| Abstract: India has emerged as a global economic powerhouse, with remarkable consistency in growth and resilience despite various stressors. The country’s GDP growth rate has increased significantly in recent years, contributing to its economic strength, while gross domestic savings have also risen, indicating robust economic performance. This study is an extract of the report “India – A Startups Nation, The Theatre of Step-Function Transformation by TV Mohandas Pai of 3one4Capital“ |
India’s economy has exhibited remarkable consistency and resilience in growth despite numerous challenges, with encouraging economic indicators giving a very positive outlook. India has made substantial progress in terms of economic growth, and its extensive infrastructure provides a robust foundation for development. Furthermore, India’s rising life expectancy and literacy rates, despite a population growth rate of 1.49% over the past three decades, are noteworthy.
India’s GDP growth rate has risen significantly, contributing to the country’s economic strength. Gross domestic savings have also increased, indicating a robust economic performance. In addition, India’s growth projection of 6.1% is the highest among all countries, surpassing China’s growth projection of 4.4% and the world average of 2.7%. India’s extensive infrastructure base ranks among the world’s largest, and the country is the world’s largest producer of milk, cotton, spices, cropland, and livestock in the agricultural sector.
India’s market capitalization has grown significantly, and the country’s median population age of 28.7 years provides a significant advantage compared to other economic heavyweights. The growing middle class in India is driving consumption, leading to higher demand for products in the industrial sector. Additionally, India’s increasing internet usage has led to a surge in online gaming due to the adoption of digital technologies in the country.
Overall, India’s economy has demonstrated impressive growth, with robust economic indicators and a strong infrastructure base, making it a significant player in the global economy.
The future of competition lies in transversal technologies such as applied AI, edge computing, nanomaterials, and tissue engineering. Exponential organizations that organize themselves efficiently, at scale, and with longevity and relevance, are gaining a 10x performance advantage over their traditional peers. It is a race to own the technologies of tomorrow.
Impact of COVID-19 on Indian Industries
The COVID-19 pandemic has had a significant impact on several sectors in India, including tech, health tech, and online gaming. The emergence of edtech companies has led to an unprecedented growth rate of 50-55% and a funding of $2.2 billion in 2020. Market leaders benefit the most due to their established trust and content variety.
Similarly, the healthcare sector has witnessed a paradigm shift with the emergence of health-tech companies. In FY20, the market size for health tech was approximately $1.6 billion, with a projected growth rate of 30-40% from FY20-24. The fear of contracting the virus in hospitals has led to a significant increase in the adoption of telemedicine apps, with online doctor consultations increasing by a staggering 500% in May 2020. Furthermore, the increased demand for at-home services for mandatory COVID testing for travel and other outpatient diagnostics has led to the introduction of new offerings, such as faster testing and approvals for essential services, leading to better health management.
India has pioneered the use of Digital Public Goods (DPGs) as technology-enabled force multipliers for growth, and the India Stack is a testament to this innovation. The platform provides a modern privacy data-sharing framework, game-changing electronic payment systems, and a transition to a cashless economy. The COVID-19 pandemic has highlighted the need for online enablers to tackle digital learning, and the Indian government has been a trailblazer in promoting DPGs as a catalyst for growth through the India Stack. The Stack has transformed the economy by facilitating a shift to a cashless economy and creating world-class products that can take India from being data-poor to data-rich.
The India Stack has had a significant impact on the financial sector, enabling the creation of products such as TReDS (Trade Receivables Discounting System) and the Open Network for Digital Commerce, which provide financial data access and skills registry. The unique digital biometric identity provided by the India Stack gives open access to nearly a billion users, making it an excellent platform for businesses to connect with customers. The volume of digital payments in India has also witnessed a staggering growth rate, with a surge from 4.12 billion in February 2021 to 10.08 billion in February 2023.
The gaming industry has also witnessed a significant surge in growth due to the increase in e-sports viewership caused by the disruption of outdoor sports and the COVID-19 pandemic. The shift from physical to virtual events and competitions has led to a 21% increase in time spent on gaming by each user, and the number of hours streamed watching esports has exceeded those spent on YouTube and Facebook combined. Home-grown gaming streaming apps in India have played a pivotal role in this growth.
The financial sector has undergone significant changes recently, with digitalization transforming the industry’s business models. In this context, the importance of data sharing between different stakeholders has become crucial. Despite the potential benefits of data sharing, there are still some challenges that need to be addressed, especially in the context of lending to micro, small, and medium enterprises (MSMEs).
One of the main challenges facing MSMEs is the high cost of lending, which makes small loans unfeasible. The cost of processing, underwriting, and servicing small loans is much higher compared to larger loans, making it unprofitable for lenders to lend to MSMEs. Moreover, MSMEs often lack the collateral and credit history needed to secure loans, making it difficult for them to access financing. As a result, there is a significant credit gap of over $330 billion for MSMEs globally, hindering their growth and development.
To address the challenge of high cost lending, there is a need to shift from traditional balance sheet lending to cashflow-based lending. Cashflow-based lending is a credit model that focuses on a borrower’s ability to generate cashflow rather than their balance sheet. This model assesses the borrower’s past and projected cashflow to determine their ability to repay the loan. Cashflow-based lending is more suitable for MSMEs as it allows lenders to assess their ability to repay the loan based on their business operations, rather than their collateral or credit history.
Another solution to the problem of MSME credit gap is to establish a common language for lenders and marketplaces to build innovative, financial credit products at scale. This requires a standardized approach to data sharing, analysis, and reporting, which allows lenders and marketplaces to make informed lending decisions. A common language also facilitates the development of innovative credit products tailored to the specific needs of MSMEs, making it easier for them to access financing.
To establish a secure and efficient marketplace for MSME lending, it is essential to connect lenders, loan service providers (LSPs), and borrowers within a secure framework. This framework should be designed to ensure the privacy and security of data exchange between different stakeholders. It should also facilitate the exchange of information between different parties, allowing them to make informed lending decisions based on accurate data.
Finally, to promote data exchange and facilitate innovation, it is important to establish open APIs for credit products. APIs (application programming interfaces) are software interfaces that allow different applications to interact with each other. Open APIs allow third-party developers to access data and services provided by financial institutions, enabling them to create innovative financial products and services. Open APIs for credit products can facilitate the development of new lending models, making it easier for MSMEs to access financing.
Data sharing plays a crucial role in the financial sector’s digital transformation, and consensual data exchange is essential for the efficient and innovative provision of financial products and services. By shifting from traditional balance sheet lending to cashflow-based lending, establishing a common language for lenders and marketplaces, connecting lenders, LSPs, and borrowers within a secure framework, and establishing open APIs for credit products, the financial sector can address the challenges of high-cost lending and the MSME credit gap, and enable MSMEs to access financing and grow their businesses.
BaaS is transforming the banking value chain by allowing third-party distributors to offer banking products and services. However, data silos between financial institutions and service providers present a significant challenge. The solution lies in using Account Aggregators (AA) that act as digital intermediaries to manage data flows based on consent. AAs are data-blind, and the data that flows through them is encrypted, making it secure. Additionally, the Electronic Consent Artefact is architected and approved by the Ministry of Electronics and Information Technology, while the Reserve Bank of India approves AAs through licenses and has oversight on the ecosystem, including FIPs and FIUs.
Another challenge faced by financial institutions is the high cost of lending, making small loans unfeasible, and exacerbating the MSME credit gap. Shifting focus from balance sheet lending to cash flow-based lending, developing a common language for lenders and marketplaces, and using open APIs for credit products can help address this challenge. By leveraging the AA framework, the OCEN will revolutionize digital lending.
The ONDC is an open protocol-based network that enables local commerce across segments, such as mobility and grocery, to be discovered and engaged by any network-enabled application. With over 90 US unicorns having Indian-origin founders, India remains one of the top startup ecosystems for value creation globally, after the US and China. By empowering problem solvers and startups, India can create a robust foundation that enables experimentation and innovation, which will contribute significantly to the growth of the Indian economy.
BaaS, AA, ONDC, and innovative solutions to India’s hard problems will play a crucial role in driving economic growth. The focus should be on empowering problem solvers, creating a robust foundation for experimentation, and developing commercially viable solutions that have a far-reaching consumer impact. The low barriers to entry and a level playing field in India provide ample opportunities for sandbox experiments that are aligned with national issues and have a rapid success/failure cycle, making them more effective.
Based on a study: “India – A Startups Nation, The Theatre of Step-Function Transformation”
by TV Mohandas Pai of 3one4Capital
