Digital Revolution, Financial Infrastructure and ... · individuals and households. I will also...
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Working Paper No. 2019- 01 Digital Revolution, Financial Infrastructure and Entrepreneurship: The Case of India Arvind Panagariya Columbia University School of International and Public Affairs Columbia University New York NY 10027
Transcript of Digital Revolution, Financial Infrastructure and ... · individuals and households. I will also...
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).
30
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/.
32
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/.
34
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.
