The Digital Public Goods Alliance aims to promote digital public goods (open-source software, data, AI models, standards, content) for attaining sustainable development goals in low- and middle-income countries. These goods aim to reduce monopolies, foster innovation, and address the digital divide by following privacy laws and best practices while promoting the SDGs. This is done in collaboration of government and IT industry. The growth of India's IT services sector is rapid, with over 90,000 startups contributing to the $40.7B raised in 2022 itself. These startups drive innovation and challenge established players to keep up, leading to a dual boost in innovation. This article will discuss some of the key DPGs of India that is transforming the Indian economy. Previously fragmented, it has undergone integration over the past decade through the expansion of highway networks, tripling of local airline traffic, implementation of GST, and advancing towards a digital economy by incorporating advancements like Aadhaar (2010), UPI (2016), and ONDC (2022). These advancements will provide India with a worldwide edge in the flow of money and goods.

Unlike other developed economies with exponentially higher ad spends per capita, in India advertising dollars cannot subsidize the creation of digital platforms which is why India needed to build its own microtransactions digital platform. UPI, with the help of Aadhaar identity, aadhar KYC for banks, affordable internet, digilocker and aadhar e-sign enables a high-volume, paperless, cashless, digitally verified zero-fee economy. Tax collection has also improved, highest 11.7% Tax to GDP in the last decade, more money to finance government spending. Additionally, there has been a rapid improvement in bringing capital to markets, be it through IPO applications or SIP autopay mandates all connected to UPI and bolstered by higher financialization of savings. On the logistics front, FastTag, eWayBill and GST have cut waiting times from days to minutes for vehicles with the ease of keeping the same tag no matter what state you are in and automatic debit from your connected accounts. The end result is all these saving millions of tonnes of CO2 emissions, improvement of revenue collection at tolls by reducing leakage and improving monetizability.

Over 1.31B of 1.41B Indians have enrolled in Aadhaar and linked their IDs to their bank accounts, establishing it as the globally, the largest and most successful national registry project, enabling the easy facilitation of targeted, direct welfare programs. Aadhar enabled state and union governments to roll out relief worth over Rs. 26.3Trillion in FY21-22 during pandemic. JAM (JanDhan-Aadhar-Mobile) has revolutionized the delivery of government benefits by reducing leakages to intermediaries and duplicate claims and using Direct Benefit Transfers to transfer financial benefits directly to the beneficiaries' bank accounts. Over 90 million Indian households are eligible for DBT and by December 2022, deposits under Jan Dhan exceeded Rs. 1.8Trillion, with 478 million accounts opened, 265 million of which were for women.

The mobile phone, being the final part of the "JAM trinity", connects Aadhaar holders with their Jan Dhan bank accounts. The widespread availability of cheap 4G access through Jio and affordable smartphones led to a surge in mobile data usage (now the highest in the world, grown 40x in last decade), resulting in a system that minimizes the potential for fraud and leakages, while promoting financial growth. This paved the way for the launch of UPI, enabling real-time payments through any bank account registered on the UPI app using just a phone number or QR code, improving the speed of money circulation, which in turn could lead to a more rapidly growing economy. As of FY22 as per NPCI and RBI data, around 88% of all transactions by value in India were through digital methods, most popular being NEFT( 55%) and UPI (16%). By volume, UPI transactions account for 40% of all digital transactions. 

The implementation of a unified Goods and Services Tax (GST) in 2017 has led to increased enforceability and compliance, boosting tax collections. The removal of fragmented taxation across states and trade levels has led to an increase in both direct and indirect taxes as a percentage of GDP.

Efforts to tackle tax evasion have led to a shift by Indian households from physical savings to financial savings, resulting in incremental financial savings of $300 billion per year in the past five years. This coupled with demonetization has also shrunk the informal unorganized sector from 52% in to less than 20% by FY18. This has significantly lowered the cost of capital for companies with good financial standing and responsible allocation of funds.

India has huge demand for credit and now bigger supply due to increasing financialization of savings (14.8% in FY22 v/s 7.7% in FY18), facilitated by DPGs to better analyse and reduce risk, price risk and collected digital cash flow. Volume, velocity, diversity of credit expected to explode. Currently small ticket loans are increasing due to informational collateral instead of physical collateral. The Indian banking sector faced severe trouble by 2015, due to sour loans to power and infrastructure. It was revived in the past 6 years through various measures, including the RBI's Asset Quality Review (2015), the implementation of Insolvency & Bankruptcy Code (2016), and merging of struggling public sector banks with strong capital adequacy. These actions effectively reduced stress assets and strengthened the sector.

‍

‍

‍

‍

‍

‍

‍‍

ONDC (Open Networked Digital Commerce) aims to democratize the ecommerce industry by providing greater control to consumers and increasing visibility for smaller vendors. ONDC functions as an interoperable facilitator of trade, enabling consumers to choose from various sellers, payment methods, delivery agents, etc. The system should increase competition and efficiency, leading to a boost in economic growth. The ecommerce market is currently dominated by a few large platforms that have significant control over which sellers can list products and at what price. This limits the ability of smaller producers to reach customers through these platforms. Additionally, these platforms offer a bundled experience, where each step from payment to delivery is controlled by the platform, making it difficult for consumers to purchase items from smaller businesses directly. This also results in small businesses becoming dependent on the platform, as leaving it would result in loss of customers and ratings. ONDC aims to address these challenges by providing a more inclusive and transparent ecommerce ecosystem which should boost economic growth.

1. Why Would Ecommerce Giants Agree to ONDC Despite potential competition? ONDC enables trade by providing increased visibility for sellers to access larger markets, leading to market expansion instead of substitution. The giants can continue their own platforms while also joining ONDC, offering more options to buyers and increased visibility for sellers.

2. Who Will Assume Responsibility for Issues in ONDC's Disaggregated System? ONDC records data at each step of the process to track what has been dispatched, received and its condition. The right agent in the system is likely to assume liability for the product, making it easily trackable.

3. Can ONDC Protect Buyers' and Sellers' Information While Maximizing Benefits? Orders placed on ONDC are considered digitally signed micro-contracts, ensuring fulfillment of commitments. Additionally, the buyer and seller catalogs are independent at all times, preventing misuse of data.

The digital network of India built on Aadhar, Jan Dhan, UPI and cheap mobile data and phone access, provides a strong foundation for ONDC to succeed which is why other countries have failed to create anything similar yet due to lack of the basic foundation that JAM has built. ONDC benefits both SMEs and customers and this step-by-step development of India's digital economy will be a massive competitive edge in the coming decade. Ecommerce by ONDC will bring small retailers to focus. Improves digitization of payments, inventory, discovery and logistics. This will be bolstered by DPGs Bhashini which uses AI to solve last mile problems for users in 22+ languages.

‍

Investment Implications

Over the past decade, well-managed companies have leveraged structural changes in the economy to improve their business performance. These improvements have increased their asset turnover, operating efficiency, and working capital cycles, resulting in higher free cash flow and the ability to scale the business 4-5x. In the 10-year period ending March 2012, the Nifty index added $440B in market cap, with 80% coming from 17 companies and a median Total Shareholder Return (TSR) CAGR of 26%. The top 20 FCFE companies accounted for only 23% of India's FCFE. In the next decade ending March 2022, the Nifty added $1.4T in market cap, with 80% coming from 20 companies, a median TSR CAGR of 18%, and the top 20 FCFE companies accounting for 51% of India's FCFE. What should be noted is that the type of concentrated wealth, while PAT of the top 20 firms remained stable, FCFE doubled as a percentage of total.

Why is this the case?

1. Efficient companies leverage networked economies better: Efficient companies with strong nationwide distribution systems have gained an advantage over regional and local players due to the rise of affordable and user-friendly enterprise technology such as mobile, SaaS, and cloud, leading to increased profit margins, reduced working capital cycles, and improved asset turnover when effectively implemented.

2. Investing in technology leads to increasing returns to scale.

Increasing returns refers to the tendency for returns to increase as output increases with minimal additional inputs. This modern economy shift from diminishing returns is due to the economy moving from resource-based bulk processing to knowledge-based design and reproduction. The nature of goods produced has changed from bulk-produced and process-driven to technology-driven and customized, creating a positive feedback loop in the economy. Algorithms once developed can be applied to numerous other functions with slight tweaks, making the marginal cost of production redundant. An example of increasing returns is Microsoft's Windows operating system, which expanded its offerings at marginal cost and leveraged network effects to dominate the operating system industry.

3. Profit growth is less tied to traditional capital expenditures

In the past 40 years, corporate investments have shifted from tangible to intangible assets which affects businesses:x

• Scalability: once developed, intangibles can be easily scaled to any level
• Synergies: multiple intangible assets can collectively produce higher returns.
• Sunk costs: costs tied to intangibles cannot be recovered
• Spillovers: benefits of intangibles investments are often reaped by others

These factors are crucial in becoming a consistent compounder as a company can scale its intangible assets (e.g proprietary database), extract spillovers (e.g. third party platform like SAP), and create synergies between its intangible investments (unique database connected to SAP with big data), potentially dominating its industry in domestic and international markets.

‍

Growth of Startups, FDI and GDP

GDP has grown at 7.1% CAGR and FDI inflows have grown at ~9% CAGR, from 2011 to 2022, making it one of the fastest growing economies in the world. Services sector accounts for over 55% of the GDP, and the industrial sector, which accounts for nearly 30%. The services sector has been growing at a CAGR of around 8% and the industrial sector at a CAGR of 7%. The major industries contributing to the growth of the services sector include the IT and ITES, banking and financial services, and tourism. Meanwhile, the key industries driving the growth of the industrial sector are pharmaceuticals, automobile, and chemicals. The FDI inflows into these sectors have been particularly strong, with the IT and ITES sector attracting the highest FDI inflows at a CAGR of over 10%.

The startup industry in India has been thriving over the last decade, growing at a much faster rate than countries such as the United States and China, with growth rate of ~17% CAGR in the number of start-ups, making it one of the largest startup ecosystems in the world and ranking 2^nd globally in terms of number of unicorns as of 2022. In the last 10 years, these industries have raised a total of $70 billion in funding. With a large pool of talented and ambitious entrepreneurs, the country is well on its way to becoming the foremost start-up hub. This growth in the start-up sector has not only contributed to the country's GDP but also helped to attract a lot of FDI. With the government's continued efforts to create a favourable business environment and attract foreign investment, it is expected that India's economy will continue to grow in the coming years.

‍

The future of Indian connectivity

The currently in progress infrastructure connectivity plan, GATI Shakti ’s main objective is to build a robust, secure digital infrastructure to integrate 16 of the Government of India's key ministries and departments, including the Railways and Roadways. This will streamline information flow and accelerate project clearance processes through better coordination among the ministries. This is also expected to generate employment for millions and meet three key objectives: seamless multimodal connectivity for easy movement of goods and people, optimized resource usage and capacity creation, and resolution of disjointed planning, standardization, and clearance issues. Key components of the plan include the expansion of high-speed internet connectivity connecting all gram panchayats, development of digital infrastructure, establishment of data centers and cloud computing services, and the promotion of electronic transactions. To ensure the security of digital transactions, the plan calls for the implementation of cybersecurity measures, including encryption and authentication. Additionally, the plan aims to provide digital literacy and skilling programs to help citizens take advantage of the digital economy.

UPI 2.0 is expected to enable data-less money transfer just with SMS eliminating the need for internet and smartphones and Jan Dhan 2.0 is expected to focus on digital literacy, better risk analysis for improving credit access especially to women, additional banking facilities and incentivizing savings. The democratization of credit through an Account Aggregation Framework, combined with simplifying commerce through ONDC and logistics transformation, will bring about a revolution in ecommerce and banking in India, particularly for marginalized communities. Instead of creating fullstack solutions to sell digital products, India is making fullstack solutions to sell physical products in a digitized economy, connecting around 1.4 billion people.

A decade of these economic changes has produced a group of efficiently-run, technologically advanced Indian firms listed on stock markets that invest greatly in intangible assets such as R&D, networks, training, branding, and databases and contribute to the growth story that is India. The digital economy in India has tremendous potential for growth and development. With a large and young English-speaking population, increasing internet and smartphone penetration, and supportive government policies, India is well positioned to become a leader in the digital space. With continued investments in technology, education and training, and innovation, India is unleashing the full potential of its digital economy, creating new opportunities and improving the lives of its citizens

‍

Sources:

https://marcellus.in/blogs/from-aadhaar-to-ondc-indias-methodical-build-of-digital-assets-creates-competitive-advantages/#

https://youtu.be/MrC7mFx3xgg

https://digitalpublicgoods.net/blog/state-of-the-digital-public-goods-ecosystem-2022-report/

https://marcellus.in/blogs/indias-moment-after-a-decade-of-structural-reforms/

https://marcellus.in/blogs/winner-takes-all-in-indias-new-improved-economy/

https://sbi.co.in/documents/13958/25272736/031122-Ecowrap_20221103.pdf/cd4b1203-b560-54b5-0b24-600015b2a81c?t=1667455438553

https://pib.gov.in/FeaturesDeatils.aspx?NoteId=151163&ModuleId%20=%202

https://youtu.be/py0cfqlhTp8

https://youtu.be/YygkS-vosNI

Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Nothing on this Blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorised to provide investment advice.