Progress comes in layers

The 'Silent Transformation of India' is now maturing, creating a fertile ground for growth of new businesses

Just funding doesn’t a business make. Last week, in the first part of a four-part series on the discovery of 100 unicorns in India, we discussed the important role of private equity and venture capital in providing the risk capital that catalysed growth for these firms. That said, capital is only an enabler of growth, valua­t­i­ons can be volatile, and invest­ors in private markets are as susceptible to herd behaviour as those in listed stocks. Eventually, business opportunities must exist or be created. If there is no promise of future growth in profits, backed by evidence of other firms and funds having delivered in the past, capital inflows would stop.
 
Similarly, cheap capital can allow businesses to chase growth, say by spending large sums advertising on national TV during IPL (Indian Premier League), giving aggressive (and perhaps unsustainable) discounts, or building a factory that can meet a fifth of global demand for that product. Each of these are business strategies that have been used by un­i­corns, and involve business risk that would have been unthinkable if capital was scarce. However, incurring losses is not the business goal, and there are several firms that are growing rapidly without taking outsized business risks too.
 
What then are the factors creating the fertile ground for this capital to operate in? In this column we discuss drivers that are helping businesses across multiple sectors, and the next column will focus on sector-specific enablers of growth.
 
Very few of the businesses in our list would have grown without the rise in tele-density, data use and smartphone penetration. Global innovation, not just in telephony standards like 3G and 4G, but also in electronics that dramatically brought down device costs making them affordable to a larger part of the population, has helped. Till 2005, less than 15 per cent of Indians had a phone, versus 85 per cent now; 700 million Indians can now access the internet; and nearly 40 per cent have smartphones, which mean access to computing; this number could double in the next five years. Telecom operators further reduced costs, improving penetration and also enabling new services. New-age distribution companies can now connect to millions of retailers efficiently, supply chains have become leaner, and e-commerce and EduTech companies can transact with remote users.

Illustration by Binay Sinha

 
Other changes helped in improving tele-density, too. Usage costs and device prices had fallen by 2008, but only 10 per cent of rural Indians had phones. There were challenges related to the cost of service provision (running telecom towers on diesel generators was too expensive), ease of use (if the phone could not be charged at home, it had limited utility), as well as the economic value of owning a phone (people in a village without a road found it less useful).
 
The most important change in this regard was the Prad­han Mantri Gram Sadak Yojana, which drove near-universal connectivity of habi­tations by all-weather roads, compared to just about half at the turn of the century. Roads speeded up electrification — while the government had had plans to electrify rural households at least since the early 1970s, execution lagged. Let alone the cost of moving equipment and stringing the wires, if a pole got damaged or a transformer malfunctioned, repairing it without good roads is too costly and time-consuming. From just 67 per cent of India’s households having wires going inside them in 2011, there is now near-universal electrification.
 
Improvement in rural roads has also helped a large part of the population to connect economically through efficient movement of labour and goods. They improved evacuation of perishables like dairy, vegetables, poultry as well as labour, the most perishable of them all, and also expanded the distribution reach of non-perishables and medicines (rural retail stores were unviable without the companies’ trucks replenishing frequently), as well as services like education and health.
 
Similarly, electrification helped expand the work day (by reducing the cost of light: that from a candle or a kerosene lamp is too expensive), automation of unpaid work in the household through large and small appliances, and is also helping expand the cold chain. Nearly a decade back, when we started flagging these changes, we called this “The Silent Transformation” of India.
 
Just as roads enabled electrification and that helped phones, phones helped establish a platform for financialisation. The cost per transaction in a bank branch is so high that universal access to bank accounts was impossible without mobile banking. Aadhaar helped, bringing down to near zero the cost of KYC (Know-Your-Client) and proof-of-identity for every financial transaction.
 
The Jan Dhan Yojana took advantage of these changes and ensured every household had access to bank accounts. This not only significantly expanded state capacity (allowing direct benefits transfer), but also established the foundation of the world-leading “India stack”. Unlike the closed and/or silo-ed systems in the developed world and China, India built an open system on which innovative applications like UPI (Unified Payments In­t­erface) could function. India skipped the cards-based paym­ent system to the more efficient digital system: Nearly 30 per cent of all payments last year were digital, from less than 5 per cent five years earlier.
 
Now the next layer is being built: “account aggregators” can accumulate financial tran­s­action data as well as other details like GST (Goods and Services Tax) returns, and with the owner’s permission, share it with lenders to assess creditworthiness. FinTech firms’ len­d­ing models have also evolved over the last few years, and they are in a position to grow the ticket sizes of their loans. Over and above the creation of fast-growing businesses in financial services, this also enables the growth of millions of smaller businesses that earlier struggled due to lack of credit.

Long-lasting monuments need strong foundations, which take time to build. A decade back, India’s low financial penetration appeared to be an insurmountable challenge. However, improvement in basic infrastructure and systems being built layer-upon-layer have now brought us to a point where there is reason for optimism and a solution no longer seems out of reach.
 
In the third part we will discuss the chances of building new and more productive layers on top of what we currently have.

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The writer is co-head of APAC Strategy and India Strategist for Credit Suisse
The first of the four-part series appeared on April 6. The third part will appear next Thursday