We provide insights into opportunities for investing in India’s digital infrastructure – both physical and soft components. We also discuss the notable trends driving growth and demand as India fastens its pace of digitization, supported by government policies, increased network connectivity, a large consumer base, and rapid business expansion.
Investment opportunities in India’s digital economy
Expansion of low-cost smartphones in India, coupled with increasing investment in digital technology infrastructure (mobile broadband, fiber-optic cable connections, and power supply expansion) has enabled hundreds of millions of Indians to be connected online.
Government policies that restrict physical movement due to the ongoing COVID-19 pandemic have further augmented India’s digital landscape, giving rise to a wave of technological entrepreneurship.
According to a recently released EY-DIPA (Digital Infrastructure Providers Association) report, India’s physical digital infrastructure sector will require investment of up to US$23 billion by 2025 to cater to the increasing demand digital services and rising online traffic.
This comprises investment in the range of US$7 billion macro tower additions, US$9 billion for fiber deployments, US$2-3 billion for outdoor small cells that is necessary for 5G roll-out, US$500-800 million in Wi-Fi and in-building solutions, US$500-700 million in edge data centers, and US$500 million in data centers.
Components of digital infrastructure
Digital infrastructure serves as the foundation for the 21st century economy and contains four inter-connected components. These can be broadly categorized into two categories:
Physical (hard) digital infrastructure
Connectivity and transformation: The physical infrastructure that carries digital data between devices, data infrastructure, and services. It includes shared infrastructure companies (infracos) and telecommunication/internet companies (telcos). Major global players in the infraco segment include companies like Starlink, Indus Tower, China Tower, American Tower, Oneweb, etc. and in the telcos segment include Singtel, Vodafone, Airtel, Telstra, Veon, etc.
Storage and processing: It refers to the computing power needed to run services and facilitate storage of user data. The infrastructure in this component includes data centers and cloud services. Key global players include Global Switch, Oracle, IBM, Alibaba Cloud, Teraco, EQUINIX, Tencent Cloud, etc.
Non-physical (soft) digital infrastructure
Terminals and devices: These include interfaces between users (human or machines) and digital services and applications. Major global players in this segment include Samsung, Apple, Qualcomm, Siemens, Cisco, etc.
Services and applications: It includes the functions and applications that create economic value-add to business sectors and customers. They include service providers and application platforms like Flipkart, Paytm, Microsoft, etc.
Trends in Asia’s digital infrastructure ecosystem
Digital infrastructure serves as the basis for Industry 4.0 innovation by facilitating internet connectedness and expanding the scope of internet applications. Digital infrastructure also provides ground for a more inclusive economy by linking people separated by distance or socioeconomic barriers, for example, by extending access to healthcare and education services via digital platforms. As per estimates, the global digital economy will grow from constituting about 15.6 percent of global GDP in 2016 to 25 percent of the global GDP by 2025. Nevertheless, this growth will not be evenly spread across the world. Experts predict an increasing digital infrastructure financing gap; for example, by 2040, this gap is estimated to reach US$512 billion for Asia.
When assessing major trends in the global digital infrastructure sector, experts point to the possibility of uneven distribution of connectivity infrastructure within Asia itself as East Asia and Southeast Asia witness continued robust investment, while Central Asia and South Asia receive delayed investments due to lower incomes.
The regional implication for this connectivity unevenness is that while existing fixed connectivity providers benefit from higher barriers to entry and can monopolize their local markets, they suffer from affordability issues in Central and South Asia, which dampen investment opportunities. Factors like price wars, competition from OTT services like WhatsApp, and price regulation have resulted in mobile connectivity providers suffering from declining revenue per user in certain Asian markets. This has in turn motivated them to further expand and consolidate the digital and telecom markets in Asia.
Another notable trend is the growth of datacenter co-location (datacenter real estate leasing). Rising workloads and emerging data protection rules are making hyperscale datacenter providers invest in Asia.
Furthermore, as demand for online services, both business-to-consumer (B2C) and business-to-business (B2B), continues to grow, there will be a simultaneous increase in demand for cloud services and data processing services. They include infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS).
Developments in India’s digital sector
India has been making great strides in digital infrastructural development. In India, digital connectivity is exponentially spreading, with internet penetration reaching 45 percent in 2021. In terms of mobile and fixed broadband performance, India surpasses many European countries. While it still lags behind China, India has immensely contributed to making Asia the modern hub for technological entrepreneurship. Besides, Asia leads the world in terms of smartphone manufacturing capacity, contributing to 90 percent of the global manufacturing.
According to a McKinsey report titled “Digital India: Technology to Transform a Connected Nation”, core digital sectors like IT and business process management, digital communication services, and electronics manufacturing have the potential to expand India’s GDP level to US$355-435 billion by 2025. Various sectors in India like health, education, retail, and financial services are leveraging technology and the country’s improving digital infrastructure to establish respective multi-billion dollar verticals – healthtech, edtech, e-commerce, and fintech. The e-commerce sector is booming and expected to reach US$200 billion by 2027 (led by giants like Walmart/Flipkart, Amazon, Snapdeal, Nykaa, etc.). Besides the Indian government’s own ambitious plans, hyperscalers like Google, Amazon Web Services (AWS), and Microsoft Corporation (MSFT) are continuously expanding on their scale to provide cloud and networking services, thereby driving the demand for digital infrastructure.
Another report, titled “Building India’s Digital Highways: The Potential of Open Digital Ecosystems (ODEs)” and published by investment firm ONI and consultancy BCG, projects that by 2030, open digital ecosystems will provide opportunities in India to the tune of about US$700 billion across a multitude of sectors – healthcare, talent, agriculture, micro, small and medium enterprises, education, urban governance, law and justice, logistics, state service delivery, and e-land records.
In 2022, trends that will shape the digital landscape in India include deployment and mainstreaming of 5G spectrum, increased focus on cybersecurity, increased adoption of cloud-native apps, democratization of artificial intelligence (AI) and growth of XaaS (everything as a service). Further, as the workforce continues to be subject to unpredictability caused by the pandemic, new hybrid work models will evolve into permanence. According to McKinsey, approximately 20 percent of the global workforce — mostly in high-skilled positions in areas like finance, insurance, and IT — can work from home most of the time with no impact on their productivity. As per a projection by a KPMG-DIPA report titled “Connectivity of the Future: 5G the Gamechanger”, as many as 330 million people will be using 5G in India by 2026.
Chinese investments in start-ups, tech sector to stay moderate as other global investors step in
Geopolitical tensions will moderate levels of Chinese investment and stakeholder participation in 2022. Large Chinese investors will also likely be preoccupied with navigating their respective state regulations as the compliance barrier grows in their domestic market. This in turn could redirect foreign investment targeting the Chinese digital market towards India – both countries representing the world’s largest market bases. Before border issues and security concerns triggered Indian government bans and restrictions on Chinese funding, Chinese investors led by Tencent, Alibaba, and Xiaomi, had dominated leading late-stage start-ups in India. This drastically scaled down in 2020 and 2021 but was not completely wiped out. As reported in The Hindu Business Line, which quotes Ashish Sharma, MD & CEO, InnoVen Capital: “There were only a few investments that happened like deals done by Tencent through some other structure outside China. Overall, there weren’t many new investments from Chinese investors. They had only participated in rounds of some of their existing portfolio companies, may be even in the form of convertible debt.” Business Line also noted in the article that US investments in Indian start-ups grew 264.64 percent from 2020 to 2021. US investments reached US$21.55 billion in private equity/venture capital deals (across 825 rounds), up from just US$5.91 billion in 2020 across 622 rounds. In 2019, US investments had accounted for US$8.55 billion across 577 rounds. To compare, data from Tracxn recorded that Chinese venture capital, private equity, accelerators, and incubators accounted for US$14.13 billion worth investments in Indian start-ups across 268 rounds in 2021 – a jump from US$3.95 billion across 225 rounds in 2020. In 2019, Chinese investors had invested US$6.68 billion across 232 deals.
Role played by the ‘Digital India’ pivot
The Digital India campaign was launched by the federal government in 2015. Since then, numerous initiatives supporting India’s digital transformation have been announced. Major objectives of the Digital India mission include:
- Providing digital infrastructure as a source of utility to every citizen.
- Ensuring the digital empowerment of every citizen.
- Providing governance and services on demand.
Major pillars of Digital India are:
Broadband Highways: This covers three sub-components, namely Broadband for All (Rural), Broadband for All (Urban), and National Information Infrastructure (NII).
Universal Access to Mobile Connectivity: This initiative focuses on network penetration and filling the gaps in connectivity in the country.
Public Internet Access Program: Its two sub-components are Common Services Centers (CSCs) and Post Offices as Multi-Service Centers.
e-Governance: Technology leveraged to make the delivery of government services more effective across various government domains.
e-Kranti: This initiative will ensure electronic delivery of services.
Information for All: It aims to ensure transparency and availability of reliable data generated by respective line ministries for use, reuse, and redistribution for the public.
Electronics manufacturing: The focus is on promoting local production capacity and innovation capabilities to create jobs, meet domestic demand, and create export markets.
In its second volume of a two-part Vision Document released January 24, 2022, the Ministry of Electronics and Information Technology set out the target of India’s transformation into a US$300 billion electronics manufacturing powerhouse by 2026, from the current US$75 billion. Among key products expected to lead India’s growth in electronics manufacturing are mobile phones, IT hardware (laptops, tablets), consumer electronics (TV and audio), industrial electronics, auto electronics, electronic components, LED lighting, strategic electronics, PCBA, wearables and hearables, and telecom equipment. The domestic market is expected to increase from US$65 billion to US$180 billion over the next five years. Meanwhile, the government has committed nearly US$17 billion over the next six years across four PLI Schemes – Semiconductor and Design, Smartphones, IT Hardware, and Components.
IT for Jobs: This pillar focuses on providing training to the youth in the skills required for availing employment opportunities in the IT/ITeS sector.
Early Harvest Programs: This pillar consists of different short-term targets like IT platforms for mass messaging, biometric attendance in government offices, Wi-Fi in all universities, etc.
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