Can India capitalize on its digital advantage?

07 Jun 2016

Venture capitalist Mary Meeker has seen the Internet’s peaks and troughs, from the dot-com boom and bust of the 1990s to the smartphone revolution. Her annual Internet Trends report has been the bible of the business for two decades now. The latest iteration, released last week, could be one of the more interesting ones—juxtaposing the slowdown in Internet growth globally and the manner in which India is bucking the trend. That contrast has positive implications for connectivity and economic growth in India, of course. But there are also pitfalls along the way.

The 2016 report’s major takeaway is that the Internet’s boom times are over. The digital economy has been hit in the past, but there were external factors at play such as the weak economic conditions in the aftermath of the financial crisis. This time around, the flat global Internet growth rate—9% year on year—hints at a deeper malaise. Market saturation to the point that the explosive growth of past years becomes impossible was inevitable at some point—at least in developed economies.

India’s 43% year-on-year growth shows that underserved economies are a different matter altogether. Add the sheer size of its market—with 277 million users, it has now overtaken the US to have the second largest Internet user base after China—and it’s likely to occupy a unique position over the next few years. There are two particular trends the report highlights that will play heavily into this. The first is global smartphone shipments slowing year on year from 28% to 10%. And the second is the rapid rise and fall of digital brands and constant push for innovation.

The first is straightforward. As Sundeep Khanna wrote in this newspaper last week, Apple’s growing focus on India and Apple chief executive officer Tim Cook’s recent visit must be seen in this context. Smartphone technology—like any other—hasn’t achieved apotheosis and never will, but it has reached a point of ‘good enough’. That’s when the new models launched every year become iterative rather than revolutionary and the incentive to upgrade decreases, lengthening the product cycle.

Consequently, sales in developed economies are going to grow increasingly stagnant given market saturation. On the other hand, India’s smartphone market is expanding rapidly—21.4% year on year for the third quarter last year, according to the International Data Corporation’s Quarterly Mobile Phone Tracker report. That means it is going to become a prime target for Apple and Android manufacturers alike, a shift that is under way.

As far as the second trend goes, digital commerce is currently in a volatile state. At the top of the ladder, a handful of companies such as Facebook, Alphabet and Amazon have a stranglehold. The network effect, feeding into the vast trove of user data they have amassed—essential for the personalized, direct marketing that drives digital commerce—means they won’t be easy to displace. But it also means that lower down the ladder, competition is particularly cut-throat. And that in turn means constant innovation and disruption—from single-product brands becoming viable to hybrid brick-and-mortar/digital models and the sharing economy.

These are all net positives for India. A fight for market share in the smartphone space means lower price points—essential in a country such as India. And the greater smartphone penetration that will bring about will mean greater Internet penetration as well; the two are symbiotic in the Indian market with some 60% of the country’s Internet users accessing it via smartphones. Likewise, innovative digital commerce can be a relatively low-investment boon in an economy that still lacks much of the infrastructure traditional models rely on. China’s Taobao villages are a fine example of the former’s potential.

But here’s the major obstacle: muddled government thinking and policymaking. In the past few months, the Modi administration and various state governments have failed repeatedly to show that they have the capacity to deal with the regulatory challenges that accompany such growth opportunities. From the drive against app-based taxi aggregators to the insistence on a 30% domestic sourcing rule that scuppered Apple’s plans to set up shop here to the absurd restrictions on foreign direct investment in domestic e-commerce companies, there has been a signal lack of the nimbleness needed to keep pace with the rapidly evolving digital economy.

India is not alone in struggling with such issues. But it has more to lose than its developed world counterparts if it doesn’t get it right. Much like its youth dividend, its digital advantage is notional until it is exploited and enabled properly.

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This article appeared in Livemint , Jun 07, 2016