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Digital economy to outpace GDP growth, will result in ‘competitive advantage period’ for leaders in digital space

* Purple patch for India’s digital economy as ‘demand’, ‘policy environment’ and ‘infrastructure’ converge: Internet penetration has been rising significantly in India (742mn broadband subscribers) along with a surge in data consumption which touched ~8.4 exabyte/month in Q2FY21 (>50x rise since Q1FY17) and is expected to rise further to 21 EB/month by 2025, as per Ericsson. Exponential rise in machine-readable digital data emanating from the digital footprint of activities ranging from personal to social to business, which can be collected and analysed, lies at the heart of the digital economy. Equally important is the proliferation of digital platforms which is allowing online interactions and transactions between parties thereby disrupting existing industries.

* India’s digital economy is expected to get augmented further by (a) strong capital flows (FDI of US$17.5bn in FY21TD in IT services & hardware); (b) conducive policy environment (digital India programme outlay more than doubled to ~Rs68bn in FY22 Budget), (c) affordability (lowest data price globally of US$0.15 per GB in Q2FY21) and (d) expected ramp up in digital infrastructure including telecom networks, data centres, manufacturing of digital devices and scaling up of digitally skilled talent pool (1.17mn digitally skilled employee base by FY21 (YoY growth of 32%), as per NASSCOM).

* Amongst the fastest growing digital economies in the world: Various estimates in the past peg digital economy within a range of 4-8% of GDP for India. However, given the trajectory in internet data consumption and proliferation of various digital platforms, this number could have risen significantly. As per a study by MEITy, digital economy in India stood at US$200bn (8% of GDP) in 2018 and is expected to rise between 3x to 5x (18-23% of GDP) by 2025. On a cross-country basis, India is the second fastest growing country based on digital adoption over the recent past although it is still much lower in digital adoption rankings.

* Lessons from US economy – high growth, low prices and high quality employment: The complete impact of digital economy on gross value added (GVA) in the economy is elusive as ‘digital activities’ are not measured in national accounts as a separate sector or consumption activity. Also, it is difficult to measure ‘intangible benefits’ provided by large digital platforms which charge nothing for their services and even incur losses. However, evidence from USA, where the BEA has developed digital economy statistics using the supply-use framework indicates that for the period 2005-2018; (a) faster growth: Digital economy growing at a much faster rate of 5.2% than the overall economy at 1.5% ; (b) lower prices: Prices for digital goods and services declined at an annual rate of 0.5% vs an inflation of 1.9% in the overall economy; (c) quality employment: Digital economy supported 5.7% of total US employment in 2018 with an average annual compensation per worker of US$105,473 vs US$70,858 for the total US economy.

* Stock prices implying a multi-year ‘competitive advantage period’ for digital players in India. Our proprietary ‘digital platform’ index (free float market cap of US$10.5bn) has outperformed the NIFTY50 since FY19 by 266% (HPR - Nifty: 45%, digital index 311%). The above index excludes large old economy stocks, which have incubated ‘digital assets’ and shown huge marketcap gains since FY19. We believe digital economy in India is at an early stage of its lifecycle and will result in a multi-year ‘competitive advantage period’ for stocks which are demonstrating leadership in various digital verticals. Leadership in turn will be driven by brand, quality of services, network-effects, user base, data control and switching costs

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