The Future is Digital as we know- The Massive benefits are mixed with a notable Risk
India
By Raoul Pal
March
2017
Companies that create massively outsized
technological breakthroughs tend to capture the investing population’s
attention and thus their share prices trade at huge multiples, as future growth
and future revenues are extrapolated into the future.
From time to time, entire countries re-model
their economies and shift their growth trajectory. The most recent example was
the liberalisation of China’s economy and massive spending on infrastructure,
which together created an incredibly powerful force for growth over the last
two decades.
But it is very rare indeed that a country
develops an outsized technological infrastructure breakthrough that leaves the
rest of the world far behind.
But exactly this has just happened in India...
and no one noticed.
India has, without question, made the largest
technological breakthrough of any nation in living memory.
Its technological advancement has even left
Silicon Valley standing. India has built the world’s first national digital infrastructure,
leaping at least two generations of financial technologies and has built
something as important as the railroad was to the UK or the interstate highways
were to the US.
India is now the most attractive major
investment opportunity in the world.
It’s all about something called Aadhaar and a
breathtakingly ambitious plan with flawless execution.
What just blows my mind is how few people
have even noticed it. To be honest, writing the article last month was the
first time I learned about any of the developments. I think this is the biggest
emerging market macro story in the world.
Phase 1 – The Aadhaar Act
India, pre-2009, had a massive problem for a
developing economy: nearly half of its people did not have any form of
identification. If you were born outside of a hospital or without any
government services, which is common in India, you don’t get a birth
certificate. Without a birth certificate, you can’t get the basic
infrastructure of modern life: a bank account, driving license, insurance or a loan.
You operate outside the official sector and the opportunities available to
others are not available to you. It almost guarantees a perpetuation of poverty
and it also guarantees a low tax take for India, thus it holds Indian growth
back too.
Normally, a country such as India would solve this
problem by making a large push to register more births or send bureaucrats into
villages to issues officialpapers (and sadly accept bribes in return).
It would have been costly, inefficient and messy. It probably would have only
partially worked.
But in 2009, India did something that no one
else in the world at the time had done before; they launched a project called
Aadhaar which was a technological solution to the problem, creating a biometric
database based on a 12-digit digital identity, authenticated by finger prints
and retina scans.
Aadhaar became the largest and most
successful IT project ever undertaken in the world and, as of 2016, 1.1 billion
people (95% of the population) now has a digital proof of identity. To
understand the scale of what India has achieved with Aadhaar you have to
understand that India accounts for 17.2% of the entire world’s population!
But this biometric database was just the
first phase...
Phase 2 – Banking Adoption
Once huge swathes of the population began to
register on the official system, the next phase was to get them into the
banking system. The Government allowed the creation of eleven Payment Banks,
which can hold money but don’t do any lending. To motivate people to open accounts,
it offered free life insurance with them and linked bank accounts to social
welfare benefits. Within three years more than 270 million bank
accounts were opened and $10bn in deposits flooded in.
People who registered under the Aadhaar Act
could open a bank account just with their Aadhaar number.
Phase 3 – Building Out a Mobile
Infrastructure
The Aadhaar card holds another important
benefit – people can use it to instantly open a mobile phone account. I covered
this in detail last month but the key takeaway is that mobile phone penetration
exploded after Aadhaar and went from 40% of the population to 79% within a few
years...
The next phase in the mobile phone story will
be the rapid rise in smart phones, which will revolutionise everything. Currently
only 28% of the population has a smart phone but growth rates are close to 70%
per year.
In July 2016, the Unique Identification
Authority of India (UIDAI), which administers Aadhaar, called a meeting with
executives from Google, Microsoft, Samsung and Indian smartphone maker Micromax
amongst others, to talk about developing Aadhaar compliant devices.
Qualcomm is working closely with government
authorities to get more Aadhaar-enabled devices onto the market and working
with customers – including the biggest Android manufacturers – to integrate
required features, such as secure
cameras and iris authentication partners.
Tim Cook, CEO of Apple, recently singled out
India as a top priority for Apple.
Microsoft has also just launched a lite
version of Skype designed to work on an unstable 2G connection and is
integrated with the Aadhaar database, so video calling can be used for
authenticated calls.
This rise in smart, Aadhaar compliant mobile
phone penetration set the stage for the really clever stuff...
Phase 4 – UPI – A New Transaction
System
But that is not all. In December 30th 2016,
Indian launched BHIM (Bharat Interface for Money) which is a digital payments
platform using UPI (Unified Payments Interface). This is another giant leap
that allows non-UPI linked bank accounts into the payments system. Now payments
can be made from UPI accounts to non-UPI accounts and can use QR codes for
instant payments and also allows users to check bank balances.
While the world is digesting all of this,
assuming that it is going to lead to an explosion in mobile phone eWallets
(which is happening already), the next step is materializing. This is where the
really big breakthrough lies...
Payments can now be made without using mobile
phones, just using fingerprints and an Aadhaar number.
That is the biggest change to any financial
system in history.
What is even more remarkable is that this
system works on a 2G network so it reaches even the most remote parts of India!!
It will revolutionise the agricultural economy, which employs 60% of the
workforce and contributes 17% of GDP. Farmers will now have access to bank
accounts and credit, along with crop insurance.
But again, that is not all... India has gone
one step further...
Phase 5 – India Stack – A Digital
Life
In 2016, India introduced another innovation
called India Stack. This is a series of secured and connected systems that
allows people to store and share personal data such as addresses, bank
statements, medical records, employment records and tax filings and it enables
the digital signing of documents. This is all accessed, and can be shared, via
Aadhaar biometric authentication.
Essentially, it is a secure Dropbox for your
entire official life and creates what is known as eKYC: Electronic Know Your
Customer.
Using India Stack APIs, all that is required is a
fingerprint or retina scan to open a bank account, mobile phone account,
brokerage account, buy a mutual fund or share medical records at any hospital
or clinic in India. It also creates the
opportunity instant loans and brings
insurance to the masses, particularly life insurance. All of this data can also
in turn be stored on India Stack to give, for example, proof of utility bill
payment or life insurance coverage.
What is India Stack exactly?
India Stack is the framework that will make
the new digital economy work seamlessly.
It’s a set of APIs that allows governments,
businesses, startups and developers to utilise a unique digital infrastructure
to solve India’s hard problems towards presence-less, paperless and cashless
service delivery.
Presence-less:
Retina scan and finger prints will be used to participate in any service from
anywhere in the country.
Cashless: A
single interface to all the country’s bank accounts and wallets.
Paperless:
Digital records are available in the cloud, eliminating the need for massive
amount of paper collection and storage.
Consent layer:
Give secured access on demand to documents.
India Stack provides the ability to operate
in real time, transactions such as lending, bank or mobile account opening that
usually can take few days to complete are now instant.
As you can see, Smart phones will act as key
to access the kingdom.
This is fast, secure and reliable; this is
the future...
This revolutionary digital infrastructure
will soon be able to process billions more transactions than bitcoin ever has.
It may well be a bitcoin killer or at best provide the framework for how
blockchain technology could be applied in the real world. It is too early to
tell whether other countries or the private sector adopts blockchain versions
of this infrastructure or abandons it altogether and follows India’s
centralised version.
India Stack is the largest open API in the
world and will allow for massive fintech opportunities to be built around it.
India is already the third largest fintech centre but it will jump into first
place in a few years. India is already organizing hackathons to develop
applications for the APIs.
It has left Silicon Valley in the dust.
Phase 6 – A Cash Ban
The final stroke of genius was the cash ban, which I
have also discussed at length in the past. The cash ban is the final part of
the story. It simply forces everyone into the new digital economy and has the
hugely beneficial side-effect of reducing everyday corruption, recapitalising
the banking sector and increasing government tax take, thus allowing India to
rebuild its crumbling infrastructure..
India was a cash society but once the dust
settles, cash will account for less than 40% of total transactions in the next
five years. It may eliminate cash altogether in the next ten years.
The cash ban digitizes India. No other
economy in the world is even close to this.
Phase 7 – The Investment
Opportunity
Everyone thinks they know about the Indian
economy – crappy infrastructure, corruption, bureaucracy and antiquated
institutions but with a massively growing middle class. Well, that is the
narrative and has been for the last 15 years.
But that phase is over and no one noticed. So
few people in the investment community or even Silicon Valley are even vaguely
aware of what has happened in India and that has created an enormous investment
opportunity.
The future for India is massive technological
advancement, a higher trend rate of GDP and more tax revenues. Tax revenues
will fund infrastructure – ports, roads, rail and healthcare. Technology will
increase agricultural productivity, online services and manufacturing
productivity.
Telecom, banking, insurance and online
retailing will boom, as will the tech sector.
Nothing in India will be the same again.
FDI is already exploding and will rise
massively in the years ahead as technology giants and others pour into India to
take advantage of the opportunity...
