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What India’s Digital Transformation Means for Markets, Investors and Economic Growth

2021-12-07

India’s digital transformation is driving a surge in tech IPOs that is reshaping its markets and economy. Goldman Sachs Research’s Tim Moe, Sunil Koul and Santanu Sengupta explain the drivers that are powering economic growth and markets, fueling IPOs and creating emerging investment opportunities. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This exchange. Is it Goldman Sachs? announce Nathan senior strategists in Goldman Sachs Research. Today, to take a closer look at a country. That's going through a digital transformation. That's reshaping its markets and economy. India, to do that. I'm joined by three people from Goldman Sachs is global. Investment. Research group tomorrow are Eve, Asia, Pacific Equity, strategist, Chonta, news and groups. Our India, economist and Senor call a senior Asia, Pacific indian equities strategies TIM sergeant, new, unseen out, welcomed the programme says Allison to be an excellent team. You and your team just published, store twenty twenty two outlook for the Asia Pacific region start by giving us a sense of where Countries in the region stand in terms of the pandemic recovery and
we are indeed thousands that we'll get them. Recovery is a key part of our look for twenty twenty two and just a bit the background scattered quickly. The key issues that are- the markets in twenty twenty two are generally slowing girl and generally rising rage, because deflation, patient with a building in monetary policy, to normalize, so we have a somewhat wooden beat view not actually negative. We think markets will deliver pause returns, but generally somewhat more down be viewed just because someone growth and rising rates typically are the best backdrop. Recorded market, and this is where the pandemic response come. Jan, because not everyone is it the same stage, a recovery from the pandemic. So we have data we call or alive, which is the effective lockdown index that our economies produce and basically measures from zero hundred the degree to which economic activities being aired by the various shut down measures that have been put in place to combat the spread of covert, and does he have a couple of four he says we ve seen a number of places
for example, are being a very strong lockdown early on, but currently and level of fines. An observer, one hundred scale no South Asia, however, did not address the Delta Barrier very well, and so they had belated increases and searches in the virus outbreak. Imagine turn, has meant that the economies are lagging in terms of their recovery. Now what was head and this year in twenty twenty one- is actually to be a tail wind or positive. Going to twenty twenty two, because you get some delayed recovery momentum and he's gonna have added children whose content without this moment and barbaric the algerian economy also going to have an increase so just to give one or two numbers here for Asia Extra PAN overall, six point: eight percent growth in twenty twenty one, I feel, combined about by seven by very significant drop in China? In contrast, will be our economies. You're gonna grow from three point percent up to five point three, and without
shouting too much much happiness is about to say it is gonna Greece Programme on research point from eight percent like one so the body and here is that better labour from carbon is actually worked, the benefit of India Summit, south asian economies next year. Santini! So can you give us some more detail about the indian economic outlook in what your expecting your time thousand. So as to mentioned, we are seeing a juniper growth in twenty Twenty two other shade over nine percent. We see three factors primarily driving this brought. One consumption will come back to trend as economic reopens fully next year. We are also Being some Mason science, often investment cycle recovery, driven bought by a housing market revival and increase corporate topics
Finally, in the new term, we are seeing a push to growth from higher government cutbacks as taxes. So far have been running ahead of budget estimates, but the government spending has lagged now. This growth is likely to come with higher inflation in twenty twenty two horses, twenty twenty one rear actually expecting core inflation to remain elevated, pretty much through the whole of me here again to reasons one as manufacturers pass on. The input cost increases due to high commodity prices to consumers and core services inflation also increases as the economic reopens fully. Hence we are expecting the army, I to normalize monetary policy. See we ve called out four stages of the monetary policy relaxation remember India did a lot in terms of liquidity, loosening and cutting the reverse ripple, which is bottom of the policy corridor.
Into the pandemic. So we are seeing a reversal of that liquidity loosening now so liquidity will tighten or the course of next year and works Acting the divorce report to normalize forced den in twenty twenty two Kyoto onwards up to cure, for we were expecting three re takes from the central bank cumulative. Seventy five basis points in the twenty two immense for that item. Maybe you can talk a little bit more about the markets perspective. You gave us the thumbnail sketch, but we recently downgraded our view on indian equities to mark away from overweight. So what were the specific drivers behind that downgrade in one word: Allison Evaluation, its evaluation call. and you can go to more detailed on be medium term outlook and obviously southerners just sketched out the psychical attract the recovery. She also will be reflected. Annoying groaning scrapped so actually fundamentally are quite constructive in India. The problem is
I'll get you some very well understood. a couple numbers on that. It's the topical me market in the region, this year of thirty percent in round numbers and actually up more than forty percent since we have created a year ago at the time. So, given that very strong- performance, valuations, have expanded and the markets traded currently in about twenty three times: warnings that stupid boost delegations above it germane and bury Broadway. trading? Add well over sixty percent premium to the key of the rest, the region that you to speak about sixty five I am ass well above the previous picture in the sort of forty percent wretch. So this is purely call same. Look let the market, but its a bit ahead of itself and needs to kind of guy it's time to allow them like fundamentals to catch up. That's really essence of it might basically are saying that there are positive fundamentals are already Preston. Birthright
for the time being? Those fundamental surprised as time goes on bended be more to go forth sitting. There still be continuing growth, but we do need to be mindful of how much repaying at the current time, and I would also add that we expected could be a large idea, which was calendar so from a technical demand, supply perspective. That could be it. better cannibals asian of secondary market performance by the primary market issue itself is additionally a couple of the factors that compelled us to take a small zinnia. Let's go you and your conversation to talk a little bit about some of the topic set TIM just hit on. If you think about the medium to long the term outlook. There are some positive structural trends you wish they wrote a report looking at the digital transformation of India, which certainly seems to be a bright spot, and then TIM just touched on the strong YO calendar. Maybe you can start by talking a little bit about. What's drive
that ip activity european solution? Only. Let me just put some numbers into context that I just mentioned We have seen close to fifty billion dollar. If I were you I'd duty, this reality, which is that a court number and more than the last few years, combined soul TAT s a lot of I get to the already this year. We are expecting another twenty to thirty billion dollars per year, or the next year saw pretty strong. I feel biplane there, question. What's driving this, I would say it's. The combination of a few factors- I guess part of it is that we are at that infection point where a lot of these start ups are forgetting to unreasonable scheme, from India standpoint? What I mean by that is that if you look at the number of unicorns, we have got in India, which is basically the private companies who have got two billion dollar valuation. Now we have about seventy of them now, and I was counting, but about half of them There are two billion dollar evaluation this year alone, and there are many please why basically hitting
hundred million in revenues and saw the company is basically feel look I'm and we got and of skill and with a kind of high valuation they're. Getting many of them are feeling that IP already right now. I guess the other factor is that regulations were changed only this year in March, and so it has made it easier for these deck start ups police on the main exchange. So that's why we're seeing so many companies going public now, even though, if you look at the last few years, the space has actually been quite active in terms of the private equity and me GPS and it seems like action is now shifting for the market share and where you seeing the activity Maoist is concentrated in certain sectors is concentrated in the economy sectors. So if you look at the top five categories, which is basically you a faint, accurate e commerce, your SAS enterprise, so he says you're education pack, your food tat, which is broadly classified as idea idea,
enable services, that's more than eighty percent of the deal biplane this year, so we have clearly seeing that the contribution of the new economy sectors in the market that rising am how that rise of the new economy affect what was the knock on effects. How will affect capital markets in particular yeah? I guess Don T take away from the indian Distillation report is that meeting there will be significant changes in the capital market over the next two to three years. Just to give you some numbers here, meeting the size of indian capital market will arise from current three and a half million too well, about five million by twenty twenty four, which would basically make India from number seventh guarantee in terms of its ranking by market gap, the fifth largest market. After? U S, China, India and Japan, in addition to This increase in market Gub India's weight in the global indices with also rise broke into global benchmarks, but
so in the emerging markets. So, for example, for the emerging markets, we expect India's way to go from one person to about fifteen percent into betrayers. I didn't the mortar But the point is that the new economy bait get indices. We think that will arise from current five percent, who perhaps fifteen sixteen percent in the next three to four years, which will in turn have implications for fundamental rights because if you look at a lot of these new economy, companies, the growing very fast and don't forget line than it would have been used, the soul if he doesn't. Lemme see I India as a headline index meeting its revenues getting good. by as much as twenty percent over the next two years, obviously adding owning swim. Over time because a lot of these market leaders right nor still on off the table, but written baby don't profitable in the next three years should earnest, also arise, but this is something which is not in any of the endless number. So there could be an upside surprise ones that comes in writing as you
earlier. This is very good Do you know what a medium to long term basis, but one thing I would highlight here is that many of these new con me companies directly trading at expense evaluations compared to the public equity, his soul. Does need to be a little bit more selective and mindful of allegations. So we think that would be great opportunities for industry to make money as long as they don't or pay for broad, something, I would say, needs to be kept. It might be guarding the delegations and such an hour. If you think about these shifts in the public and private markets, that's the others talked about and the revenue flows they will create. Will there be an end on economic growth is a part of a positive medium to long term story for the country. You're sure saw just puts on numbers into perspective so years, while the largest into that markets in the
world. Second, only to China about eight hundred million on internet users, its grown about five times over the last five years about half a billion or a smartphone users, and there was a sharp drop in mobile cost and you know it making. It wants the cheapest markets in the world which accentuated this train Rachel. This has caused a rapid switch to online in many of the sector's. This includes education for delivery. A snail talked about e commerce and faint dick. What covert did was always did exaggerated this further, because our rights, the containment measures and the shift to work from home or stay at home, this just grow even faster. This overall is expected to have a positive impact on services growth, but also over a period of time. They should increase productivity. Growth in the economy are
Damn it on this thing that the E commerce adoption can double over the next four years or so, and we are expecting, therefore, more investment in infrastructure and logistics to overcome bottlenecks in these sectors to aid this week where's border. Finally, in terms of delivery of public goods, that is likely to become easier and subsidies become more targeted with various technological and financial innovations. So a couple of examples are unique: biometric identification system, which is a matter which has about one point: three billion people are registered currently and a unified payment interface for cashless digital payments to did customers. So let's take a step back for a minute. How did India girl from a country where its gdp per capita is still relatively low too? country that could enable these different unicorns and digital economy players to lodge successful business it
Senora, maybe you can talk a bit about? How did it accomplish that transformation? Sure we had a whole section on business report in terms of what's in it, bold and help start ups, the growing large, successful businesses. I think it essential he was at the availability of capital from these private equity and venture capital extradite talked about earlier the rise of the entire India internet ecosystem, and this fosters shift online after Kuwait the channel was describing earlier the favourable regulations that we talked about. But perhaps I think one of the most important factors which is worth mentioning here is this entire innovation in the payment infrastructure. So just as an example, one such innovation is in your step, which is basically a set of opening it be eyes which will ensure unique Byron.
The identification we got on. I mean your bank account and you are mobile number and then basically cashless payment here. On top of it, which is all you be unified payments interface, so that basically has exploded in the last The forty? Let's take a look at India right now in terms of its based on payments? May you be has overtaken both to credit cards and the demagogues put together and it now actually accounts for more than half of the or additional payments in India. So I guess what it does is that if you are a finger company on safer peak, almost split, it reduces your cost of setting up operations. You can now acquired customers at a much lower cost and more efficiently. So your customer equation costs actually comes down. If you hadn't peak, almost Blair, you can sign up
a large number of merchants on your platform and saw it essentially hopes the start up still gaitskill pretty rapidly just mention here our internet and backs and is TAT you Don T per day on this topic. So if people are interested, it's worth taking a look so clearly that a lot of positive with their eyes in the internet ecosystem in India, and we see its potential to transform the economy markets, but are there risk Around that shot, you know, maybe you could talk a little bit about. Some of the risks are focused on solid dimensional talked about valuation earlier, and what that would mean for equities, but remember from a macro standpoint, significant for. An influx of money chasing these digital assets, leading to consistently high balance of payment surpluses, can become a problem of plenty for the central bank as ideally, India wouldn't want to watch The appreciation, when it's trying to promote export growth, saw on sterilised Ex interventions in the ethics market.
Would increase domestic liner liquidity and that become so difficult to manage the time, especially when the central bank is trying to normalize monetary policy, saw. Those actually bank, then has to think about many more satellite dish and tools and so on. So that would be one key macro risk to keep in mind and secondly, we would have in mind is services wage inflation, particularly in these digital economic sectors, will rise and we are seeing it already a lot of that in the software. So with the sector and that can potentially feed into wait inflation in other sectors as well, so those are the tourists that I would keep in mind going forward. So we think about the opportunities and risks that we discussed. My mind goes to China. China, of course, is the poster child for digital transformation. So TIM, maybe you could talk a little bit about what India's going through you know is similar or different China's journey and if we think we're like this, the other ASEAN countries follow suit.
anything. China really is the analogue that many people, including us looking had so we did a digital piece on China, specifically about a year ago, where we really based on this, did your transformation, which has taken place and just to enumerate that we saw that projectile ten years ago, chinese internet sector away in the overall market was five percent it was not sure about forty percent current weight and you take a broader them the nation, but we call new China and that sort of includes areas like not just tat. But I was to health care and other similar facing businesses that was about twenty percent ten years ago now at sixty five percent She died. This total transformation of the attacks from previously was dominated by
economy, lumbering companies, banks, energy, steel, etc to very much higher growth, digital economy, focused players and that's been transformative for the market, and this resulted in China posing the best tenure figure, a burning of all the markets in the region and is generated yet again, the mouth of wealth. So to give one example, since two thousand and five new China is up about twenty times, whereas all tribes about three times so since been tremendous, gonna wealth, generating phenomenon which is taking place, this is obviously not been lost on people, and we were seeing in India is a very clear analogue, no not saying, as you put it exactly the same, because others think countries at different sorts of different starting points are different. But you have a number a very appealing commonality. His very large missed population as jumping out anyway, then noting you ve got this appealing
digital stack and underline set of technologies which enables companies to build this year rapidly, and you ve got the idea of being a vessel. someone else's established, be precedent, bet it's easy to God of copy bad and the practically frog bats. You got alarm circumstances that are in place for an excellent, vision and a structural transformation take place now. It may not happening same way almost is guaranteed and it won't, but the potential for significant improvements to people's livelihoods, for economic development and for equity market, a basis for significant immigration. We think is very much there. That is really central to our positive view on the medium term. Investigates upper India now interesting, happily receiving this also in provisions your question, so we just me operator of you on Asia and the best form of reciprocal Jones coming out of co. You get suppose we met him next year about the economy, Zeb earnings, but important made is also did.
the story I ll just give you one statistic here, which is that currently the internet sectors, but four per cent of the army index. That's very soon, gonna go to twenty percent and without side. As you get the fuller inclusion into the index of Mark a cap of some eggs players and the like, we were seeing of other awaiting the sidelines, much Israel was mentioning or India finally, to just add liberalizing the gate, we feel somewhat transformation in Korea, for example, Should it be known as a sort of a super deep cyclical warmly sensitive index dominated by shipping companies and steel companies and during construction companies now the new economy. Part of green and acts is rising rapidly and leave you were just once it has taken is a simple Biagi and acts batteries biotech internet baby five years ago. That was five percent of the market. Now,
We wish you so you seeing this kind of digital fluorescence take place really throughout the region that China has been a leader, but now it's spreading out elsewhere. Everything, that's gonna, be the route of some tremendous, the best opportunities, as we look out over the next ten years, We will certainly be watching the extent to which India and other ASEAN countries either sent him follow in China's sets in this regard. to continue and Sidney. I thank you for joining us and sharing our views. My job losses and you haven't greece- is decided the common sacks thinks well sitting and if you and joined the show we hope, uses crap and apple part Kathleen awaiting a comment. This card castle accorded Monday November. Twenty ninth, twenty twenty one,
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Transcript generated on 2021-12-07.