to that problem? Surely something will be done in that direction but the preferred solution seems to be much more oriented towards digital education. Edtech in India has been one of the fastest startup growth sectors in recent years and it is quickly expanding overseas with great prospects to become a force around the world, especially now that Chinese edtech has been slowed down by its own government. And India is expected to launch a National Digital University this year as an easily accessible path to higher education for millions. Again, leapfrogging from a weak situation to a leading one.

In sum, I believe that asking when India will catch up with the developed world is asking the wrong question and waiting to make investments in India until it does is the wrong strategy. The better approach is to take a fresh look at the new opportunities that such a fast-growing dynamic digital economy offers and act accordingly. That is the promise of India.