Digital Economy-India Perspective

Prime minister Narendra Modi’s Digital India programme is an attempt to create a digitally empowered society, with financial inclusion contributing to a robust formal economy. The main idea behind this vision is not just connectivity, but about how to leverage that connectivity in enabling consumers, small businesses, traders and farmers to harness technology to maximize efficiency and productivity.

 The data exhaust that this digitization will produce can be leveraged for a host of applications. The JanDhan-Aadhaar-Mobile trinity and cashless initiatives are the backbone of the reforms and development agenda.

Demonetization will give a much required push for consumption to be digitally driven and payments to go cashless. Every Indian can now have access to full financial services through the revolutionary IndiaStack. This is open innovation at its best, with tight integration of Aadhaar-identity, digital locker-paperless and payment systems available to all to build their innovations on top of these platforms. Banks can open new accounts using Aadhaar-linked e-KYC mechanisms. Consumers can make payments to merchants using the Unified Payments 

Merchants will benefit from receiving payments digitally at the lowest cost possible. They can raise invoices with GST-enabled software and get appropriate tax credits in their bank accounts.

Tax collections will increase and evasion will come down as electronic transactions grow. Small business owners and micro-entrepreneurs will have greater capacity to act as mini-multinationals in their own right reaching out to make transactions, offer services and interact with other parties in new forms of collaborations across traditional geographical boundaries along the supply chain.

The Demonetization of old currency is a bold move not only for economic and security reasons but for offering an inflection point to leapfrog a few generations into the future and take ownership of the digital industrial revolution. The challenge that lies ahead for FinTech disruptors is to ensure that consumers use digital payments as comfortably as they have used cash.

The first few weeks after the Demonetization announcement saw a multifold increase in usage of cards, mobile wallets and mobile payments. Digital infrastructure is being rolled out faster than ever. For digital methods to be sustainable and as acceptable, pervasive and inclusive as cash, they need to be low cost, work in poor connectivity environments, on basic feature phones and offer the same level of trust as cash. With frugal innovation unleashed by the IndiaStack, is set of APIs that allows governments, businesses, startups and developers to utilize a unique digital infrastructure to solve India’s hard problems, these challenges can be overcome by entrepreneurs. India is heading towards a digitally empowered society where digital payments are set to become the norm and cash the exception.

Considering India’s macro-economic outlook, we believe that domestic consumption, not export, will drive India's growth. The economy will be services-led and not manufacturing-led. Small businesses will lead rather than large corporations. World trade may be shrinking and barriers may be emerging between nations. India, with its vast unified market, youthful labor force and growing digital platform-backed service alone is poised to build a new power economy.

Cashless transactions in India are presently in the following forms: a) cheques, b) RTGS/NEFT, c) debit cards/credit cards, d) ATMs, e) mWallets, f) IMPS, g) mobile banking and h) Aadhaar based.

The World Bank's Global Findex shows that Indians are significantly less familiar with digital banking

Nandan Nilekani has been unequivocal that the systemic shock of demonetization will accelerate the digitalization of the financial economy. A shift which he originally thought would take three years will, he now estimates will be compressed into just three to six months!

The eventual ambition. As Niti Aayog CEO Amitabh Kant has declared is clear. "Mark my words: by 2024, India will have made credit cards, debit cards and ATM machines redundant because of this move. We will have made the greatest innovation and all our transactions by 2024 will be taking place through mobile phones: every single credit and every single debit."

India remains a land of contradictions. It has a large number of people living in poverty, hunger and malnutrition and without access to electricity, safe drinking water and sanitation. 

On the other hand, the number of mobile phone subscribers is nearing a billion. The number of internet users, in spite of significant growth, is at best 400 million.

       

Outages in bandwidth and unpredictable power supply make reliability of digital systems a big challenge.

Currently, only 13% Indians in rural areas actually have internet access - and we are not even talking of quality yet.

For the 400 million Indians with a smart phone the UPI architecture is in place.

Of the 300 million Indians who have basic feature phones only, the USSD technology backened architecture is in place.

Of the 300 million Indians who do not have phones - Aadhaar is the key through micro-ATMs and cashless payments.

In a country of over 1.2 billion people, we currently have only 0.25 million ATM machines and 1.5 million POS card machines. A POS card M/C costs Ra. 9000 and MDR of 0.75% is charged for transactions.

Recently, payments through mWallets have seen an exponential growth. Key drivers of mWallet usage are recharge payments, use of cashbacks and of course the demonetization drive.

 JanDhan accounts and RuPay cards seem to have created a bedrock for the poor, and we can only go forward from here.

 While technological solutions exist, making them work on the ground will require major mindset shifts.

 Also, the government has to place incentives for merchants to prefer digital payments.

The JAM trinity (Jan-Dhan, Aadhaar and Mobile) enables the creation of an IndiaStack (digital interfaces for all aspects of finance like documentation, consent for information, payments, etc.).

Aadhaar will not only deliver minimum consumption to those who need it but make resources available from the subsidy saved from misdirection and fraud. However, the most important use of the Aadhaar platform will be to revive credit and kick-start the Indian economy. The use of JAM will make it possible to eliminate middlemen from the delivery system of the welfare scheme. About 30 years ago, PM Rajiv Gandhi, had famously argued that only 17 paise of every rupee spent on the poor actually reaches them. In order to rectify this malice, the center is looking to move nearly half of its 1000-odd schemes to direct benefit transfer (DBT) from the next financial year in the biggest ever thrust to track beneficiaries, improve efficiency and check leakages. Currently, 78 DBT schemes are operational, which will rise to 600 by April 2017.

Dramatic consequences will follow creating thousands of startups and billions of dollars of capitalization. Four shifts will happen. First, banking at scale because everything a bank can do, individuals can do on the phone with one click. Second, investment at scale - people can buy a mutual fund on the phone with one click. Third, credit at scale where entrepreneurs can get a loan with just a click by aggregating their own data. And fourth, skilling at scale - as platforms happen, India will have thousands, millions of people gathering skills to operate in this new economy with great strides in reading and math literacy happening at scale. 

 Aadhaar transaction data is not only protected by the most powerful contemporary law to restrict data access, but also by unusually strong cryptography (2048-bit).

 Aadhaar was designed in 2009 as an online identity program for all Indian residents. The system has over a billion people and can already authenticate 100 million transactions per day.

What about cyber frauds and cyber security? Most cyber frauds are modern versions of confidence tricks. The hackers do not bother to crack the 128bit encryption, which is akin to attempting to break steel walls. All they need to do is to get you to part with your keys which are your credentials. Also, cyber security measures of various types have been implemented, which are yet to face the test of hacks. 

Cyber insecurity is now a global risk of huge dimensions ($445 billion a year).

Three crucial trends will decisively influence the future of cyber-security - A) The centralization of data, B) The arrival of connected devices and C) The rapid adoption of digital payment technologies.

 Also, we must consider these key questions regarding cyber-security: 1) If cyberspace is a global common, will the socialization of bad follow the privatization of profits? 2) Cyber-security is a private service - how can we make it a public good? 3) India is moving towards security by identity, but many advanced economies believe security comes through anonymity. Are we on the wrong side of history? 4) If cash based systems, ATMs and payment gateways are increasingly vulnerable to cyber-attacks, are distributed ledger technologies going to make governments adopt cryptocurrencies? 5) Cyber security is an expensive proposition in advanced economies, where the most sophisticated instruments are also assumed to be the safest. How can India apply its famed frugal innovation in this space and protect the user while providing affordable access to the internet? 6) Who determines the risk of transacting in the internet, and how?

             

(Ideas in this article have been borrowed from different write-ups by Nandan Nilekani, Amitabh Pant, Nalin Mehta)