How India’s Digital Economy Compares to China

In the consumer internet sector, major markets such as the U.S., Europe, China, and India have each followed broadly similar development patterns, focusing on payments, e-commerce, gaming, search, and social media. However, distinct regulatory and competitive dynamics in these regions have created unique investment landscapes. While the industry's major players have become well-established in China, India's consumer internet sector remains nascent, offering varied investment prospects compared to its more mature counterpart in China.

Market Dynamics and Competitive Landscapes

In China, major platforms like Alibaba, Tencent, and Baidu offer extensive service ecosystems and dominate the market. However, these companies face heightened regulatory intervention, intense competition and slowing consumption growth, which impacts their long-term growth and investment appeal, in our view. Chinese tech companies are now trying to improve investor sentiment through cost-cutting and stock repurchases in the face of fundamental growth challenges.¹

India's tech landscape presents a stark contrast, with a fragmented market structure that encourages competition and boasts numerous innovative startups. India's digital economy is defined by its favorable demographics, impactful policy decisions, a large informal economy, and deep inefficiencies, along with distinct regulatory frameworks. These factors suggest a future market structure and investment landscape markedly different from China's. The chart below shows how a thriving ecosystem has already emerged, contrasting China's tech landscape which is now characterized by a small number of platform companies.

India’s Robust Tech Landscape Spans Multiple Sub-Industries

Source: Antler as of March 2023.

Performance Analysis: India Tech is Outperforming China

Since 2022, Indian tech companies have notably outperformed their Chinese counterparts. This outperformance is likely due to the different stages of market maturity: India remains in a mass adoption phase with extensive digital growth potential, while China’s mature market is contending with sometimes unpredictable regulatory measures and slowing consumption growth.

Returns Since 2022

^* Reflects annualized returns since 12/28/2021. Data as of May 31, 2024.

India's differentiated growth outlook is driven by its free-market structure and Digital Stack, which ensures essential services like payments and KYC are free and universally accessible. This has so far prevented monopolistic moats around these functions that are prevalent in other markets. India’s ubiquitous United Payments Interface (UPI) is a prime example of the success of the Digital Stack.

Foundations of India Stack

Source: VanEck.

Key Infrastructure and Startup Ecosystem Comparisons

In China, early tech giants captured critical infrastructural niches, creating substantial barriers to entry. This had the ultimate effect of concentrating revenues and growth potential within a few key players (Tencent, Alibaba, Meituan, etc). In contrast, India's Digital Stack supports an environment where success hinges on competitive product offerings rather than control over platform-centric advantages and enables a level playing field. The presence of major e-commerce players like Meesho, Flipkart, and Amazon in India illustrates a competitive market not dominated by a single entity. In the chart below, note that Others represent nearly 20% of the universe.

Competitive Platform Landscape with Many Players

Source: VanEck as of June 2024.

The comparative analysis of market concentration is highlighted by the weights of the top five holdings in the CSI Overseas China Internet Index versus the MVIS® Digital India Index within their respective MSCI benchmark indexes. The data shows a significant increase in concentration in Chinese tech firms starting in 2020, in contrast to a more consistent diversification in India over time. Currently, the top five holdings of the CSI Overseas China Internet Index represent 33% of the MSCI China Index, while the top five holdings of the MVIS Digital India Index represent only 19% of the MSCI India Index. This concentration difference underscores the different market structures of the China and India digital ecosystems, with China being much more concentrated by a smaller number of large firms.

India’s Tech Market is Less Concentrated Compared to China

Source: VanEck, Factset as of June 2024.

India’s Hands-Off Regulatory Environment

Within the consumer internet and tech sector, India’s market- and demand-driven economy contrasts China’s, which many investors view as being more centrally controlled and prone to unforeseen regulation. Indian regulators have adopted a more hands-off approach, relying more on competitive market forces to determine industry winners and losers. The current Indian administration has preemptively reduced the need for disruptive interventions, fostering a healthier investment climate, largely credited to India’s Digital Stack.

On the other hand, Chinese regulators are seen as being unpredictable, especially towards the tech sector, and vacillating between too much regulation and not enough. Starting in 2020, the Chinese government implemented a regulatory crackdown that spanned antitrust, data, and labor regulations, in addition to imposing massive fines on tech giants for anti-competitive business practices. The unprecedented new regulations and enforcement led to a steep selloff in Chinese tech and somewhat negative sentiment for Chinese tech stocks since the regulations were announced.

Going forward, India’s market structure and differing regulatory philosophy are likely to support a more vibrant and diverse digital enterprise landscape in India, regulated more by market forces and competition rather than heavy-handed government control.

Accessing India’s Tech Growth

The compelling investment opportunity in India’s consumer internet sector is driven by a combination of supportive infrastructure, favorable regulatory conditions, and a burgeoning startup ecosystem. We believe this positions India as a more attractive investment destination compared to China for the digital opportunity set, offering substantial growth and innovation potential in the coming years.

For investors looking to capitalize on the dynamic growth potential of India's tech sector, the VanEck Digital India ETF (DGIN) offers a strategic entry point. This ETF provides exposure to a diverse array of companies thriving within India’s supportive digital infrastructure and regulatory environment.

¹ Bloomberg Intelligence, May 2024.