India’s next $200B in GDP

February, 2013

Document for discussion

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

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Executive summary

Bulk of this opportunity will come from technology for society (e.g., water, smart meters) and technology for consumers (e.g., e-commerce)

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India domestic opportunity in technology (~$200B GDP incremental impact by 2017) as large as the technology export market ($225B revenue by 2020)

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4 opportunities highlight this potential – smart meters, e-commerce, digital cash transfer for subsidies and “Alibaba for SME”

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Technology investments can increase India’s GDP by USD 200 Bn

1 Expected growth rates projections ranged between 7- 8% by analysts. Downward revision done to 6-7% given recent macroeconomic circumstances.

1

700

2017

2,600

Impact of technology

200

Normal growth1

2012

1,700

2% of additional GDP growth

Technology can add USD 200 Bn to India’s GDP (2017)

India nominal GDP US$ billion

Globalexamples

Macro economicregressionanalysis

Academicresearch

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There are four large areas of technology-led opportunities in India

BA

DC

USD 200 billion impact

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Increased consumer consumptionTechnology for society

Moving ‘unorganized’ to ‘organized’ in the economy

Improved efficiency and productivity for enterprises

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We have a set of 12 ideas with potential GDP impact of $90B+ billion

1 The theme ‘Global innovation and product development’ has been deprioritized

Technology for societyTechnology for society

Unorganized to organizedUnorganized to organized

▪ Mobile money5 99

▪ Smart Meter6 2323

▪ Education technology7 1111

▪ Remote healthcare8 0.50.5

9▪ SME B2B marketplaces 33

▪ SME Cloud solutions10 99

▪ Digital selling11 11

▪ Digital cash transfers1 44

▪ E-governance2 0.50.5

▪ Tech. for Agriculture3 44

Increasing consumptionIncreasing consumption ▪ E-commerce4 1414

Enterprise productivityEnterprise productivity

▪ Digital supply chain12 1212

GDP ImpactUSD billion

Idea Theme1 Examples

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4 high-impact ideas – quick snap-shot

Idea Examples Potential impact in 2017

Tech. for societyTech. for society33

▪ Smart meters ▪ $23B GDP impact

▪ 85 TWh power saving

▪ 50% reduction in accumulated losses of DISCOMs1

Enterprise productivityEnterprise productivity44

▪ SME B2B marketplaces

▪ $3B GDP impact

22Increasing consumptionIncreasing consumption

▪ E-commerce ▪ $22B GDP impact

▪ USD 80-100B industry

▪ 100-120 M e-commerce users

Unorganized to organizedUnorganized to organized11

▪ Digital cash transfers for subsidies

▪ $4B GDP3 impact

▪ USD 21 Bn lower leakage

▪ USD 1 Bn cost savings

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Why Now? Some of the fundamental enablers falling in place. . .

Largest # of incremental internet users added by 2015: 350M-450M

Sub-$100 smart devices in 1-2 yrs

50M incremental digital literates by 2020

30%+ of Internet users will be online shoppers in 2-3 yrs

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E-commerce in India could be upto ~$100 billion in 5 years

SOURCE: Expert interviews, team analysis

1 E-commerce penetration taken as 20% among all internet users; current penetration in India is 8% with China at 24%

TECH FOR INCREASED CONSUMPTION

FROM (2012) TO (2017)

$10 billion $80- 100 billion

100- 120 million1

0.2 billion 1.9- 2 billion

17 million

Size of industry

Social impact

Mobile as enabler

Users

Transaction volume

50-60% of internet users to access internet through mobile phones

xx Numbers in 2017

xx Numbers in 2012

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Overview of different e-commerce modelsGlobal examples

Developing country examples

SOURCE: Expert interviews, team analysis, company websites

Detailed later

1 ‘Mobile only’ models include specific applications on mobile/tablets or optimized websites for mobiles (such as Landmark)

Definition of E-commerce

B2C C2C

Mobile only1

Mobile only1

PC/ web based

Mobile & PC/ web based

PC/ web based

Mobile & PC/ web based

1

2

6

Pure online player

Brick & mortar players’ online stores

5

TECH. FOR INCREASED CONSUMPTION

3

4

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Amazon has contributed USD ~17 bn to the US GDP by offering pioneering e-commerce services

SOURCE: Amazon reports, press releases, team analysis, expert interviews

TECH. FOR INCREASED CONSUMPTION

1 10% of sales contributes to additional consumption in the economy; based on internal survey (100+ participants) & expert interviews2 Marginal propensity to consume (mpc) taken as 70%; marginal product of capital is 20%3 15 minutes saved on average when transacting online primarily with reduction in transit time; Value of time saved taken with GDP/capita of $41, 673

Consumption (2nd order

effect2)

Increased productivity of end users3 (1st order effect)

Increased productivity of end users (2nd order effect)

+USD1.6 Bn+USD

11 Bn +USD5.1 Bn

Total positive impact of USD 16.7 Bn on US GDP

Key drivers

▪ Increased convenience offered bye-retailing

▪ Reduced transaction and search costs

▪ Pricing dis-counts offered by e-retail

▪ Productivity release into the economy from the additional man hrs

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Taobao has increased rural consumption in China and impacted the GDP by ~ USD 10 Bn

SOURCE: Amazon reports, press releases, team analysis, expert interviews

TECH. FOR INCREASED CONSUMPTION

1 10% of sales contributes to additional consumption in the economy; based on internal survey (100+ participants) & expert interviews2 Marginal propensity to consume (mpc) taken as 70%; marginal product of capital is 20%3 30 minutes saved on average when transacting online primarily with reduction in transit time; Value of time saved taken with GDP/capita of $5, 450

Consumption (2nd order

effect2)

Increased productivity of end users3 (1st order effect)

Increased productivity of end users (2nd order effect)

+USD1.1 Bn+USD

8 Bn + USD1.1 Bn

Total positive impact of USD 10.2 Bn on China GDP

Description

▪ China’s largest online retailer (~400 mn users in 2012)

▪ 78% revenue growth in last 3 years

▪ Over 65% of users located in Tier 3 cities or lower

Key drivers

▪ Increased convenience offered by e-retailing

▪ Reduced transaction and search costs

▪ Pricing discounts offered bye-retail

▪ Productivity release into the economy from the additional man hrs

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Scale up of e-commerce in India is expected to increase India’s GDP by ~US$ 22 billion

Tech for increased consumption

UrbanRural

SOURCE: Expert interviews; industry reports; team analysis

TECH FOR INCREASED CONSUMPTION

120-130

80-9040-5017

15 2

80-100

65-8015-208

8 1

1,330

2017

2,000670

2012

170150 20

Key figures – accelerated case

No. of E-commerce users in IndiaMillion

E-commerce revenues in IndiaUS$ billion

Number of E-commerce transactionsMillion

USD billion

Impact on GDP

Levers Overall

▪ Increase in consumption through the online channel

19-20

▪ Increased productivity of end-customers3

1.9-2.5

Total 20.9-22.5

Industry reports predict e commerce revenues in the range of US$50-60 billion

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Key actions suggested for scaling up E-commerce ventures in India

TECH FOR INCREASED CONSUMPTION

SOURCE: Expert interviews, team analysis

Payments ▪ Provide low cost payment gateways exclusively for SMEs3

▪ RBI to create robust system to allow recurring purchases without need for OTP

4

Logistics ▪ Affordable options for shipping goods to tier 3 cities (only Blue Dart serves 8K+ postal codes in India)

5

▪ Indian postal service to improve service quality (currently 20 30% leakage)

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Interventions

Government

▪ Improve internet connectivity (currently 10%) in semi-urban and rural areas

2

▪ Financial and regulatory support to flourish in India1