India has used technology to transform its economy, strengthening its ability to continue to grow faster than other major economies. The use of technology in the country also had a positive impact on society and helped reduce emissions. Technology has also changed the way capital markets work and the opportunities they offer. In this article, we examine some of these recent changes and how they are likely to shape the future trajectory of the Indian economy and its capital markets.
banking: The key to financial inclusion and formalizing the economy
Only one in 25 Indians had a formal ID card in 2008 and one in four had a bank account. India’s unique Aadhaar biometric identity system, launched in 2010, was the first digital system specifically designed for the purpose of authenticating individual identity. More than 1.2 billion Indians now have a unique digital identity and the system is used to authenticate identity in more than 1.6 billion transactions each month.
Authentication trend (in billions)
The rapid rollout of Aadhaar, along with other government initiatives, has also resulted in a sharp increase in the number of bank accounts. According to the Bank for International Settlements (BIS), more than 470 million Indian adults opened bank accounts between 2011 and 2017. With this increase came an improvement in inclusion. The gender gap – the difference between the proportions of men and women with a bank account – fell from 17% in 2011 to 6% in 2017; the proportion of employed and non-employed fell from 18% to 9%; between those with secondary education and those without secondary education 29% to 10%; and between rich and poor from 14% to 5%. All distances are now below the world level.
The proportion of India’s population aged 15 and over with a bank account has increased by more than 27% in less than three years (from 53% in 2014 to almost 80% in 2017). The BIS estimates that if India had relied solely on traditional growth processes, it would have taken 47 years for 80% of adults to have bank accounts. India did it in seven years with the help of technology.
However, this financial inclusion also carries risks. The risk of fraudulent behavior and the potential for fraud increase when consumers are less informed and less comfortable using technology. Therefore, a focus on both – preventive fraud detection and consumer education – is required. Consumers must be continuously educated, not only about the use and functions of digital financial platforms, but also about how to protect their personal data.
Connectivity: The key to unlocking the potential of the crowds
The proliferation of bank accounts has led to a more formal economy, increasing the need to smooth payment speeds and processes. The system of physical clearinghouses for payment instruments represented a stumbling block to growth and blocked capital for companies for days, if not months. The emergence of digital payments, particularly the Unified Payment Interface (UPI), since 2016 has helped India achieve the highest volume of digital payments in the world every year since 2019.
The UPI is a unique system that enables interoperability and has transformed India from a cash-oriented economy to one of instant payments without the need for bank details to be disclosed to the counterparty. This has also reduced friction and freed up working capital for the corporate world. All of these digital payments require access to the internet, and data is a crucial requirement. Data costs in India are among the cheapest in the world, rising from INR 268 (about US$4) in 2014 to INR 6.6 in 2021. This has led to mass adoption and a surge in the adoption of internet-enabled phones, which equates to a reduction in cash and the government’s ability to pass benefits directly to the end user, saving time, effort and expense. The ecosystem is now being expanded to process payments even without the internet, thus integrating the lower end of the economic pyramid into the digital payment system.
Cost of 1GB data (in Indian rupees)
Real-time payment transactions (in billions)
Indirect taxes, logistics and transport: the key to creating a single market in India
India consists of 28 states and eight union territories. The indirect tax system in the country was state-controlled before 2017. This meant numerous and cumbersome tax returns for companies with a national presence, resulting in lost revenue. The National Goods and Services Tax (GST) is an online tax return filing system where the back-end takes care of correct tax credits. This system has shifted the frequency of tax returns from quarterly to monthly, giving the government a predictable and stable cash flow. A study by the National Council of Applied Economic Research found that the introduction of the GST has the potential to boost India’s GDP growth rate by 0.9% to 1.7%.
Total GST collected monthly
The GST has not only helped ease the burden of tax compliance. The international movement of goods has improved significantly. The previous system led to congestion at state borders on national roads, blocking the entire system and delaying the transfer of goods for days. GST, along with a cashless toll payment mechanism called FasTag, has reduced that delay to minutes.
It is now mandatory in India for every new vehicle to have a FasTag sticker with which the toll fee can be debited from a virtual bank account using a barcode system. The FasTag is a system similar to those in developed countries where toll collection is automated. This reduces the losses caused by cash collection at toll booths. It also gives a clearer picture of intergovernmental activities and frees up more money for road infrastructure maintenance. The Ministry of Road Transport and Highways in India estimates that the introduction of FasTag saved around 350 million liters of fuel in 2021 and avoided around 9.8 million tons of carbon emissions. These savings are mainly due to shorter waiting times at tollbooths and higher fleet efficiency. Although the reduction in emissions is relatively small compared to the country’s total emissions of more than two billion tons in 2020, it is a positive step towards the stated goal of achieving net-zero emissions by 2070.
Road and rail infrastructure in India has also improved significantly in recent years, showing how technology can be leveraged for physical infrastructure. For example, the road network connecting the north-eastern parts of the country is being improved to cut travel times from a few days to a few hours despite the challenging mountainous terrain. An industrial corridor is being developed between Mumbai and Delhi to reduce travel time from 20 to 12 hours. Some parts of this road network will be built from recycled waste, which has a positive impact on the environment.
How are capital markets benefiting from these disruptive technological changes?
Stock markets in India have grown in line with the economy. Market infrastructure is not immune to the use of technology and is changing the way Indians invest. Not only are Indians a population traditionally buying real estate, gold and fixed deposits, but they are also increasingly turning to stocks for their savings. Regular monthly payments, called “systematic investment plans,” into equity-focused mutual funds have seen a steady increase since 2016 and now total nearly $2 billion per month.
The number of private investors is constantly increasing due to the availability of information and online platforms that offer the possibility of opening a paperless account. The top three stockbrokers, based on the number of individual active clients, are new-age fintech companies that have no physical trading locations. They account for more than 40% of the total market share. The established operators have switched their business models to an online model. Online trading and paperless processing including cash payments overtook the offline system a few years ago.
With a large and growing number of investors, counterparty and market risk increases with the time it takes to settle trades. Because of this, regulators are shortening their trade settlement cycles from two days (T+2) to one day (T+1). India is one of the first countries in the world to gradually introduce this settlement cycle. The US Securities and Exchange Commission will not introduce this until mid-2024.
India’s vibrant start-up ecosystem has attracted strong private equity inflows over the past decade. These funds were able to exit in a variety of ways, including IPOs. At last count, India has produced 108 unicorns (start-up companies with a market capitalization of more than $1 billion) with a combined valuation of more than $354 billion, according to Inc42. The listed new age technology companies are part of various sectors such as financials, consumer discretionary, retail, communications services, defense and even utilities. Established companies have also adopted technology to grow and retain market share.
The stock market has benefited from a re-rating of existing companies and new listings as the range of investment opportunities has increased. Stock prices reflect earnings growth due to the structural and macroeconomic changes mentioned above. India has performed strongly relative to other markets, individually or as a basket, across all timeframes. India has historically traded mostly at higher valuations relative to other emerging markets, but it has different characteristics. For example, countries like Brazil and China are export oriented while India is a net importer. While valuations are important, earnings growth and the long-term prospects of the company and its business are also important considerations.
Although the Indian stock market can be volatile and appears expensive compared to other markets, it has produced above-average returns over time. India is a large and deep equity market with a wide range of equity opportunities. We believe these conditions present a good opportunity for active stock pickers to identify companies that have the potential to generate returns in excess of the market.
Performance of selected MSCI indices over time
Comments are closed.