Digital India: China fallout, pandemic lay ground for SMB growth; MSMEs to adapt to shifting reality

By Rajan Navani

The on-going COVID-19 pandemic has brought significant changes in consumer behavior and the shift from ‘physical’ to ‘digital’ is witnessing a big push due to pandemic. The silver lining is that the move is in favor of Digital in India and the changes are here to stay even in the post-COVID era! India, the second-largest country in the world in terms of population, is also ranked as the second-largest online market worldwide. As per reports, the number of internet users is expected to grow from 700 million in 2020 to 974 million by 2025. The pandemic is acting as a catalyst in accelerating digitalization, giving a major boost to the ‘Digital India’ mission.

The MSME sector which is the backbone of the Indian economy and accounts for nearly a quarter of India’s $2.9 trillion economy is facing a crisis since the start of the pandemic. Many small businesses are adapting to the changing situation and realigning their business models to reduce dependency on offline services. Online presence has become an absolute necessity and many businesses now have a basic website that enables transactions.

The growing digitization of businesses accelerated by the pandemic and favourable government policies around financial inclusion will give a big boost to the country’s digital payments market. Digital payments in the country is expected to grow to ₹ 7,092 Lakh crore by 2025, a three-fold increase from the current Rs 2,162 lakh crore.

The digital payments share of grocery stores increased to 75 percent and there is an opportunity for growth of EDC (Electronic Data Capture) terminals as far as small & medium retailer segment is concerned. Apart from initiatives announced by the Government for supporting the MSME sector, many tech-based start-ups have also risen to the occasion by providing financing options to MSMEs listed on their platform.

The push towards digital is inevitable and businesses, irrespective of the scale & size are agile enough to integrate these changes in their processes. India’s current digital economy is just around $300 billion (i.e. 12 percent of the GDP) and as a nation, we are taking incremental steps in realizing the dream of a ‘cashless society’.

The CAGR (Compound Annual Growth Rate) of the digital sector in India over the past two decades is roughly comparable to that of China albeit on a much lower base, with greater catch up potential. The digital sector in India grew annually by 35 percent whereas China witnessed a growth of 50+ percent.

However, the digital strike carried out by the Indian Government in June 2020 could be the turning point in the nation’s digital journey.

The decision for an emergency ban on 59 Chinese mobile apps earlier this year and 118 apps recently, including SHAREiT, TikTok, PUBG and Club Factory; amid the brewing Indo-China tension, poses an opportunity to realize an ‘Atmanirbhar Bharat App Ecosystem’. Though a majority of the apps currently in the ban list only serve high ‘entertainment value’ and have ‘minimal impact on the downstream value chain’, the digital vacuum still needs to be filled. High valuation of global Chinese entertainment companies has been driven by the large user base from India combined with high monetization of the west. In the current scenario, these will get choked.

Indian alternatives to the banned apps and games have received a tremendous response from the users and investors alike. The majority of the alternatives received close to a million downloads within weeks since the Chinese app ban took effect. The ban on Chinese apps and the acceptance of Indian alternatives would have a significant impact on the Indian digital landscape and leverage that to grow their presence globally.

It is like an ‘AhA moment’ for the Indian entrepreneurial ecosystem, as there lies an opportunity for the nation to build the fourth largest tech-ecosystem in the world after the USA, China, and Russia. The ban will help India become self-reliant (or Atma Nirbhar) in terms of resources and revenue, as far as the tech industry is concerned.

Apart from India, Chinese digital exports are facing intense heat from nations such as the USA, the United Kingdom (UK), amongst others. India’s digital entrepreneurs have to seize this opportunity and ‘build in India’ for the world! The digital surge could play a major role in reinventing the Indian economy which is currently witnessing a slowdown due to the pandemic.

The escalating trade war of China with other economies (like the USA) has forced major mobile manufacturers to diversify their production base away from China. The potential of ‘Make in India’ and ‘Assemble in India’ would hold major promise for the global OEM manufacturers. It would create jobs, boost exports, and provide a further push to the burgeoning electronics manufacturing sector in India. Under the Production Linked Incentive (PLI) scheme applicable from 1st August 2020; incentives of around 4-6 percent are offered on the incremental sale of mobile phones and electronic components like Printed Circuit Boards, Packaging Units, amongst others. These actions will further bolster the smartphone manufacturing sector and give wings to small businesses that are into the manufacturing of electronic components. The manufacturing and assembling of Apple iPhone 11 in India for reducing dependence on China is just the start of good things lined up for the Indian mobile manufacturing sector.

The dream to build a ‘New Digital India’ will be further strengthened by the roll-out of 5G, the fifth-generation wireless network. The India-China border tension fallout coupled with the on-going COVID pandemic has impacted 5G roll-out plans. Huawei Technologies Co. and ZTE Corporation might not feature in India’s plans for rolling out 5G networks. Canada, USA, UK, amongst others have already blocked Huawei from 5G on security grounds.

As per reports, a self-built 5G software stack from India has an export market potential of $10 billion and could reduce network rollout cost by 10~15 percent in comparison to traditional infrastructure. The ‘Digital India’ programme would receive a major push once 5G is rolled out, as it opens a range of opportunities in areas related to digital manufacturing (Industry 4.0), digital health, mining automation, and more.

India’s digital economy is getting a tailwind. The nation’s favourable FDI (Foreign Direct Investment) policies, strong entrepreneurial ecosystem, Make in India incentives, and rising socio-political tension with China gives a huge upper-edge for home-grown brands to ‘Make in India’ for the world.

• Rajan Navani is the Chair, CII Council on India@75. Views expressed are the author’s own.