pl en false false

How India’s Digital Economy Compares to China

23 July 2024

Read Time 4 MIN

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.

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

India's Robust Tech Landscape

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

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

Foundations of indias 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.

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.

To receive more Emerging Markets Equity insights, sign up to our newsletter.

IMPORTANT DISCLOSURES

1 Bloomberg Intelligence, May 2024.

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH / VanEck Asset Management B.V.