Working Paper No. 2019- 01

Digital Revolution, Financial Infrastructure and

Entrepreneurship: The Case of India

Arvind PanagariyaColumbia University

School of International and Public AffairsColumbia UniversityNew York NY 10027

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DigitalRevolution,FinancialInfrastructureandEntrepreneurship:TheCaseofIndia

ArvindPanagariya1

DigitalRevolutionhasbeensweepingacrosstheworldoverthelastthree

decades.Thisrevolutionhasspreadfarmorerapidly,especiallyindeveloping

countries,thanwasthecasewitheithertheIndustrialorAgriculturalRevolution.

Indeed,thespreadhasbeensorapidthatChinahasbecomeitsmajordriverwith

Indiaemergingasoneaswell.

ThispaperisdevotedtotwoaspectsoftheDigitalRevolutionasitimpacts

India:financialtechnologyorfintech,andinnovationandentrepreneurship.Asin

othercountries,thespreadofdigitaltechnologieshasledtoadramatic

transformationoffinancialinfrastructureinIndia.Ontheonehand,thishas

improvedefficiencyandontheotherithasledtoincreasedfinancialinclusion.The

government’spaymentssystemhasevolvedtoapointthatitcanmakepayments

directlytoindividualsandfirmsthroughbankaccounts.Individualsareseamlessly

abletotransferfundsfromtheirbankaccountstothoseofothers.Businessesand

customerscantransactdigitallyinrealtime.

Digitaltechnologieshavealsohelpeddemocratizeinnovationand

entrepreneurship.Unlikeconventionaltechnologies,digitalinnovationsareless

costlytocommercializeonaverage.Scalingupofconventionalinnovationsrequires

alargevolumeofinvestment.Incontrast,manydigitalinnovationslendthemselves

1TheauthorisProfessorofEconomicsandJagdishBhagwatiProfessorofIndianPoliticalEconomyintheSchoolofinternationalandPublicAffairsatColumbiaUniversity.FromJanuary2015toAugust2017,heservedastheViceChairmanoftheNITIAayog,GovernmentofIndiaintherankofaCabinetMinister.HeisgratefultoNasdaqforfinancialsupportandtoSaumyaDevafornumerouseditorialsuggestions.

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toscalingupatlowcosts.Asaresult,inthedigitalspace,innovatorsthemselvesare

oftenseenasturningintoentrepreneurs.Thesharpdivisionbetweeninnovators

andentrepreneursthatexistedinthepasthasgreatlydiminished.

Idividethepaperintothreeparts.Part1focusesonthespreadoffinancial

technologiesinIndia.Part2considershowthedigitalrevolutionhashelpedspawn

andtransformthenatureofentrepreneurshipinthecountry.Part3offerssome

concludingremarks

1 FinancialTechnologies

Whilethereisnoconsensusdefinitionoffintech,thetermismostcommonly

usedtorefertotechnologicallyenabledfinancialinnovationswithapplicationsin

suchareasastransferoffundsandpayments,borrowingandlending,asset

managementandinsurance.Theactivitiesthatdefinefintechinclude:payments

andtransfersusingmobileapps,investmentsinandpaymentsviacrypto-

currencies,peer-to-peerlendingandinsurance,crowdsourcingviaplatformssuch

asKickstarter,loanandinsurancecomparisonwebsites,androbo-adviceonboth

investmentandassetmanagement.

Indevelopedcountries,wethinkoffintechaslargelyaprivate-sector

phenomenonconsistingoftransactionsbetweenandamongbusinessesand

households.IfIweretofollowthesameapproachindescribingtheroleoffinancial

technologyinIndia,Iwouldmissalargepartoftherolethattechnologyisplaying

thereinrevolutionizingthepaymentssystem.Thisisespeciallytruewhenweare

consideringtheareaoftheeconomyinwhichfinancialtechnologyintersectswith

inclusionanddevelopment.Forthisreason,indiscussingtheroleoffinancial

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technologyinIndia,Iwilltakeabroaderviewofitalongtwodimensions.First,I

willincludeinfinancialtechnologytherolethattechnologyplaysintransactionsin

whichthegovernmentisoneoftheparties.Second,indefiningfinancialtechnology,

Iwillincludeallcashlesstransactions,whetherornottheyinvolvetheuseofthe

latestinnovationsormobile-basedapplications.AsIwilldiscusslater,equipping

individualsandhouseholdstotransactdigitallythroughsuchinstrumentalitiesas

theBusinessCorrespondentmodelandpaymentbanksrepresentsamajorstep

towardsfinancialinclusioninapoorcountrylikeIndia.

1.1 ActorsintheEconomyandTransactionsAmongThem

Forapoorcountrywithper-capitaincomeatapproximately$2000per

annumincurrentdollarsin2018,Indiahasdeployedfinancialtechnologiesona

surprisinglylargescale.Inthefollowing,Iwilloutlinethecomponentsofthe

infrastructurethatIndiahasbuilttobringdigitalmodesoftransactionto

individualsandhouseholds.Iwillalsoexplainhowthegovernmenthasbeenusing

thisinfrastructuretodisbursethebenefitsunderitsvarioussocialschemesamong

thepoorandwhatrolebusinessesareplayinginthespreadoffintechinIndia.

Butasanintroductiontothisdiscussion,itisusefultofirstconsidera

schematicchartprovidingthetransactionsthattakeplaceinaneconomyamong

variousgroupsofactors.Itistheefficiencyofthesetransactionsthatfintechcan

greatlyimprove.InTable1,Iidentifythreebroadgroupsofactorsintheeconomy:

Government(G),Households(H)andBusinesses(B)whereIincludeallentities

otherthanthegovernmentandhouseholdssuchasnon-profitinstitutionsin

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businesses.Thetableillustratestypesoftransactionsthattakeplaceamongthese

threeentitiesinIndia.

Table1:IllustrativeListofTransactionsAmongMajorActorsintheEconomy

TransactingParties Transaction

GovernmentßàGovernment • Employeepayroll,pension,insurance

• Devolutionofrevenuestostates

• CentrallySponsoredSchemes

GovernmentßàHouseholds • DirectBenefitTransfers(DBT)

• NREGAwages

• Incometaxbyindividualstogovernment

GovernmentßàBusinesses • Procurementofgoodsandservices

• Subsidies

• CentralSectorSchemes

• GST,Tolls,CustomDuties,Corporatetax

HouseholdsßàHouseholds • Loans

• Transfers

• Rental

HouseholdsßàBusinesses • Salesofgoodsandservices

• Salaries,pensions,healthbenefits

• Loans,investments

BusinessesßàBusinesses • Inputpurchases,wholesaletransactions

• Loans

• Transportservices

AsTable1illustrates,myriadtransactionstakeplacewithinandamong

government,householdsandbusinesses.Technologyoffersopportunitiestoreduce

frictionandraiseproductivityintheconductofthesetransactions.Butthisrequires

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thebuildingofplatformsthatcanintermediatethetransactions.Duringthepast

decade,Indiahasbeenengagedinbuildingmanyoftheseplatforms.Theprocessis

farfromcompletebutconsiderableprogresshasbeenmade.

1.2 BringingDigitalTechnologiestoAll

Oneofthemostimportantdevelopmentsinbuildingfinancial-technology

infrastructureinIndiaisrelatedtoindividualsandhouseholds.Theabilityto

completetransactionsthroughnon-cash,digitalmeansrequiresverificationof

identity,havingabankaccountandaccesstoinstrumentsofdigitalcommunication

suchasmobilephones.Accesstoinvestmentandsavingsinstrumentsalsorequires

accesstofinancialservicesconventionallyprovidedthroughbrickandmortarbank

branchesbutnowfeasibleviadigitalplatforms.Inrecentyears,Indiahasmade

considerableprogressalongeachofthesedimensions.

1.2.1 Aadhaar:ABiometricIdentityforAll

Ifanindividualistoengageinafinancialtransactionwithoutusingcash,the

firstthingsheneedsisaproofofidentity.InavastcountrysuchasIndia,where

two-thirdsofthepopulationstilllivesinruralareaswithmanyoftheseareasin

remotelocations,givingindividualsproofofidentityisahugechallenge.Indeed,

untillessthanadecadeago,Indiahadnosystematicprogramofprovidingaproofof

identitytoitsresidents.Inprinciple,anyonecouldapplyforapassportordriver’s

license,butwiththerelevantofficeslocatedinfaroffplacesandmanyindividuals

lackingthebasicdocumentsrequiredtocompletetheapplicationsforthem,itwas

notapracticaloptionformost,especiallywomenlivinginruralareas.

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Surprisingly,today,nearlyallresidentsofIndiahaveanidentitycardcalled

theAadhaaridentitycard.Theprocessofissuingthecardwaskickedoffin

September2010andtodaythereare1.2billionofsuchcardsinexistence.Eachof

thesecardsgivesadefinitiveproofofidentitytoanindividualbackedbybiometric

data.TheAadhaarcardcarriesthename,gender,address,a12-digituniquenumber

andaphotooftheindividual.AsimpleinstrumentconnectedbyWi-Fitoacentral

databasecanscanthefingerprintsandirisoftheindividualandmatchthemagainst

thosestoredinthedatabasetoverifywhethersheiswhosheclaimstobe.

HowsuchamassivetaskofcollectingbiometricdataandissuingtheAadhaar

cardscouldbeaccomplishedinsuchasshortperiodoftimeinthecontentious

democracythatisIndiaisitselfafascinatingtale.Itsdetailscanbefoundinarecent

bookentitled“RebootingIndia”byNandanNilekaniandViralShah.Inthisbook,the

authorsalsoprovidearoadmapofhowtheAadhaaridentitycanbeleveragedto

takeadvantageofmanyothertechnologies.ThankstotheAadhaarproject,Indian

residentstodayhavetechnologicallythemostadvancedandreliableproofof

identity.Thebeautyofthisidentityisthattheindividualneednotcarryacardwith

hertoprovewhosheis.Theproofisalwaysthereinherpalmsandeyes.

1.2.2 TheJan-DhanScheme:BankAccountsforAll

Proofofidentityisjustthestartingpointforpromotingfinancialinclusion.

Byitself,itdoesnotgoveryfar.Itspowerisrealizedonlywhencombinedwith

otherfinancialinstruments.Themostbasicofsuchinstrumentsisabankaccount.

Whateverotherinstrumentsprivateactorsinthefintechindustrymakeavailable

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mustbuildonthebankaccount.Checks,creditcards,andwalletscanbeoperated

efficientlyonlyiftheindividualusingthemhasabankaccount.

Creatingbankinginfrastructureoveritsvastexpansehasalsobeena

challengeforIndia.Openingbankbranchesinvillageswithpopulationslessthan

onethousandisnotcosteffective.Inthe1980s,Indiaexperimentedwithspreading

bankbranchestotheremotecornersofthecountryusingpublicfundsbutthe

experimentprovedcostly.Intheend,ithadtobegivenuponthatinitiativeafter

thelaunchofthe1991economicreforms.AccordingtotheGlobalFindexReportby

theWorldBank,only53%ofIndiansabove15yearsofagehadbankaccountsin

2014.2

OneofthefirstmajorinitiativesthatPrimeMinisterNarendraModilaunched

afterhecametoofficewasPrimeMinister’sJanaDhanYojana(PMJDY).Translated

literally,itmeansPeople’sWealthScheme.PMJDYisalarge-scalefinancialinclusion

effortthroughadramaticexpansionofbankaccounts.Announcedduringhisfirst

IndependenceDayaddressaftercomingtoofficebythePrimeMinisteronAugust

15,2014,theinitiativewentontosetaworldrecordforthelargestnumberofbank

accountsopenedinoneweek.ThisrecordnowfindsaplaceintheGuinnessBookof

Records,whichstates,“Themostbankaccountsopenedin1weekasapartofa

financialinclusioncampaignis18,096,130andwasachievedbyBanksinIndiafrom

23to29August2014.”Thegovernmentaccomplishedthetaskbygettingthepublic

sectorbankstoorganizecampsaroundthecountrywhereindividualscouldlineup

andsuccessfullyopenabankaccountwithinafewhours.AccordingtotheGlobal2Seehttps://timesofindia.indiatimes.com/business/india-has-second-largest-unbanked-population-in-the-world/articleshow/64570254.cms(accessedon26thFebruary2019).

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FindexReportoftheWorldBank,theproportionofIndiansabove15yearsofage

withbankaccountshadreached80percentin2017.AsofFebruary28,2018,the

totalnumberofaccountsundertheschemestoodat312millionanddepositsin

theseaccountsamountedto$12billion.3Asignificantproportionofthehouseholds

stilldonotusebankaccountsasinstrumentsofsavingsandinvestment,however.

Sinceitslaunch,thegovernmenthasaddedseveralfeaturestotheJana

Dhanaaccountstopromoteinclusion.RuPaydebitcardscanbeissuedonthe

accounts.AsofJanuary2016,bankshadissued247millionsuchdebitcards.4The

accountsalsoentitletheholdertoanaccidentalinsurancefor$1500.Sixmonths

afteropeningtheaccount,theholderiseligiblefor$75inoverdraft.Account

holderscanalsoengageinmobilebankingusingevenfeaturephonesthrough

NationalUnifiedUSSDPlatform(NUUP).

1.2.3 DigitalConnectivity:AmobileinEveryHand

Onceanindividualhastheproofofidentityandabankaccount,sheisonlya

mobilephoneawayfromacquiringthepowertotransactdigitally.India’sgood

fortunewasthatbythetimetheAadhaarandJanaDhanAccountswerelaunched,

themobilerevolutionwasalreadyunderway.Thisrevolutionspreadacrossthe

lengthandbreadthofIndiaduringthefirstdecadeofthemillennium.

IgrewupinIndiainanerainwhichtelephonewasconsideredanabsolute

luxury.Ifyoucouldaffordit,youhadtoapplyforitandthenwaitforseveralyears

beforeyourturncame.Tillaslateas1999,therewerelessthan40millionphones

3Seehttp://pib.nic.in/newsite/PrintRelease.aspx?relid=177851.4Seehttps://www.medianama.com/2016/04/223-rupay-cards-38-percent/.

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intotalinthecountrytranslatingintojust3.5phonesper100individuals.Then,

afterthegovernmentlaunchedtheNewTelecomPolicyof1999,mobilephones

begantospreadlikewildfire.Entryofprivateplayers,rapidlydecliningcostsdue

totechnologicaladvancesandtariff-freeimportsquicklyturnedthisluxuryintoa

necessity.Atitspeak,everytwomonths,Indiawasadding40millionphones.This

wasmorethantheentirestockofphonescreatedinthefirst120yearsafterthe

phonewasintroducedinIndia.Today,thereexist1.2billionphonesinIndiawith

halfabillioninruralIndiaalone.Onaverage,therearenearlythreephonesper

householdoffiveinruralIndiaandsixphonesperhouseholdoffourinurbanIndia.

Bankaccountsandmobilephonesaretwoessentialbuildingblocksofa

paymentssystemthatallowsindividualstomakemoneytransfersandpayments

digitally.Toturnsuchbankaccountsandmobilephonesintoeffectiveinstruments

ofthesetransactions,aplatformthatintermediatesbetweenthepayerandpayeeis

required.HeretooIndiahasbeeninnovative.

1.2.4 UnifiedPaymentsInterface:ALow-costPaymentsSystem

TheNationalPaymentsCorporationofIndia,anot-for-profitorganization

ownedbyaconsortiumofmajorbanksandpromotedbytheReserveBankofIndia,

isauthorizedtooperatevariousretailpaymentsystemsinthecountry.TheNPCI

hasdevelopedaninstantreal-timepaymentssystemtofacilitateinter-bank

transactions.KnownastheUnifiedPaymentsInterface(UPI),thissystemallows

real-timetransferoffundsbetweentwobankaccountsonamobileplatform.UPI

withdrawsfundsfromthebankaccountofthepayeranddepositsthemdirectlyinto

thepayeeaccount.

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Thisisincontrasttoatraditionalmobilewallet,whichtakesaspecifiedsum

ofmoneyfromthepayer’sbankaccountbeforehandandstoresitinitsownaccount

toaffectfuturetransactions.Therefore,thetransferoffundsviathesewalletsis

confinedtodifferentusersofthesamewallet.Incontrast,thefacilitytotransfer

fundsdirectlyfromonebankaccounttoanotherofferedbytheUPIopensthedoor

totransactionsfornearlyallcustomerswithbankaccountsinoneofthe71banks

thatsubscribedtotheUPIasofFebruary2018.

ThisiswhythedecisionbyWhatsApptoaddtheWhatsAppPayfeaturetoits

platformcreatedastirintheelectronicpaymentsmarket.WhatsAppalreadyhas

250millionactiveusers,nearlyallofthemhavingbankaccounts.Allusersneedto

doistolinkWhatsAppPaytotheirUPIaccount,withouthavingtoshareanyoftheir

confidentialbankaccountinformation.Theycanthenseamlesslymaketransfersto

orreceivetransfersfromotherWhatsAppPayusers.Interestingly,giventhelarge

userbaseofWhatsApp,NPCI,whichmanagestheUPI,didnotallowafull-scale

launchofWhatsAppPayinonego.Instead,itchoseaphasedrollouttoallowthe

applicationandbankplatformstoadjusttothespikeinvolume.

1.2.5 TransactingDigitallyThroughaFeaturePhone

AccesstoUPIthroughappsrequiresasmartphone.Whilesmartphone

usersareexpandingrapidlyinIndia,atpresenttheyconstituteonlyone-thirdof

totalmobilephoneusers.Thatistosay,two-thirdsofthemobileusersstillrelyon

featurephones.Keepingthisinview,theNPCIhascreatedanotherservicecalled

theUnstructuredSupplementaryServiceData(USSD),whichfacilitatestheuseof

theUPIonfeaturephonesbydialingacode.

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1.2.6 ImplicationsofSeptember2018AadhaarRulingbytheSupremeCourt

WhileIndiahascreatedanimpressivelow-costinfrastructuretofacilitate

digitaltransactions,arulingontheuseofAadhaaridentitybytheSupremeCourtin

September2018hasthrownsomesandintheirway.Therulinghasgaveagreen

lighttotheuseofthebiometricidentitybythegovernmentintaxationand

disbursementofitsfundstopeople.Butithasdeniedprivatesectoronlineaccessto

biometricdataforpurposeofverificationofidentity.Thissecondpartoftheverdict

constitutesamajorsetbacktotheuseofAadhaaridentitybyprivateentitiessuchas

commercialbanks,mobileserviceprovidersanddigitalwallets.Theseentitieswill

requireanalternativeforofidentificationtofulfillKnowYourCustomer(KYC)

requirementsofdifferentregulations.Thegovernmentisconsideringbringinga

newlegislation,whichwillensurefulldataprivacywhilegivingaccesstoidentity

verificationfacilitytoprivateoperatorsuponapprovalbytheAadhaarholder.But

untilthen,theuseofAadhaardatabasesforpurposesofverificationofidentityhas

beendeniedtoprivateentities.

1.2.7 RapidlyExpandingDigitalTransactions

InthemonthofNovember2016,whendemonetizationwasannounced,

electronictransactionsnumbered671.5million.Thisfigureroseto1.1billionin

February2018.Thisrepresentsa63.5%jumpinjust15months.Invalueterms,

electronictransactionsrosefromRs.94trillion($1.5trillion)inNovember2016to

Rs.115.5trillion($1.8trillion)inFebruary2018.Thisrepresents22.9%increase

overthe15-monthperiod.Therefore,thegrowthinthenumberoftransactionshas

faroutstrippedthegrowthinvalue,implyingthatthestrategyofthegovernmentto

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spreaddigitizationamongindividualcustomers,whotypicallyengageinlower-

valuetransactions,hasbeensuccessful.Figure1showstheevolutionofthe

transactionsinbothnumberandvaluebeginningfromNovember2016,themonth

duringwhichdemonetizationwasannounced.

TransactionsviaUPIprotocolhavegrownfarmorerapidly,althoughthey

beginfromalowbase.Innumber,thesetransactionsgrewfromatiny0.3millionin

November2016to171.4millioninFebruary2018.Invalueterms,theincreasewas

from0.9billionrupeesto191billionrupees.Figure2showstheevolutioninboth

numberandvaluefromNovember2016toFebruary2018.

Figure1:Evolutionofelectronictransactions:November2016toFebruary2018

Source:Author’sconstructionusingtheRBIdatafrom

http://rbidocs.rbi.org.in/rdocs/content/docs/ELECT07022016_FEB18.xls

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ThegovernmentprovidestheUPIplatformfreeofcharge.Theonlyfeepaid

ontransactionstakingplaceonthisplatformisthatchargedbythebanks.Insofar

ascompetitionamongbanksislikelytokeepthischargelow,transactionsonUPI

havethepotentialtoeventuallyoverwhelmthoseonotherplatforms.Indeed,given

thatthetransactionsoncreditanddebitcardstypicallychargemuchhigherfees,in

thelongrun,theirsurvivalisabitdoubtful.Itisonlyamatteroftimethat

merchantswillrecognizethevalueofacceptingpaymentsviatheUPIplatform.

Figure2:TransactionsviaUPIprotocol:November2016toFebruary2018

Source:Author’sconstructionusingtheRBIdatafrom

http://rbidocs.rbi.org.in/rdocs/content/docs/ELECT07022016_FEB18.xls

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1.2.8 TheBusinessCorrespondentModel:BringingFinancialServicestoUnbanked

Areas

Whileindividualsareabletomakeandreceivetransfersoffundsusingbank

accountsandmobiles,theyalsoneedotherbankingservices.Mostnotably,

individualsneedtobeabletocarryoutcashdepositandwithdrawaltransactions

andusetheirbankaccountsasinstrumentsofsavingsandinvestment.Butthis

requiresaccesstoabankbranch,whichisoftenveryfarawayfromthecustomer’s

village.

Toovercomethisproblem,beginningin2006,thegovernmenthaspromoted

theBusinessCorrespondent(BC)modelinareaswherebankbranchesdonotexist.

ABusinessCorrespondentisengagedbyabanktoprovidebankingandfinancial

servicesinsuchlocations.Theservicesmayincludeopeningbankaccounts;

collectingcashfordepositintheirpersonalorbeneficiary’saccount;disbursing

smallamountsofloans;recoveringinstallmentsforloans;andsellingbankproducts

suchasinsurance,mutualfundsandpensionschemes.Banksarefullyresponsible

fortheactsofcommissionandomissionoftheirBCs.

EntitiesthattheRBIallowstoserveasBCsincludeNon-governmental

Organizations(NGOs);Micro-financeInstitutions(MFIs);postoffices;Section25

companies;retiredbankemployees,teachers,governmentemployeesandmilitary

personnel;individualownersofkirana,medicalandfairPriceshops;agentsofSmall

SavingsschemesoftheGovernmentofIndiaandInsuranceCompanies;petrol-pump

owners;andauthorizedfunctionariesofSelfHelpGroups(SHGs)withlinksto

banks.TheRBIadvisesbankstokeepchargesoftheBCservicesatlevelsthatare

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seenasreasonableandfair.BCsusemobile,PoSmachinesandmicro-ATMstomove

fundsacrossbankaccountsviaUPIprotocol.

Goingbydata,theBCmodelhasbeenhighlysuccessfulinbringingbasic

bankingservicestoruralareas.ThespreadofBCstoIndianvillageshasfar

outstrippedthepaceofbrickandmortarbranchexpansion.Figure3providesthe

totalnumberofbranchesandBCinruralareasonanannualbasisbeginninginthe

endofMarch2010andendingintheendofMarch2017.

Figure3:BankbranchesandBusinessCorrespondentsinruralIndia:2009-10to

2016-17

Source:author’sconstructionusingthedatafromRBIAnnualReports

Dataonbasicsavingsdepositstellsasimilarstoryintermsofabsolute

numberoftransactionsthoughnottheirvalue.Table2reportsthekeydatafor

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years2009-10,2015-16and2016-17.Startingatamuchlowerlevelattheendof

March2010,thenumberofaccountsundertheBCmodeljumpedabovethoseatthe

bankbranchesbytheendofMarch2017.Butinvalueterms,thedepositswithbank

branchesremainedsignificantlyhigherthanthosewithBCs.Thisisasonewould

expectgiventhatbranchesaremuchlargerandlocatedinareaswithvibrant

commercialactivity.

Table2:BasicSavingsBankDepositsinBranchesandwithBankCorrespondents

Entity EndMarch2010

EndMarch2016

EndMarch2017

DepositsinMillion Branches 60 238 254BCs 13 231 280Total 73 469 533ValueinRs.Billion Branches 44 474 691BCs 11 164 285Total 55 638 977

Whilethedatashowsimpressiveprogressinspreadingbankaccountsand

depositsthroughtheBCmodel,criticshavenotedthatthisremainsasupplydriven

model.Thekeyevidencesupportingthiscriticismisthepresenceofasubstantial

proportionoftheaccountsbeingdormantandvirtuallynocreditactivity.In

addition,therateofusageofactiveaccountsislow.CompensationtoBCsispoorin

relationtotheservicesexpectedofthem.Opportunitiesfortheexpansionofnew

bankaccountshavealsogreatlydiminishedduetonearsaturationundertheJan-

DhanScheme.Scopeforearningfeesondepositandwithdrawaltransactions

remainslimited.

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1.2.9 PaymentsBanks:YetAnotherInnovationforInclusion

Toenhancethereachofdigitalpaymentsfurther,theGovernmentofIndia

hasintroducedpaymentsbankslaunchedinAugust2015withthegrantof“in

principle”licensesto11ofthe41applicants.Therecipientsofthelicensewere

given18monthstofulfillallrequirementsafterwhichtheycouldbeginoperations.

BhartiAirtel,atelecommunicationscompany,wasthefirsttogoliveasapayments

bankinMarch2017.OtherstogoliveincludeIndiaPostsandPaytm.Afewothers

suchasTechMahindraandSunPharmaceuticalssurrenderedtheirlicenses.

Paymentsbanksareregisteredaspubliclimitedcompaniesunderthe2013

CompaniesActwithalicensefromtheRBI.Theyarenotcommercialbanks,though

thelicensefromtheRBIgrantsthemthepermissiontoperformsomeofthebanking

functionsincludingremittanceservices,mobilepayments,fundtransfers,issuance

ofATM,debitcardservices,netbankingservicesandsalesofthird-partyfinancial

productssuchasinsuranceandmutualfunds.However,paymentsbanksarenot

allowedtoadvanceloansorissuecreditcards.

Currently,paymentsbanksareallowedtoacceptdepositsuptoRs.100,000

andcanpayinterestonthem.Theyearnpartoftheirprofitbydepositingthefunds

receivedinbanksthatpayhigherinterestthanwhattheypaytheircustomers.They

alsoearnprofitsbychargingamerchantdiscountrate(MDR)ontransactions

undertakenbydepositholders.Othersourcesofrevenuemayincludedata

monetization,cross-sellingoffinancialproducts,andformingcreditaccess

platforms.

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Forexample,AirtelPaymentsBankpays7.25%interestonsavingsaccounts

andchargesa0.65%transactionfee.Airtelmobilenumberofthedepositholder

alsofunctionsastheaccountnumber.Thebankhaslaunchedanappandanonline

debitcardincollaborationwithMasterCardthatcanbeusedatonlinemerchant

portalsacceptingMasterCard.Thebankalsoofferscustomersafreepersonal

accidentalinsurancecoverofRs.100,000onitssavingsaccounts.

1.3 ChangingLandscapeofGovernmentTransactions

AsshowninTable1,incarryingoutitsbusiness,thegovernmentmust

transactfinanciallywithitsownministries,states,andlocalgovernmentaswellas

withbusinesses,individuals,andhouseholds.Today,technologyplaysacentralrole

infacilitatingthesetransactions.Ishallbrieflytouchuponsomekeycomponentsof

thistechnologyandassociatedfinancialflows.

1.3.1 ThePublicFinanceManagementSystem

Thegovernmenthasdeployedtechnologytocutdownfrictioninitsown

paymentssystem.Initiallylaunchedin2009asasystemfortrackingfundsreleased

bythecentralgovernmenttostatesthroughtheerstwhilePlanningCommission,the

PublicFinanceManagementSystem(PFMS)hasevolvedintoanend-to-endsolution

forprocessing,tracking,monitoring,accounting,reconciliation,andreportingof

financialflowsintoandoutofthecentralgovernment.Itisexpectedtoprovidea

unifiedplatformfortrackingreleasesoffinancialflowsandtheirutilizationdownto

thelastmile.Theplanistoeventuallyintegrateallexistingstand-alonefinancial

systemstointegrateintoPFMS.Thesewouldincludeallpaymentsofthe

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GovernmentofIndia,taxandnon-taxreceipts,HumanResourceManagement

InformationSystems,pensionsystemsandGeneralProvidentFunds.

AmajorstrengthofPFMSisitsintegrationintothecorebankingsystem.

Thisintegrationgivesthesystemtheuniquecapabilitytopushonlinepaymentsto

almostanyentitywithinthebankingsystemincludingstategovernments,local

governments,variousagenciesimplementingmyriadgovernmentschemes,and

evenindividualbeneficiariesofsuchschemes.PFMSalreadyinterfaceswithcore

bankingsystemsof170banksincludingallpublicsectorbanks,regionalrural

banks,majorprivatesectorbanks,RBI,IndiaPost,andcooperativebanks.5

Thebenefitsofreal-timepaymentsandanaccountingsystemcannotbe

underestimated.First,byallowingjust-in-timetransactions,itcutstheinterestcost

thatisotherwiseincurredwhenfundssitunusedintransit.Forexample,statesare

theimplementingagenciesforvariousCentrallySponsoredSchemes.Thecentral

governmentmaydisbursefundsfortheseschemestothestatesbutstatesmaytake

sometimebeforetheydisbursethemtoimplementingagencies.Whilethesefunds

sitidlewiththestategovernments,thecentralgovernmentincursinterestcostson

them.Ajust-in-timepaymentssystemcanensurethatthecentralgovernmenthasto

releasefundsonlywhentheimplementingagenciesarereadytoreceivethem.

Second,thesystemcanalsoeliminatetheneedformanuallybalancingbooks,

therebyminimizingthecostofaccountants.Finally,thesystemalsoallowstracking

andmonitoringofprojectsandcanhelpimproveefficiencybyprovidingreal-time

datatomonitoringagencies.5Seehttp://www.cga.nic.in/Page/PFMS.aspxandhttps://www.2thepoint.in/public-finance-management-system-pfms-central-sector-schemes/forsomeofthedetailsreportedhere.

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1.3.2 DirectBenefitTransfers:PFMS,AadhaarandBankAccountsComeTogether

InIndia,thecentralgovernmentsponsorsseveralschemes,jointlyfundedby

bothitselfandstategovernments,involvingpaymentsandcashorin-kindtransfers

toindividualsorhouseholds.AfoodsubsidyprogramundertheNationalFood

SecurityAct,2013provideswheatandriceatlessthan5%ofthemarketpriceto

75%oftheruraland50%oftheurbanpopulation.Cylindersofliquidpetroleum

gas(LPG)andkeroseneareprovidedforcookingatsubsidizedprices.Farmersare

providedfertilizer,especiallyurea,atsubsidizedprices.Thegovernmentrunsa

massiveemploymentguaranteeprogramundertheNationalRuralEmployment

GuaranteeAct(NREGA),2005,whichentitlesoneadultineveryhouseholdto100

daysofemploymentperyearataspecifiedwage.Thegovernmentalsoprovides

scholarshipstostudentsandpensionstowidows.

Ineachoftheseprograms,therehasbeenahistoryofghostbeneficiariesand

acollectionofbenefitsmultipletimesbythesameindividual.Thereareleakagesin

thesystemthroughotherchannelsaswell.Forexample,employersunderNREGA

programschoosetodisburseonlyapartofthewagesduetoworkerswhile

skimmingofftherest.Similarly,sellersofLPGcylindersdivertapartofthesupply

tocommercialLPGuserswhoarenotentitledtosubsidizedLPGcylinders.

Inrecentyears,thegovernmenthasbeensystematicallypluggingthese

leakagesthroughtheuseofAadhaarverificationanddirectbenefittransfer(DBT).

Ithasbeenabletoeliminatemillionsofghostbeneficiariesaswellasmultiple

collectionsofbenefitsbythesamebeneficiary.Otherformsofleakageshavealso

beenpluggedbydepositingthebenefitdirectlytotheAadhaarseededbankaccount

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ofthebeneficiary.Forexample,LPGcylindersarenowsoldatthemarketprice

insteadofsubsidizedprices.Oncethesellerrecordsthesaletoabeneficiaryina

centralizedsystem,thesubsidyisdepositeddirectlytoherAadhaarseededbank

account.Similarly,onceanemployerunderNREGAfilesinformationonaworker

havingperformedworkinacentralizedsystem,wagesaretransferreddirectlyto

herAadhaarseededbankaccount.TheapproachappliedtotheLPGsubsidyisalso

currentlybeingextendedtothedisbursementoffertilizersubsidies.

EstimatesofsavingsthroughtheeliminationofghostbeneficiariesandDBT

ofapproximately$2.5to$3.3billionannuallyoverathree-yearperiodhave

appearedinthemedia.Itisdifficulttoverifytheaccuracyoftheseestimatesbut

theyseemplausible.Itisalsoareasonableguessthatthesesavingswillmultiplyin

theyearstocomeasthescopeofDBTexpandsandsomeofthein-kindtransfersare

convertedintocashtransfers,aprocessthatiscurrentlyunderway.

1.3.3 GovernmentProcurement:TheGovernmente-Marketplace

Inanewexperiment,inAugust2016,thegovernmentlauncheda

Governmente-Marketplace(GeM)foritsprocurementofgoodsandservicesina

transparentmanner.GeMisapaperlessandcashlessopenplatformfor

procurementofcommon-usegoodsandserviceswithminimalhumaninterface.

Time-boundpaymenttosellerssellingontheGeMplatformisfacilitatedthrough

integrationwithPFMS.EffortisalsounderwaytointegrateGeMwithpayment

systemsofrailways,defense,publicsectorenterprises,andstategovernments.

TheGeMexperimentisatpresentinitsinfancy.Butitholdsgreatpromisein

acountrylikeIndiawheremultiplelayersofrulesandregulationsmake

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procurementopaque,costlyandtimeconsuming.Inprinciple,themarketplacecan

resultinspeedyprocurementatcompetitivepricesandhencemajorsavingsforthe

government.Asanexample,ticketsforairtravelbygovernmentemployeesare

currentlypurchasedthroughamonopolyagent.Byallaccounts,priceschargedby

thisagentareexorbitant.MovingtheprocurementoftheticketstoGeMalonecan

savethegovernmentmillionsofdollars.

1.3.4 E-NationalAgriculturalMarket

Traditionally,agriculturalmarketsinIndiahavebeenbothopaqueand

fragmented.Eachfarmerisrequiredtosellherproduceinagovernment-assigned

marketplacecalledamandi.Inmandis,commissionagentsandtraderscolludeto

buytheproduceatminimalpricesandthenselltowholesalersandretailersatthe

maximumprices.Priceswithinandacrossmandiscanvarybywidemargins.

Tointroducecompetitionwithinandacrossmandis,inApril2016,the

governmentlaunchedthee-NationalAgriculturalMarket(e-NAM)initiative.Under

it,thegovernmenthasalreadyconnected470mandisacross14states

electronically.Inthesemarkets,thefarmercanuseanelectronicplatformfor

auctiontosellherproducetothehighestbidder.Opene-auctionshavegonesome

distancetowardseliminatingdependenceoncommissionagentsandbringing

transparencytothesalesprocessandalsohelpedspeeduppaymentstofarmers.

Farmerscanbringtheirproducetothemandiinthemorningandgenerallyreturn

homeintheeveningafterauctioningtheproduceandreceivingpayment.Because

transactionsmustbedoneelectronicallyusingbankaccounts,paymentscannotbe

delayed.Inthepast,theyhadtooftenstayovernightandwouldnotgetpaymentfor

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onetotwoweeks.Effortsarecurrentlyunderwaytoconnectanother109mandis

toe-NAM.

1.3.5 GoodsandServicesTaxNetwork

Recently,IndiareplacedmorethanadozenindirecttaxesbyasingleGoods

andServices(GST)tax.Useofatechnology-basedplatformcalledtheGSTNetwork

orGSTNhasbeenkeytotheadoptionofthistax.Sellersofgoodsandservices

aboveathresholdarerequiredtoregisteronGSTNwitha12-digitidentification

number.InMarch2018,thetotalnumberofsuchsellerswas10.3million(6.4

millionoriginaltaxpayersand3.9millionnewregistrants).Eachsellermustfilea

returnonamonthlyorquarterlybasis.Thereturnsummarizesallinformationon

sales,purchases,taxcollectedonsales,andtaxpaidonpurchases.Taxdueis

calculatedasthedifferencebetweentaxcollectedonsalesandtaxpaidon

purchases.AmajortaskofGSTNistomatchbuyerandsellerinvoicestoensurethat

creditbeingclaimedbythebuyermatchesthetaxcollectedfromhimbytheseller.

1.4 BusinessesasProvidersofFintechServices

Althoughreferencetobusinesses’participationinfintechhasbeenmadein

thecontextoftransactionsbygovernmentsandhouseholds,itisimportantto

highlighttheirrolehere,especiallyinintermediatingdigitalpayments.

1.4.1 DigitalPayments

Private-sectorplayersdominatethemarketintheprovisionofdigital

payments.ThelargestplayercurrentlyisAlibababackedPaytm,whichhas300

millionregisteredusersand7millionofflinemerchants.Itisadding10million

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userseachmonthandaccountsfor250milliontransactionspermonth.

Approximatelyhalfofthesetransactionsoriginateinsmalltownsandvillages.

InNovember2017,PaytmstartedacceptingUPIpayments,whichtookoff

immediately.InFebruary2018,itsUPItransactionstouched68millionoutofa

totalof171.4millionUPItransactions.CurrentnotablecompetitorsofPaytm

includeMobikwik,GoogleTezandFlipkart-ownedPhonePeandAmazonPay.The

biggestdisruptionisexpectedtooccurwhenWhatsAppPayfullyentersthemarket.

Animportantpromiseofprovidersofdigitalpaymentsservicesisthatthey

canbecomesourcesofcreditfortheirusers.Transactionsconductedontheir

platformsprovideusefuldataonpaymentshabitsoftheircustomersandmaybe

capableofbeingleveragedforlendingactivities.Ifthisturnsintoreality,credit

marketsforsmallborrowerswouldundergoamajorchangeinIndia.

1.4.2 OtherFintechServicesbyPrivateBusinesses

Amongotherimportantfintechservicesprovidedbyprivatebusinesses,

mentionmaybemadeofthefollowing:

• Amazon,Flipkart,Snapdeal,Myntra,BigBasket,IndiaMart,MakeMyTrip,

YatraandTrivagoareexamplesofsomemajorplayersine-commerce.

• BankBazaarisamajorloancomparisonportalofferingpersonalloans,home

loans,creditcards,mutualfunds,fixeddepositsandsavingsdeposits.Italso

offershealth,lifeandhomeinsurancepolicycomparisons.PolicyBazaarand

Apnapaisaaretheothermajorplayersinthisspace.

• Peer-to-peerlendingisinitsinfancy;nevertheless,severalsiteshave

emerged.ProminentamongthemareLendbox,Faircent,I-lend,Easy

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Rupiya,andLenDenClub.Someoftheseportalshaveseveralthousand

lenders.

• Indiahasabout15cryptocurrencyexchangesofwhichfourarefunded.

Bitcoin,EtheriumandRippleinthatorderarethemostpopularcrypto

currenciesinuseattheseexchanges.6Thegovernmenthasneither

endorsednorbannedcryptocurrencies.Itregularlywarnsofrisks

associatedwithtransactinginthem,however.

2 DigitalRevolutionandEntrepreneurship

Letusnowturntoentrepreneurshipinthedigitaltechnologyspace.

Implicitly,wehavealreadyintroducedsuchentrepreneurshipwhendiscussing

fintech.Entrepreneursoperatinginfintechareallengagedindigitaltechnology

entrepreneurship.ButwemaynowconsidertheentrepreneurshipaspectofDigital

Revolutionmoredirectly.

Intheliteratureonentrepreneurshipanddigitaltechnology,adistinctionis

drawnbetweendigitaltechnologyentrepreneurshipanddigitalentrepreneurship.

TheformerreferstoentrepreneurshipbasedonnewICT[Informationand

CommunicationsTechnology]productssuchastheiPhoneandthelatteron

productsandservicesbasedontheInternet.Broadly,theformermaybethoughtof

asinvolvingmanufacturingandthelattercreatingservicesusingnewsoftwareand

6Seehttps://inc42.com/features/cryptocurrency-exchanges-ethereum-bitcoin-india/

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existingdigitaldevicesandplatformsasexemplifiedbyWhatsApp.7Inthe

following,Idiscussentrepreneurshipofeachkind.

2.1 DigitalTechnologyEntrepreneurship

Indiahasdonewellindigital-devicespaceattheinnovationlevel.

Unfortunately,however,withonemajorexception,ithasnotdonewellat

translatingtheinnovationsintolarge-scalecommercialenterprises.Arecentpaper

offersafascinatingdiscussionofhighlycost-effectiveinnovationsbyIndian

entrepreneursthatcanpotentiallyimpactthelivesofthemasses,notjustinIndia,

butworldwide.Butinallcasesbutone,sofar,thisimpacthasbeenextremely

limited.8

2.1.1 JioMobileandBroadband

Themostsuccessfullow-costdigitaltechnologyinnovationthathasalso

madeamajordifferencetothelivesofthemassesisJio’sGreenfield4GLongTerm

Evolution(LTE)network.BecauseJiojoinedthetelecommunicationsworldlate,it

hasno2Gor3Glegacyservices.ItsuniqueconfigurationallowsJiotoofferfree

voicecallstoanynetworkacrossIndia.Ithasnonationalroamingcharges,making

itsnetworkseamlessthroughoutthecountry.TheremarkablethingaboutJioisthat

itoffers4GInternettocustomersatjust10centspergigabyte(GB).Jio’sphoneis

offeredeffectivelyfreeofcosttocustomers.

7See,forexample,Giones,FerranandAlexanderBrem,2017,“DigitaltechnologyEntrepreneurship:ADefinitionandResearchAgenda,”TechnologyInnovationManagementReview7,no.5,44-51.Alsoavailableathttps://timreview.ca/article/1076(accessedonAugust31,2018).8SeeMashelkar,R.A.,2018,“DismantlingInequalitythroughASSUREDInnovation,”K.R.NaraynanOrationathttps://crawford.anu.edu.au/acde/asarc/pdf/narayanan/oration/2018oration.pdf(accessedonAugust31,2018).

27

JiowaslaunchedonSeptember5,2016andwithinthefirstmonth,it

acquiredarecord16millionsubscribers.Itcrossedthefigureof50million

subscribersin83daysandhadsignedup100millionsubscribersbyFebruary22,

2017.ByJuly5,2018,Jiohad215millionsubscribers.Thisisafeataccomplished

injust22months.CompetitivepressurebroughtbyJiohassentthepricesof

broadbandservicesonmobilephonestumbling.Theresulthasbeenarapid

expansionoftheuseofdigitaltechnologiesinIndia.

WhiletheinnovationsunderlyingJiohavemadelow-costprovisionofits

servicespossible,thefactthatitisownedbyoneofthelargestconglomeratesof

India,RelianceIndustriesLimited(RIL),hasbeencrucialtoitsrapidspreadacross

India.Withitsdeeppockets,RILwasabletorapidlyscaleuptheoperationsofJio.

Sofar,youngerentrepreneurswhoarefinanciallylesscapablehavehadfarless

successinscalinguptheirdigitaltechnologystartupseventhoughunderlying

innovationsinsomecaseshavebeenequallycosteffectivewithpotentiallylarge

markets.Atthesametime,itneedspointingoutthatyoungerIndianentrepreneurs

indigitalasopposedtodigitaltechnologyspacehavehadenormoussuccessin

attractingandmobilizinginvestmentfunds.

2.1.2 iBreastexam

Onelow-costdigitaltechnologyinnovationhasbeenadevicecalled

iBreastExambyyoungentrepreneurMihirShahwholaunchedstartupUE

LifeSciencesin2009.Thedeviceoffersapainlessandnon-invasivescan,whichcan

detectbreastcancerwithgreataccuracyatacostofjust$1.Theexamisentirely

radiationfreeandcanbeoperatedbyacommunityhealthworker.Thedevicehas

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theUnitedStatesFoodandDrugAdministrationclearanceandhastheCEmark

requiredforsalesintheEuropeanEconomicAreaconsistingof28countriesofthe

EuropeanUnionandthreecountriesofEuropeanFreeTradeArea.Thedeviceis

currentlysoldinmorethan25countriesinAfricaandAsia.Recently,theNewYork

Timespublishedanarticleextollingitsvirtues.9Nevertheless,despitetheexistence

ofavastpotentialmarketforthedeviceduetoitslowcost,easeofoperation,and

non-invasivenatureoftheexamination,itssaleshavebeenrelativelylimited.The

totalannualrevenuesremainbetweenonetotwomilliondollars.

2.1.3 ElectrocardiogramSanket

AnothersimilarinnovationisaportablematchboxsizeElectrocardiogram

(EKG)machinecalledSanket.Thedevicesellsforlessthan$100.Itconnects

remotelytoasmartphoneandrecordsanddisplaysEKGonit.Thereportcanbe

sharedinstantlywithadoctorusingthesmartphone.Sankethasfiledformultiple

patents.Onceagain,thedevicehasnothadnotablecommercialsuccess.

Thereareseveralotherstoriesofdevicessuchasthosethatcandetect

multipleeyediseasesanddiagnosemosquito-bornediseasesatlowcost,buttheyall

haddifficultyscalingup.Sofar,outstandingsuccessesinthedigitaltechnology

spacesuchasthatachievedbytheJiophonehavenotemergedinabigwayinIndia.

2.2 DigitalEntrepreneurship

Thestoryhasbeendifferentindigitalentrepreneurshipwithseveral

entrepreneurssuccessfullyscalinguptheiroperations.Insomecases,startupshave

9Seehttps://www.nytimes.com/2018/08/28/opinion/detect-breast-cancer-developing-countries-asia.html.

29

madeinroadseveninforeigncountries.Idiscussahandfulofthestartupsinthe

digitalspacebelow.Someofthemhaveappearedearlierinourdiscussionof

fintech.Nevertheless,itisimportanttodiscussthemheretohighlighttheir

innovationandentrepreneurshipaspects.

2.2.1 FlipkartE-commerceCompany

ThebiggestsuccessstoryinIndiandigitalentrepreneurshipspacehasbeen

Flipkart.10TwoIITgraduatesstarteditinSeptember2007asawebsiteoffering

homedeliveryofbooks.In2018,Wal-Martacquireditfor$16billion.Thisisthe

largesteveracquisitionofanIndianstartup.In2007,Flipkartmadejust20

deliveriesintotal.Thefollowingyear,thisfigureclimbedupto3,400deliveries.In

2009,thestartupacquiredsufficientvisibilitytoreceiveaventurecapital

investmentof$1million.Itbegantheyearbyhiringitsfirstemployeeandendedit

with150employees.In2010,Flipkartbegansellingmoviesandelectronicproducts

suchasvideogamesandmobilephones.Thefollowingyear,thecompanyexpanded

intosellingcameras,computers,laptops,largeappliances,andstationery.Italso

launcheditsdigitalwalletandacquiredtwodigitalcontentcompaniesand

expandedthedeliverynetworkto600cities.

In2013,Flipkartadoptedamarketplacemodelandbroughtthird-party

sellerstoitsplatform.Thatyear,italsoraised$360millionandthefollowingyear,

$1.6billion.In2014,itacquiredonlinefashionretailerMyntraandmajoritystakes

inafter-salesserviceproviderJeevesandpaymentsplatformNgpay.Bytheendof

10MydiscussionofFlipkartisbasedontheblogathttps://yourstory.com/2018/05/flipkart-through-the-years/(accessedonSeptember20,2018).

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theyear,itwasvaluedat$11billion.Inthefollowingyears,thecompanymade

severaladditionalacquisitions.By2016,itsmobileapphad50millionusersandit

had100millionregisteredcustomers.In2017,Tencentinvested$1.4billionand

SoftBank’sVisionFund$1.5billioninthecompany.Thesameyear,Flipkartalso

acquiredeBayIndia.By2018,whenWal-Martacquiredit,thecompanyhad

130,000third-partysellersandwasexpandingitsproductcataloguetohouse80

millionproducts.

2.2.2 PaytmPaymentsWallet

Aspreviouslymentioned,Paytm(paythroughmobile)beganasadigital

walletin2010.Thefounderstartedthecompanywitha$2millioninvestmentofhis

own.BasedonsecondarysharessaleattheendofJanuary2018,itisnowvaluedat

$10billion.Itsoperationsincludeapaymentsbankandane-commercebusiness.

AlibabaGroupandSoftBankarebothinvestorsinPaytm.

Paytmwalletallowsausertotransferfundsdirectlyintoarecipient’s

accountusingaQRcodeormobilenumber.InMay2018,thecompanyhadseven

millionofflinemerchantsspreadoverIndia’s600districts.Thefirstofthese

numbersrosefromjustonemillionatthebeginningof2017.Annualizedgross

transactionsvalueofthecompanycrossed$20billioninFebruary.This

representedafour-foldincreaseoverthepreviousyear.Thenumberof

transactionsusingPaytmfarexceedsthetotalnumberofdebitcardtransactions.11

11Seehttps://economictimes.indiatimes.com/small-biz/startups/newsbuzz/paytm-transactions-reportedly-grew-four-fold-to-20-billion-in-february/articleshow/63375003.cms(accessedonSeptember22,2018).

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ByAugust2018,Paytmhad300millionregisteredusers.Thisfigure

compareswith520millionAlipayusersand237Paypalusersaroundthesame

time.12Onaverage,oneinfiveIndiansalreadyusesPaytm.

2.2.3 OlaCabService

Ola,acabhailingservice,representsanothermajorsuccessfulIndianstartup

indigitalspace.Thestartupwaslaunchedin2010incompetitionwiththe

AmericancabhailingservicecalledUber.Foundedbytwoyoungentrepreneurs,it

operatesinmorethan110Indiancitiestoday.Itofferslicensedtaxis,privatehire

carsandrickshawsandhasanetworkofapproximatelyonemilliondrivers.The

companyhasbeenvaluedat$7billionandhasraisedapproximately$3billionin

investmentfunds.ItsinvestorsincludeSoftBank,Tencent,DidiChuxingandDST

Global.InJanuary2018,OlalauncheditsserviceinAustraliaandcurrently

operatesinsevencitiesthere.AttheendofAugust2018,italsolaunchedlicensed

taxiandprivatehirevehicleservicesinSouthWalesintheUnitedKingdom.13

2.2.4 Rivigo:AlogisticsStartup

Anespeciallycreativestartup,whichcanmakeamajorcontributionto

transformationoflogisticssectorinIndia,isRivigo.14Launchedin2014,thestartup

saysonitswebsite,“WearetransforminglogisticsinIndiamakingithuman,faster

andsafer.”Undertheconventionaltruckingmodel,asingledriverdrivesthetruck

12Seehttps://expandedramblings.com/index.php/many-users-epay-platforms/(accessedonSeptember22,2018).13Formoredetails,seehttps://techcrunch.com/2018/08/06/ola-is-bringing-its-ride-hailing-service-to-the-uk/(accessedonSeptember20,2018).14MydiscussionofRivigodrawsheavilyonhttps://yourstory.com/2018/03/rivigo-billion-dollar-valuation-journey/.

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toitsfinaldestinationhundreds,eventhousands,ofmilesawaywithmultiplestops

onthewaytocatchuponsleep.Stopsonthewaycausedelaysinreachingthe

destinationandthedriverremainsseparatedfromhisfamilyfordays,sometimes

weeks.Temptationtokeepdrivingthetruckforlonghourstocompletethetask

soonercanalsoleadtofatigueandresultinaccidents.

Toovercometheseproblems,Rivigohasinventedwhatitcallsa“relay”

modeloftrucktransportationwherebyadriverdrivesthevehicleforfourorfive

hoursand,atadesignatedpitstop,meetsanotherdriverdrivingatruckinthe

oppositedirection.Thedriversexchangethetruckswitheachotheratthepitstop

anddrivebacktowheretheycamefrom.Uponreturningtoahomepitstop,each

driverhandsoverhistrucktoanotherdriverwhocarriesittothenextpitstop.This

“relay”drivingoftruckskeepstrucksmovingcontinuouslywhilealsoallowingeach

drivertoreturntohishomethesamedaytobewithhisfamily.Themodelhas

allowedthestartuptosubstantiallyreducethetimeatrucktakestoreachits

destinationwhilealsosavingthedriversfromhavingtospendlongperiodsaway

fromfamily.Withmorehumanetruckingjobs,thestartupisalsoabletorecruit

driverswithgreaterease.

Infouryears,byMarch2018,Rivigohadafleetof3,000trucks.The

companyhascreatedanetworkof70pitstopsnationwide.Eachdriverdrives

about250kilometers,orfivehours,betweenpitstops.Simultaneousmovementof

alargenumberoftrucksinmanydirectionsrequiressolvingacomplex

programmingproblem.Asophisticatedalgorithmdoesroutingandassignmentof

drivers.Wheneveroneormoretrucksbreakdown,thealgorithmre-optimizesand

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rejigstheassignments.Eachdrivercarriesamobileapp,whichprovidesnecessary

instructionsinrealtime.

Rivigoalsodeployssophisticatedtechnologytomonitorpilferageofgasoline

andrefrigerationofperishablesittransports.Duringityearsofoperation,ithas

collectedvastvolumeofdata,whichitisbeginningtousetodeployArtificial

Intelligence.In2017,thecompanyraised$50millionandwasvaluedat$1billion.

2.2.5 OYOHospitalityCompany

Startedin2013byan18-yearoldentrepreneur,OYO(“onyourown”)isa

hospitalitycompanyofferingbudgethotelrooms.Thestartuppartnerswithhotels

togiveguestsasimilarexperienceintermsofcertainbasicamenitiesacrossthe

nationathighlycompetitiveprices.InJanuary2013,thestartuphadjustonehotel

withwhichitpartnered.ThatnumberrosetothirteeninJuly2014andrapidly

climbeduptomorethan8500bySeptember2018.In2018,OYOofferedhotel

roomsin230Indiancities.IthasalsoexpandeditsoperationsabroadinMalaysia,

NepalandChina.In2017,thestartupraised$260millionwithSoftBankbeingthe

largestfunder.AlthoughthecurrentvaluationofOYOisplacedat$1billion,ithas

sofarbeenrunninginsubstantiallossesanditsbusinessmodelhasbeen

questioned.15

2.3 StartupIndia

In2015,theGovernmentofIndiaannounceditsStartupIndiainitiative.

Underit,thegovernmentcreatedasimplifiedsetofrulesforenterprisesqualifying

15Seehttps://the-ken.com/story/can-oyo-go-from-ponzi-to-profit/.

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asstartups.Italsocreatedafundof100billionrupeestoprovidefinancingfor

startups.

StartupIndiadefinesastartupasanenterprisethatislessthansevenyears

oldandhasaturnoveroflessthan250millionrupees.UndertheInsolvencyand

BankruptcyCode,astartupcanexitin90days.Itcancomplywithlawsthrough

self-certificationandisfreefrominspectionsforthefirstthreeyearsofoperation.It

isalsoexemptfromcapitalgainsandothertaxesinthefirstthreeyears.Asapartof

StartupIndiainitiative,thegovernmentalsolaunchedtheAtalInnovationMission,

whichoffersfundingforincubatorsandAtalInnovationLabsinschools.

3 ConcludingRemarks

Inthispaper,IhaveanalyzedthemannerinwhichtheDigitalRevolutionhas

progressedinIndiaintwoareas:fintechandentrepreneurship.Indiscussing

fintech,Ihavedescribedthekeychangesthatdigitaltechnologyisbringingto

transactionstakingplaceamongthegovernment,individualsandbusinesses.The

focusofthisdiscussionhasbeenoninclusionanddevelopmentaspectsofthe

changespawnedbydigitalization.Thegovernmenthasplayedaveryactiverolein

drivingthechangeinthisareainIndia.

Thekeytotheongoingchangeinfintech,whichhasaconsiderabledistance

togoinIndia,isabiometricidentityknownasAadhaar.Nearlyeveryfinancial

transactionrequiresdefinitiveproofofidentityofthetransactingparties.Aadhaar

providesthisproofwithoutanydocumentviabiometricverification.Thisisamajor

assetthecountrynowhas.Thoughthereremainsomelegalissuesrelatedtodate

privacytoberesolved,withthematterunderconsiderationbytheSupremeCourt,

35

thegovernmentandbusinessesarealreadyusingthisasseteffectivelyincreative

ways.

Regardingentrepreneurshipinthedigitalspace,adistinctioncanbedrawn

betweendigitaltechnologyentrepreneurshipanddigitalentrepreneurship.The

formertypicallyinvolvesinventionofdevicesthatfulfilloneormoreneedswhile

thelatterreliesprincipallyonnewsoftware,whichisusedonexistingdevicesand

digitalplatforms.IhaveshownthatIndiahashadlimitedsuccessatbestindigital

technologyentrepreneurship.Thoughstartupshaveinnovatedhighlycost-effective

devices,theyhavenotbeenabletoturnthemintomajorcommercialsuccesses.

ThisoutcomemirrorsIndia’sgenerallylimitedsuccessinthemanufacturingsector.

Thestoryinthedigitalspacehasbeenahappieronewithalargenumberofstartups

successfullyscalingupandeventakingtheirinnovationstoforeignmarkets.

Fourfinalpointsmustbemade.First,notechnologycansubstitutefor

growthinsofarasinclusionisconcerned.Intheend,therealempowermentcomes

fromhavingcommandoverfinancialresources,andthatcommandcomesfrom

income.Indeed,withoutaccesstoincome,eventhespreadoffinancialtechnology

risksremainingasupplysidephenomenon.Whetherornotindividualsand

householdsusethesuppliedtechnologiescriticallydependsontheirincomes.Asan

example,thoughthegovernmentandbankshavebeenabletoproliferatebusiness

correspondents,theuseoftheirserviceshasremainedlimitedsimplybecause

incomesandcommercialactivityinthesmallervillagesarelimited.

Mysecondpointisthatmereavailabilityoftechnologywillnotlead

individualstoadoptit.Incentivesmatter.Asanexample,iftaxratesarehigh,

36

partiesinvolvedinatransactionhaveanincentivetousecashtomakepayments

andnotriskcreatingadigitalrecordofthetransactionbymakingorreceiving

paymentdigitally.Thisisparticularlytrueofsmallbusinesses.Likewise,iftax

enforcementauthoritieshaveahistoryofharassingtaxpayers,smallbusinesses

wouldtrytoremainoutofthetaxsystem.Onceagain,theywouldprefertotransact

incashaslongaspossible.

Mythirdpointisthatitisimportantnottofallintothetrapofturning

technologyintoanenemyofgoodpolicies.Momentumfortheremovalofpolicies

thatarepopularbutneverthelesspromoteinefficiencycomesfrompoor

implementationofthosepolicies.Largeleakagesandpoortargetingofsubsidies

canprovidecriticsmuchneededammunitiontoadvocatefortheirremoval.Tothe

extentthattechnologybecomesthemeanstoeffectiveimplementationoftheseanti-

growthpolicies,itturnsintoanenemyofreform.Insuchcircumstances,thetaskof

convincingthepolicymakersthatwhatisneededisnoteffectiveimplementationof

thepoorlythoughtoutpolicy,butitsremoval,becomesyetmoredifficultfor

economists.

Finally,Indianeedstokeepalevelplayingfieldbetweendomesticand

foreigninvestorsinthedigitalspace.WhileIndiamusttakeallnecessarystepsto

ensurecybersecurity,itmustresistcallsforrestrictionsonforeigninvestorsto

promotedomesticentrepreneurs.Suchrestrictionsharmtheconsumerbydenying

herthebestservice.Theyalsoexertnegativeinfluenceonproductivitybyblocking

theentryofenterprisesemployingthelatestinnovations.Indeed,totheextentthat

mostsuccessfuldomesticstartupsinthedigitalspacethemselvesachievehigh

37

valuationsafterforeigninvestorsmakesizeableinvestmentsinthem,tiltingthe

playingfieldinfavorofdomesticinvestorsisself-defeating.Insuchsituations,they

willhavetooptoutofforeigninvestmenttoavailthebenefitsofbeingconsideredas

domesticenterprises.Itisimportanttorememberthatformanyyearstocome,

foreignventurecapital,angelinvestment,andprivateequitywillremaincriticalto

thegrowthofstartupsinIndia.