The need to broaden the base of Indian economy

I have long argued that despite its massive population, India's economic foundations are built on an extremely narrow base. This means that the country needs to focus on broadening its economic base across all dimensions, and in its absence the limits to economic growth will become apparent very soon. 

The digital economy, which has been the basis for a good part of the high growth enthusiasm about India, may not be as large as is being imagined. No matter how disruptive the technology, the net addressable market of customers who are meaningful enough consumers may be far smaller than is believed. This can expand only with broad-based economic growth. 

The latest data point concerns the plateauing of mobile data users in India. The Economist has a recent article,

All but a tiny proportion of Indian internet users get online using their phones. Yet the number of wireless broadband connections is flat. In October last year, the latest month for which figures are available, the telecoms regulator counted 790m wireless broadband connections, barely exceeding the previous peak of 789m, which was recorded in August 2021. Smartphone sales are down. After growing for a decade, sales peaked at 161m units in 2021, according to IDC, a market researcher, which reckons that last year the number fell to 148m. Meanwhile the average smartphone price has surged, from $163 before the pandemic to $220 in 2022... manufacturers no longer find it worth their while to sell ultra-cheap phones, says Navkendar Singh of IDC. The market share of smartphones costing less than $100 dropped from 30% in 2019 to 12% last year, according to Counterpoint, another research firm. Before the pandemic some 5m people traded up from a dumbphone to a smart one every month. That dipped last year to about 3m, says Shilpi Jain, an analyst with Counterpoint. Mobile subscriptions are getting dearer, too. In the year to June 2022, prices rose 28%. The number of converts, from dumb to smart, is expected to fall again this year.

A Business Standard oped had this to say

The sweet spot for people in the middle and lower end of the market to upgrade from an ordinary phone to a smartphone was Rs 8,000. Thanks to the chip shortage triggered by the pandemic and the resulting supply constraints, there are no smartphones available in that range. The average selling price is Rs 16,000-Rs 20,000, say analysts.

In other words, while the global average selling price for smartphones is above $300, the majority of Indian smartphone users can only afford one for $100. 

The stagnation and decline, even at the low baseline, points to a very limited market segment which can afford these devices and services. The flush of low prices to capture the market is over and telecoms providers (and smartphone makers) realise the need to improve profitability. And when prices rise, the price sensitive nature of Indian consumers become apparent and demand tanks quickly. The Ken has a nice graphic which captures the smartphones trend

These numbers are skewed by the fact that many users have multiple connections and smartphones, thereby making it difficult to identify the true number of consumers with smartphone connections. 

The Ken has another striking statistic on the number of wireless subscribers, including those on feature phones and those not subscribed to internet usage.

In its latest report, as of October last year, TRAI puts this number at 1,144 million users. In September, it was more or less the same. Go back to January. Still the same. If you go back one full year, to January 2021, this number was a bit higher, at 1,159 million users. But essentially, this has been flat. It seems like this is the natural limit... January 2017—1,151 million users... For half a decade, India has seen almost zero growth in its mobile phone users. So while India’s mobile internet users have stopped growing for the last year or so, there’s an even deeper trend—India’s mobile users stopped growing since much, much earlier. 

The article gets to the heart of the problem,

If India needs more mobile data users, it needs to raise income levels. Cheaper smartphones will help, but only to a point.

This is important since as another Ken article here points out the number of active internet users, the addressable market for internet customers, in India too may have become stagnant. The article describes these annual active customers (AAC), 

These are the users who have access to the internet through a smartphone, use mobile apps, have some disposable income, and have bought something online at least once a year. E-commerce. Shopping. Food Delivery. Rides. Subscriptions. This is the customer base of most Indian internet companies. These are the users who pay for stuff online... if you really stretch it, it’s about 70 million users (realistically, it’s closer to 40-50 million, but more on this later)... A great proxy is the number of postpaid mobile users in India, which is around 50 million, who form the bulk of this base... Essentially, if you want to make money online in India, you’ll need to take it from these 70 million users... (who) can be broken down into three categories... 

At the lowest level, with the broadest base, comprising roughly 40 million users. These users are the ones who have bought something online, but have done it very sparingly. Maybe once or twice last year, and they have done it because they heard that one gets a good deal online for a really important purchase, which is usually a mobile phone... Also, these users are extremely price-sensitive. You’ll find it hard to persuade them to pay even a delivery fee... At the middle level, comprising roughly 20 million users. These users may buy something online, but will venture outside online shopping very, very sparingly. Think of users like our moms and dads, who spend money online to get food from Zomato as a treat, or maybe take an Ola once a month if they are feeling particularly generous. College students also form a part of this. It’s a base that’s somewhat comfortable online, but can’t be relied on to spend regularly... At the highest level, comprising 10 million users... (they) buy nearly everything online—from products, to groceries, to food... may even have a Netflix subscription... are the elite user... 

This is the customer everyone desperately wants... They may be just 15% of the active transacting customer base, but according to one founder I spoke to, they account for nearly 40% of the money spent by this pyramid... In its recent pre-IPO report, Zomato, which is a food delivery service and had a strong use-case during a pandemic, reported an average monthly transacting user base of...10 million users. Netflix has about 3 million subscribers in India (and has started tapping out) CRED claims to have about 6 million. Amazon Prime has 6-7 million users... That’s the population of Sweden... Take China for instance, which has a per capita GDP of around $10,000. That’s five times of India. Alibaba, their largest online horizontal commerce platform, has an active transacting customer base of 800 million users. India has just a tenth of that, assuming the best case scenario.

India's internet businesses are primarily locked in a battle to grow at the intensive margin by differentiating and expanding their offerings to the 10 million consumers. At the extensive margin, it's more a long-haul to get the occasional consumers to spend more and expand the base itself. The 10 million market is enough to support several unicorns, but not large enough to support a $100 billion company. 

The last part of the limits of the digital economy comes from a third article in The Ken which shines light at the very narrow pool of high quality and experienced digital technology manpower. The article puts the number at 10,000. The article points to anecdotes of the extraordinary lengths startups go to attract and retain good quality engineers. Since the pool of good quality engineers is small and since everyone is fishing in the same pond, the salaries of these engineers rocket up also pulling up salaries of others too.

However, the number of engineers absorbed by the largest ten tech unicorns is very small.

In other words, ten largest startups with a combined valuation of $116 bn employ just 8871 engineers! This also points to another insight about the technology startup industry - it's limited role in addressing the country's employment crisis.

When it comes to the top 10 Indian startups, the average engineering strength per billion dollar valuation is 77. In other words, if a company wants to increase its valuation by a billion dollars, on average, it needs 77 more engineers.

This about Byju's (and Edtech) is interesting, 

Byjus, which has built its valuation on a series of acquisitions and does not necessarily depend on a tech moat, has the lowest ratio of engineers per billion in valuation—38. This partially explains why edtech companies are able to suck up funding like crazy. They need tech to a certain point, but beyond that they don’t need engineers to scale.

In any case, the point to be made is the small size or base of India's consumer class, digitally addressable market, and skilled engineering work-force. This is far smaller than widely believed.