India's Dual Realities: Challenges to Opportunities

India is becoming a major economy, forming a significant market block uncorrelated to U.S. and China. While India’s GDP nears $4 trillion and is expected to grow to $10 trillion over the coming decade, stark inequality persists. There are 60 million affluent, 400 million middle-class, 750 million aspiring, and 200 million in poverty.

A key driver of this inequality is the productivity gap. The top 10% of the labor force, primarily employed in the organized sector, contributes about 55% of GDP. In contrast, the remaining 90%, working in the informal economy, generates only 45% of GDP. This disparity in labor productivity is striking. While access to basic infrastructure for the informal sector has improved significantly, closing the gap requires further advancements in key areas such as education, skill development, access to credit, innovative Agritech solutions, healthcare services, supply chain optimization, among others. Enhancing productivity of this cohort will unlock a self-sustainable income and consumption boom, driving transformative changes in education, healthcare, finance, lifestyle, consumer brands, and career aspirations for the aspiring and middle-class populations.

Addressing these challenges is no small task. While government policies aim to bridge these gaps, they alone are insufficient. Innovative, tech-enabled "phygital" solutions—combining physical and digital approaches—are needed to leverage government policies and create scalable, impactful solutions that can create step change in productivity and thereby income and consumption of middle and aspirer cohorts. This presents a once-in-a-generation opportunity for entrepreneurs. Success in this arena not only promises significant returns for founders and investors but also has the potential to generate profound social impact, reshaping India's economic and social landscape. At SamVed, we systematically curate, invest in, and continuously monitor startups positioned to capitalize on these trends.

The charts below paint the picture.

India’s economy has been growing at a healthy pace of 6-7% over the past decade. There has been a clear shift upwards in the economic growth rate from the 1990s-2010 period. aided by structural policy reforms combined with physical and digital infrastructure buildout. The chart on the right shows India’s prospective 10-year growth rate along with other major regions. India is estimated to grow at a much healthier rate of about 6.3%. This is based on exhaustive research by Ray Dalio’s team on Great Power Index. The drivers behind the strong estimated growth rate for India are improving labor competitiveness supported by continued structural reforms, coupled with labor force growth, and favorable indebtedness picture.

Despite strong economic growth, there is a large dispersion in income and wealth. There are 60 million affluent, 400 million middle-class, 750 million aspiring, and 200 million in poverty. The affluent and upper middle class has seen its real income grow strongly at 5.1% annual rate over the past decade. Middle and lower-middle have experienced only 1.5% annual real income growth, whereas poor section has seen its real income decline. The following chart shows real average annual household income by quintiles for 2016, 2021, and 2023:

A key driver of this inequality is the massive productivity gap. The following table shows the composition of organized vs unorganized economy by Industry, along with the size of the industry in relation to the broad economy, and share of workers in organized vs unorganized economy. Roughly 10% of the labor force is employed in the organized sector and it contributes about 55% of GDP. In contrast, the remaining 90% of the labor force is working in the informal economy, generating only 45% of GDP. This disparity in labor productivity is striking. The majority of less productive workers are concentrated in three industries: Agriculture, Trade, and Construction.

Over the past decade, individuals operating in the unorganized sector, primarily from the Poor/Aspirer class and parts of the Middle class, have experienced notable improvements in access to physical and digital infrastructure. However, persistent challenges such as insufficient education and trade skills, inadequate healthcare, restricted access to credit, and inefficient supply chains continue to impede productivity. The table below presents a heat map illustrating the levels of access to physical and digital infrastructure, education, and credit across different income cohorts:

The combination of limited education or trade skills, along with challenges like restricted access to credit and low mobility, often forces these households to engage in less productive, lower-income activities (e.g., running food stalls, small-scale garment production, or operating small retail stores). While long-term solutions, such as improving education, will take time to address, there are numerous tech-enabled innovations that can enhance the productivity of these small businesses.

At SamVed, we seek visionary founders passionate about addressing these critical challenges. Our investments exemplify this mission, including UnOrg, an e-procurement platform transforming the unorganized food supply chain through digitization. We are also finalizing investments in a SaaS startup addressing the fragmented Indian textile industry and a Retail SaaS platform integrated with IoT devices designed to empower micro-retail entrepreneurs.

In the coming research pieces, we will share our insights on major investable themes driving growth and transformation in this space.

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