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Why the Indian Market Continues to Disappoint

Posted on Monday, Jan 15th 2018

Indian B-to-C startups started off with huge promise and were constantly compared with China’s Alibaba. But the reality has been consistently sobering. The Economist offers some excellent analysis on the phenomenon in two articles: India’s missing middle class and India has a hole where its middle class should be.

Some notable points:

Reports put out by management consultants routinely point to 300m-400m Indians in the ranks of the global middle class. HSBC, a bank, recently described nearly 300m Indians as “middle class”, a figure it thinks will rise to 550m by 2025.

But for some of the firms trying to tap this “bird of gold” opportunity, as McKinsey once called it, an awkward truth is making itself felt: a lot of this middle class has little money to spend. There are many rich people in India—but they number in the mere millions. There are a great many more who have risen above the poverty line—but not so far above it that they spend much on anything other than feeding their families. And there is less in between the two than meets the eye.

Companies that have tried to tap the Indian opportunity have found that returns fell short of the hype. Take e-commerce. The expectation that several hundred million Indians would shop online was what convinced Amazon and local rivals to invest heavily. Industry revenue-growth rates of well over 100% in 2014 and 2015 prompted analysts to forecast $100bn in sales by 2020, around five times today’s total.

That now looks implausible. In 2016, e-commerce sales hardly grew at all. At least 2017 looks a little better, with growth of 25-30%, according to analysts (see chart 1). But that barely exceeds the 20% the industry averages globally. Even after years of enticing customers with heavily discounted wares, perhaps 50m online shoppers are active in India—roughly, the richest 5-10% of the population, says Arya Sen of Jefferies, an investment bank. In dollar terms, growth in Indian e-commerce in 2017 was comparable to a week or so of today’s growth in China. Tellingly, few websites venture beyond English, a language in which perhaps only one in ten are conversant and which is preferred by the economic elite.

India has yet to move the needle for the world’s big tech groups. Apple made 0.7% of its global revenues there in the year to March 2017. Facebook, though it has 241m users in India, probably the most in the world in one country, registered revenues of just $51m in the same period. Google is growing more slowly in India than in the rest of the world. Mobile phones have become popular as their price has tumbled—but most handsets sold are basic devices rather than the smartphones that are ubiquitous elsewhere in the world.

Both articles are worth reading and their implications worth considering as capital continues to flow, defying objective analysis.

In addition, there are five major forces threatening India’s growth:

  1. Water Crisis: Indian states are already fighting water wars. The water situation in India is approaching unsustainable levels, and water wars with China are not inconceivable since the country’s main water sources are all in China-occupied Tibet.
  2. Environmental Disaster: Delhi is the most polluted city in the world. Bangalore is an environmental basket-case, newly dubbed the city of burning lakes. The city may be uninhabitable by 2025 because of pollution-related water shortages.
  3. Corruption: India has a corrupt justice system and a corrupt law-enforcement system. Vast majorities of people do not have the instruments with which to protect themselves from the friction it creates. As an example, let us say, a family has inheritance battles (many do), however large or small they may be. Let us say, one member of the family forges a will. Try going to court with it. Thirty years will go by without resolution.
  4. Automation: Artificial Intelligence will turn the Indian IT boom into a deflated balloon. All IT work that can be automated will be automated. Millions will lose their jobs.
  5. Sectarian Risk: India was a reasonably successful secular democracy for at least sixty years post-independence. No more. Unrest is boiling.

For now, India continues to grow at a decent pace.

Long term, I am concerned.

Photo credit: Srinivasan L/

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