India's Digital Gold Rush: The Rise Of Digitization And E-Commerce

India's digitization journey creates a favorable environment for structural growth. We explore India’s robust digital infrastructure and the companies that stand to benefit.

India's digitization journey has revolutionized multiple sectors and transformed the lives of its citizens. Through initiatives like the India Stack and Open Network for Digital Commerce (ONDC), India has created a robust digital infrastructure.

The Indian government has put support programs in place that are facilitating innovation and creating private sector structural growth opportunities in multiple industries ranging from financial services, e-commerce, food delivery and logistics.

This blog explores:

• The key aspects of India's digitization efforts and their transformative impact on the country’s growth trajectory.
• Companies at the intersection of digitalization, increased e-commerce and rising incomes that are shaping a mobile-first economy.

Democratization of Data

India’s government has been leading the push in digitization with its “Digital India” reforms since 2015. Smartphone adoption has taken off in India and most of the country’s population accesses the internet via their phones using low-priced data. The government’s vision has been to democratize access to data, financial services and e-commerce using a mobile-first approach.

Smartphone Adoption in India Has Surged While Costs Have Plummeted

Smartphones have become more common in India – and cheaper to use

Source: IMF: Pai and Vats. As of December 31, 2022.

The India Stack: The Foundation of Digital India

At the center of this digitalization effort lies ‘The India Stack’. A government-backed initiative, which provides seamless integration of application programming interfaces (APIs) enabling third-party developers to build software with access to government IDs, payment networks, and data.

Comprising layers such as the Aadhaar digital ID scheme, the Unified Payment Interface (UPI) payments system, and a data layer for document storage, the India Stack forms the backbone of India's digital infrastructure.

Infosys Limited (INFY) (portfolio holdings weight 7.44%)* played a pivotal role in advising the government on setting up the Aadhaar digital ID program and setting up ‘India Stack’.

The company’s chairman Nandan Nilekani is also advising the government on the Open Network for Digital Commerce (ONDC) initiative. India has plans to launch an India stack 2.0 that will be powered by artificial intelligence (AI) by using the large data sets collected as part of the program enabling more nuanced solutions across multiple industries.

How Digital Payments in India could Benefit Financial Inclusion

India's digitization efforts have achieved remarkable progress in financial inclusion. India using digital means has achieved financial inclusion for 80% of the population in 6 years compared to the projected figure of 46 years.¹

The Aadhaar digital ID scheme facilitates cost-effective customer identity verification, reducing barriers to banking services. The interoperability of the UPI system has further accelerated digital payments, with payment apps facilitating billions of transactions monthly.

With the highest digital payments adoption rate of 87% among the public compared to the global average of 64%, India has gained the third place in digital payments, after the US and China, attesting to India’s untapped market.²

India UPI Monthly Transactions

Source: National Payments Corporation of India (NPCI).

One 97 Communications Ltd. (portfolio holdings weight 2.04%)^* is a direct beneficiary of these trends. It provides a digital payments and financial services platform for consumers to make digital payments to merchants across industries using the UPI.

Its services span from hotel booking, data processing, games, mobile content, bill payments to opening up a savings account and investing in the stock market all through the Paytm (PAYTM) app. The company’s Buy Now Pay Later (BNPL) loan segment has seen significant growth and could become a major revenue stream for it.

E-commerce Trends in India

E-commerce in India is just 7% of the overall market and has considerable room to grow.³ The Indian government’s digitization efforts extend to e-commerce, exemplified by initiatives like the Open Network for Digital Commerce (ONDC), which is a government-backed ecommerce network aiming to create a level playing field in online commerce by putting the Indian family businesses on an even footing with the online giants.

ONDC presents an alternative to platform-centric models such as Amazon (AMZN) that manage everything from sellers to the customers. ONDC promotes interoperability, allowing buyers to seamlessly make purchases from different apps and platforms.

For example, using ONDC a buyer can order groceries on JioMart, pay for them using digital payments service like Paytm and another app like Dunzo can deliver the order.

ONDC intends to democratize online commerce with an open network that includes small and micro vendors. With a record transaction volume of 2 lakh crore (worth approximately $25 billion in US dollar terms) FY22, the e-commerce platform has overtaken the top two privately operated counterparts. Over the next few years, it is expected to hit 3 lakh crores rupees (approximately $37 billion USD) of e-commerce transactions.⁴

Delhivery Limited (portfolio holdings weight 1.23%)^*, which is India’s largest and fastest growing logistics operator by revenue supports the country’s leading e-commerce marketplaces, direct-to-consumer e-tailers, consumer brands and enterprises across diverse sectors, is a part of ONDC and has a leading 40% volume share among the third-party logistics (3PL) players and about 20% of the overall parcel delivery market.⁵ The company could emerge as a direct beneficiary of digitization of small offline merchants via ONDC.

Delhivery is at the cross-section of several growth drivers

Source: VanEck Research, Delhivery Company data.

India's Leadership in AI Adoption

According to a report by Peak, a decision intelligence company based in the UK, Indian businesses lead the US and UK in AI adoption. While 84% of the businesses in India have adopted AI, the number drops to 68% in the US and just 46% in the UK.⁶

India also produces 16% of the world’s AI talent pool placing it among the top three talent markets in the world.⁷ Reliance Industries Ltd. (portfolio holdings weight 7.78%)* is at the forefront of AI adoption and digitalization in India.

Reliance is focusing on end to end data connectivity solutions and building digital eco-systems across industries. The company has enacted its digital strategy by setting aside $2 billion for transforming itself into a technology powerhouse focusing on in-house technology development and global acquisitions in the fields of AI, machine learning, blockchain, augmented reality, Internet of Things, robotics, and Big Data analytics, among other emerging technologies.⁸

Moreover, AI adoption in India and abroad could boost demand for AI solutions to integrate enterprise data sources real-time. The Information Technology industry (portfolio sector weight 59.6%)^* could benefit from this trend and further lift India’s technology industry.

Future Outlook of Digitization & E-commerce in India

India's digitization journey has transformed the nation, creating a thriving digital ecosystem that creates a favorable environment for structural growth. Companies positioned at the convergence of increasing disposable incomes, a mobile-first economy, rapid growth of e-commerce, and the expansion of fintech and digital payment platforms stand to benefit from the digitalization underway.

Through initiatives like the India Stack and ONDC, India is harnessing the power of digital platforms to drive financial inclusion, foster innovation, and position itself as a global leader in the digital landscape.

VanEck Digital India ETF (DGIN) offers access to the structural digital growth story of India and could be an appealing investment opportunity for investors looking to seek technology or growth exposure in emerging markets.

Important Disclosure

^* VanEck Digital India ETF (DGIN) portfolio holdings weights as of 6/19/2023.

¹ Using datasets and AI, India Stack 2.0 to be more nuanced, intelligent, sophisticated: Rajeev Chandrasekhar, ET Government (indiatimes.com).

² Impact of the Budget 2023: Hastening the PACE of Digital Revolution.

³ Democratizing digital commerce in India April 2023.

⁴ AI will elevate the India Stack to be more sophisticated and nuanced: Rajeev Chandrasekhar, Minister of State of Electronics and IT.

⁵ Bain & Compay: From Buzz to Reality: Accelerating Pace of AI in India Jan, 2022.

⁶ India ahead of US and UK when it comes to AI readiness, says a new report.

⁷ Bain & Compay: From Buzz to Reality: Accelerating Pace of AI in India Jan, 2022.

⁸ Now Reliance wants to conquer the AI space.

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