For the first 50 years after independence the Indian economy grew at a snail’s pace, which became known as the ‘Hindu rate of growth’. That changed 25 years ago when, spurred by a series of economic reforms, the growth rate jumped to seven per cent, lifting 300 million people out of poverty. China made a similar transition, prioritising manufacturing and infrastructure investment. The Chinese government used an authoritarian, top-down macro push. India's transformation has been very different, with economic growth driven from the bottom up.
India has made the transition from a largely agrarian economy to a services economy, bypassing manufacturing altogether. A series of privatised models evolved, leapfrogging to the next generation technologies. Television leapfrogged to cable, bypassing free to air. Telecoms skipped landlines and went straight to 2G, and then to 4G. Today India has one of the lowest call rates and data rates in the world, creating a large subscriber base of 900 million users. It is now the fastest growing smartphone market as well.
More recently, ‘Digital India’ has become the Indian Government’s single biggest initiative. This is underpinned by “IndiaStack”, a paperless, cashless, consent-based scalable architecture. These public assets have revolutionised the way India does business, making it a leader in digital infrastructure. Today, more than 1.2 billion people have a digital identity, known as Aadhaar. Enrolment into Aadhaar was rapid - reaching one billion people in just 5 1/2 years, one of the fastest in the world.
This digital identity has resulted in lower know-your-customer (KYC) costs, and rapid expansion of the banking system. Today most Indian families have access to a bank account. The subsidy program now transfers benefits directly into bank accounts, reducing wastage and corruption. Mobile payments have bypassed plastic cards, propelling India towards a cashless economy. The digital infrastructure includes a digital locker for important documents such as driver’s licenses and degree certificates.
Taxation was simplified, resulting in a uniform tax with a digital interface. The tax coverage has improved significantly.
The digital infrastructure is becoming richer, with new additions enabling an ambitious healthcare and health insurance scheme and a digital sky for drone flight plan authorization, for example. The success of IndiaStack has attracted considerable interest from other countries, who are exploring ways and means to leverage this infrastructure for their own use.
A similar leapfrog story appears to be playing out in the entrepreneurial ecosystem. India has historically been a land of traders and small-time entrepreneurs. A technology revolution started with IT and Business Process Outsourcing (BPO) in the 1990s. The ambition was clear: there is a demand for software and India has the talent to meet it. These scaled remarkably into a $180 billion industry with success stories like Infosys.
A second wave started with a focus on the Indian consumer. The aim was to meet the aspirations of a growing middle class online. Risk capital was available for some of these models, and there has been a boom in ecommerce, market places and hyper-local delivery. This followed the path of other markets, and many global leaders entered India. Indian companies have competed in an open local market. India now has more unicorns, the most successful of which has been acquired by Walmart. While some elements are comparable to what happened in China, this growth happened in an open market, despite weaker infrastructure, and without government capital.
Meanwhile, the first wave of IT, services and BPO matured into a large hub for global R&D centres which now takes ownership of global products. The talent pool has matured to include IT, software, management, and R&D talent, leading to the creation of an innovation hub.
A combination of mature talent and markets is creating a third wave of start-ups in India. A supporting ecosystem of advice, expertise and capital is nurturing these start-ups, which are innovative, focused on deep tech and solving problems in B2B and other spaces. Some challenges do remain, including a smaller number of early adopters. Yet there is a confidence that these start-ups will take off and create value. Early signs are encouraging, with India already becoming the third largest start-up ecosystem in the world.
The leapfrog in the digital infrastructure, and the evolution of the entrepreneurial ecosystem create an exciting outlook for India. There are many challenges: India is a chaotic democracy, regulatory institutions are maturing and infrastructure is still evolving. However, there is the talent, the supporting ecosystem, the market and the growing economy. Together, these provide the necessary ingredients to fuel entrepreneurial aspirations, and allow India to make the next leap.
Sanjay Jain and Som Pal Choudhury are Investment Principals at Bharat Fund, investing in technology companies in India.