ENTREPRENEURSHIP & POLICY WORKING PAPER SERIES Digital Revolution, Financial Infrastructure and Entrepreneurship: The Case of India Arvind Panagariya In 2016, the Nasdaq Educational Foundation awarded the Columbia University School of International and Public Affairs (SIPA) a multi-year grant to support initiatives at the intersection of digital entrepreneurship and public policy. Over the past three years, SIPA has undertaken new research, introduced new pedagogy, launched student venture competitions, and convened policy forums that have engaged scholars across Columbia University as well as entrepreneurs and leaders from both the public and private sectors. New research has covered three broad areas: Cities & Innovation; Digital Innovation & Entrepreneurial Solutions; and Emerging Global Digital Policy. Specific topics have included global education technology; cryptocurrencies and the new technologies of money; the urban innovation environment, with a focus on New York City; government measures to support the digital economy in Brazil, Shenzhen, China, and India; and entrepreneurship focused on addressing misinformation. With special thanks to the Nasdaq Educational Foundation for its support of SIPA’s Entrepreneurship and Policy Initiative. SIPA’s Entrepreneurship & Policy Initiative Working Paper Series Digital Revolution, Financial Infrastructure and Entrepreneurship: The Case of India Arvind Panagariya1 Digital Revolution has been sweeping across the world I divide the paper into three parts. Part 1 focuses on over the last three decades. This revolution has spread the spread of financial technologies in India. Part 2 far more rapidly, especially in developing countries, considers how the digital revolution has helped spawn than was the case with either the Industrial or Agricul- and transform the nature of entrepreneurship in the tural Revolution. Indeed, the spread has been so rapid country. Part 3 offers some concluding remarks that China has become its major driver with India emerging as one as well. 1 Financial Technologies This paper is devoted to two aspects of the Digital Rev- While there is no consensus definition of fintech, the olution as it impacts India: financial technology or fin- term is most commonly used to refer to technologically tech, and innovation and entrepreneurship. As in other enabled financial innovations with applications in such countries, the spread of digital technologies has led to areas as transfer of funds and payments, borrowing and a dramatic transformation of financial infrastructure lending, asset management and insurance. The activi- in India. On the one hand, this has improved efficiency ties that define fintech include: payments and transfers and on the other it has led to increased financial inclu- using mobile apps, investments in and payments via sion. The government’s payments system has evolved crypto-currencies, peer-to-peer lending and insurance, to a point that it can make payments directly to indi- crowd sourcing via platforms such as Kickstarter, loan viduals and firms through bank accounts. Individuals and insurance comparison websites, and robo-advice are seamlessly able to transfer funds from their bank on both investment and asset management. accounts to those of others. Businesses and customers can transact digitally in real time. In developed countries, we think of fintech as largely a private-sector phenomenon consisting of transactions Digital technologies have also helped democratize between and among businesses and households. If I innovation and entrepreneurship. Unlike conven- were to follow the same approach in describing the tional technologies, digital innovations are less costly role of financial technology in India, I would miss a to commercialize on average. Scaling up of conven- large part of the role that technology is playing there in tional innovations requires a large volume of invest- revolutionizing the payments system. This is especially ment. In contrast, many digital innovations lend true when we are considering the area of the economy themselves to scaling up at low costs. As a result, in in which financial technology intersects with inclusion the digital space, innovators themselves are often seen and development. For this reason, in discussing the role as turning into entrepreneurs. The sharp division of financial technology in India, I will take a broader between innovators and entrepreneurs that existed in view of it along two dimensions. First, I will include the past has greatly diminished. in financial technology the role that technology plays in transactions in which the government is one of the __________________________________________ Digital Revolution, Financial Infrastructure and Entrepreneurship: The Case of India | 1 parties. Second, in defining financial technology, I will to bring digital modes of transaction to individuals and include all cashless transactions, whether or not they households. I will also explain how the government involve the use of the latest innovations or mobile-based has been using this infrastructure to disburse the ben- applications. As I will discuss later, equipping individ- efits under its various social schemes among the poor uals and households to transact digitally through such and what role businesses are playing in the spread of instrumentalities as the Business Correspondent model fintech in India. and payment banks represents a major step towards But as an introduction to this discussion, it is useful financial inclusion in a poor country like India. to first consider a schematic chart providing the trans- actions that take place in an economy among various 1.1 Actors in the Economy and groups of actors. It is the efficiency of these transac- Transactions Among Them tions that fintech can greatly improve. In Table 1, I identify three broad groups of actors in the economy: For a poor country with per-capita income at approx- Government (G), Households (H) and Businesses (B) imately $2000 per annum in current dollars in 2018, where I include all entities other than the government India has deployed financial technologies on a sur- and households such as non-profit institutions in busi- prisingly large scale. In the following, I will outline the nesses. The table illustrates types of transactions that components of the infrastructure that India has built take place among these three entities in India. Table 1: Illustrative List of Transactions Among Major Actors in the Economy Transacting Parties Transaction • Employee payroll, pension, insurance • Centrally Sponsored Schemes Government Government • Devolution of revenues to states • Direct Benefit Transfers (DBT) • Income tax by individuals to government Government Households • NREGA wages • Procurement of goods and services • Central Sector Schemes Government Businesses • Subsidies • GST, Tolls, Custom Duties, Corporate tax • Loans • Rental Households Households • Transfers • Sales of goods and services • Loans, investments Households Businesses • Salaries, pensions, health benefits • Input purchases, wholesale transactions • Transport services Businesses Businesses • Loans As Table 1 illustrates, myriad transactions take place 1.2 Bringing Digital Technologies within and among government, households and busi- to All nesses. Technology offers opportunities to reduce fric- tion and raise productivity in the conduct of these One of the most important developments in building transactions. But this requires the building of platforms financial-technology infrastructure in India is related that can intermediate the transactions. During the past to individuals and households. The ability to complete decade, India has been engaged in building many of transactions through non-cash, digital means requires these platforms. The process is far from complete but verification of identity, having a bank account and considerable progress has been made. access to instruments of digital communication such 2 | SIPA’s Entrepreneurship & Policy Initiative Working Paper Series _______________________________________________________ as mobile phones. Access to investment and savings beauty of this identity is that the individual need not instruments also requires access to financial services carry a card with her to prove who she is. The proof is conventionally provided through brick and mortar always there in her palms and eyes. bank branches but now feasible via digital platforms. In recent years, India has made considerable progress 1.2.2 The Jan-Dhan Scheme: along each of these dimensions. Bank Accounts for All Proof of identity is just the starting point for promot- 1.2.1 Aadhaar: A Biometric Identity for All ing financial inclusion. By itself, it does not go very far. If an individual is to engage in a financial transaction Its power is realized only when combined with other without using cash, the first thing she needs is a proof financial instruments. The most basic of such instru- of identity. In a vast country such as India, where two- ments is a bank account. Whatever other instruments thirds of the population still lives in rural areas with private actors in the fintech industry make available many of these areas in remote locations, giving indi- must build on the bank account. Checks, credit cards, viduals proof of identity is a huge challenge. Indeed, and wallets can be operated efficiently only if the indi- until less than a decade ago, India had no systematic vidual using them has a bank account. program of providing a proof of identity