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August 15, 2022

The great Indian dream

QED began investing in India in 2020 and has invested more than $150 million in financial technology companies. These initial investments have further deepened our resolve on India's economic and transformational opportunities. I am sharing the macro-economic view from our investment thesis and why we continue to be bullish on India despite the prevailing global winter in venture capital.  

Usually, folks point to the GDP growth rate to encapsulate the macro-economic rationale for India investments. While numbers are essential to separate facts from fads, I believe the true story is more profound and nuanced.

We are almost a quarter of the way through the 21st Century. So far, it has been a tumultuous ride for the world economy with three periods of shock.

The first shock was in the early 2000s with the dot-com bust, the September 11, 2001, attack and the war on terror, which rattled investor confidence, particularly in technology companies. The second shock was the 2008 financial crisis, which peaked with the Lehman bankruptcy and left a legacy on banking regulation, monetary policy and market structure, among other things. The third shock is from the pandemic and a return to the theatre of war which threatens to unwind globalisation, cause sustained inflation and precipitate a negative credit cycle.

Against this backdrop, the world economy almost tripled from $33 trillion in 2000 to $95 trillion in 2022. The U.S. and China powered the bulk of growth. The U.S. doubled from a $10.3 trillion GDP to $22 trillion. China entered the century as only the sixth-largest economy at $1.2 trillion and powered through the two decades across manufacturing and exports to be the second largest with a $16.8 trillion GDP. This 13x growth was probably the most extensive poverty eradication and urbanisation story in human history.

However, other large economies did not fair so well against those three shocks. Japan hovered around $5 trillion in GDP. Germany doubled from just under $2 trillion to $4 trillion but has been remarkably slow after the 2008 financial crisis.

Other significant European economies did not fare any better. The U.K. and France flattened after the financial crisis at around $3 trillion in GDP. Italy is yet to equal its pre-2008 peak of $2.4 trillion. The last two top-10 economies, Canada and South Korea, trended with the global economy.

In the context of these shocks and the hobbling international economies, India’s growth story really shines.

India began the century as not even a top-10 economy at around $470 billion in GDP. Since then, its GDP has increased over sixfold to around $3 trillion. It now closely shares the spot as the 5th largest economy with the UK and France.

It achieved this stature by prevailing over the three periods of shock. The dot-com bust slowed momentum, but the country resumed growth soon after. During the 2008 crisis, India did not decouple from the global economy as experts believed, but it continued to grow and accelerated immediately in the following years. The pandemic did cause a noticeable dip, much like other countries, but thus far, the country’s GDP seems to have bounced back resolutely.

This ability of the economy to grow through global crises is awe-inspiring. It speaks to the resilience and robustness of underlying factors. It gives investors confidence that growth is supported by productivity and quality improvements. It underlines diversification across sectors and across domestic and international consumption.

So then, what does the current stature mean -- how large is $3 trillion?

• $3 trillion is the same as the combined size of Brazil and Mexico's economies, respectively $1.6 trillion and $1.3 trillion GDP. Mexico is the second-largest trading partner to the U.S., and Brazil is vast and resource-intensive – and each had a larger economy than India at the beginning of this century.

• $3 trillion is also the GDP of all Southeast Asian countries (erstwhile Tigers) taken together, excluding Singapore, which grew substantially through manufacturing and resource exports in the 1980s and 1990s.

• $3 trillion is also larger than the GDP of the continent of Africa ($ 2.7 trillion).

India now has an economy with a top of the pyramid that compares favourably with other large economies. In my estimate, the wealthiest households in India, representing the current population of Brazil, Mexico, or Indonesia, would have higher total household income than each of those countries.

Equally so, the bottom of the pyramid in India is extensive. India’s total population exceeds that of Africa and the combined population of Southeast Asia and Latin America.

We, at QED, have invested in these macro trends. Refyne provides financial access to workers. Jupiter is building a digital retail banking platform for young professionals and smartphone population. OneCard provides a vaunted credit card for premium customers. FinancePeer (Leo1) provides financial tools for quality education to parents across the spectrum. Upswing is building tools for banks, financial technology and consumer technology companies to work together to serve customers across India.

We can’t help but admire the resilient through-cycle growth achieved by the country. The current size is still small relative to global leaders and provides ample headroom for continued growth. It is a stepping stone to the vast opportunities ahead.