investment viewpoints
Digitalisation, equality, India
The relationship between technology and equality is complex and multi-faceted. On one hand, the growing global economy, driven by developments in technology, has benefited the world’s wealthiest1, making the few richer. On the other, technology has improved areas such as access to healthcare, financial services and education, which has benefited the many.
The biggest technological impact can be felt in emerging market countries. For example, developments in online education and medical material can instantly provide less developed societies with a wealth of information, improving the overall quality of life. Although many advances have arisen from the tech-boom, a significant proportion of the global population is still excluded from basic goods and services.
We expect digitalisation to continue accelerating, with new and existing companies developing tools that will further benefit the less fortunate majority of the world’s population. However, we must keep in mind that digitalisation will disrupt entire industries. We believe this transition creates opportunity and risks, and calls for a rethink of investing. In this context, the investment process needs to adapt, identifying companies that will transition and those that will disappear. We do this with a three-pillar approach.
Governments play a pivotal role in fuelling technological advances by funding research and corporate development. In most countries, governments are strategically investing in the race to stay ahead. Additionally, they are installing technologies to fix problems and gaps in services. India is a key example of both trends and has transformed its growing economy with digitalisation.
Digital India
Over the last two decades, India’s economy has boomed. From 2000 to 2017, the economy has grown from US$2.27tn to US$9.60tn (GDP, PPP current international) and the population has increased by 286m to 1.39bn people. Proactive steps by the government over this time have greatly improved the lives and productivity of many.
Statistics from the World Bank over the past 16 years show that India benefits from a more productive workforce, a higher number of children in schools, and better healthcare, resulting in falling mortality rates.
| 2000 | 2016 | % Change | |
| GDP per person employed | US$6771 | US$16306 | 41.5% |
| Secondary education, pupils | 71030515 | 132161359 | 53.8% |
| Children aged under-five deaths | 2526532 | 1046505 | -58.6% |
Aadhaar (‘Foundation’)
In 2009, over half of the Indian population was not registered at birth and therefore unable to access financial services or government subsidies. To tackle this problem, the Indian government setup the Unique Identification Authority of India (UIDAI). The aim of the authority is to issue Indian residents with a unique identity number2 that is used as a primary basis for identity checks when opening a bank account, or applying for a driving licence.
UIDAI uses biometrics, such as two iris scans, a facial photograph and ten fingerprints, to register each person on a centralised database. Names, dates of birth, addresses, and other metrics are also recorded. Individuals are given an ‘Aadhaar number’, or randomly-generated 12-digit unique identity.
Since launch, the government has opened over 13,000 Aadhaar registration centres, with mobile registration centres also moving between remote villages. The countrywide effort now has 1.2bn people registered2, amounting to almost 90% of the Indian population, and an estimated 17% of the world’s population.
There has been a surge in new bank accounts being opened since Aadhaar numbers have been assigned. Banks also incentivised new accounts with rewards such as free life insurance. In 2018, over 80% of adults in India had a bank account, up from 35% in 2011, according to the Reserve Bank of India3.
Building on Aadhaar
India has the fastest-growing smartphone market and the second-largest telecommunications market in the world4. The UIDAI have been working with smartphone providers since 2016 to produce secure, Aadhaar compliant devices2. Collaboration efforts have led to a new transaction system linked to Aadhaar. The user payment interface (UPI) links users’ bank accounts, allowing a credit and debit payment service using biometric data to authenticate transactions.
This cashless payment system was also stimulated by the government’s demonetisation scheme in 2016, aimed at boosting tax revenue and tackling India’s infamous black market. Removing larger bank notes had an initial knock-on effect overall for the Indian economy, disrupting many smaller businesses who had more difficulty in the transition. The economy has since bounced back, with businesses adapting accordingly.
Mobile infrastructure teamed with biometric authentication have enabled further tools to develop for over a billion people. UIDAI recently introduced a digital locker for people to store their important documents, such as academic records and vehicle registrations. In addition, they established an e-consent system, where users can selectively share important documents with another party.2
Privacy control
The information contained within Aadhaar could, in theory, be beneficial to private and public sectors. For example, businesses could use data mining techniques to develop predictions surrounding consumer-buying habits; governments and agencies could use Aadhaar information for surveillance techniques. Of course, it would be unethical to use the population’s data for such things, especially without consent. However, there have been reports of the data being available to purchase online5 - claims which the UIDAI has disputed as false6. The Indian government has explicitly stated that the platform is secure with the data encrypted and multi-layered authentication required for access.
Privacy protection is paramount to the success of this project. Cyber security has developed exponentially over the past decade. We believe this area will continue to grow with security concerns, and as new encryptions and blockchain develops, security will continue to enhance.
A future superpower
Aadhaar has clearly helped stimulate India’s economic boom. The newly-developed infrastructure was made possible by strong digital foundations which were laid initially. Ultimately, this has greatly improved the lives of many who, just a decade ago, would have been unable to access many of these services.
Building on this strong foundation, the government can continue to add layers of useful and accessible information to further empower the people of India.
Implications for investors
India’s rising digitalisation has triggered several trends, which we believe will continue to gather momentum for years to come and will create a number of investment opportunities. We examine some examples of these trends below.
Unleashing consumers’ purchasing power
Aadhaar has meaningfully improved the transmission of income to individuals. Subsidies now reach the beneficiaries directly, avoiding multi-level leakage, which was the norm in the past. Since 2018, civil servants’ wages are now increasingly being paid on time (the proportion of timely payments increased from 43% in FY17 to 85% in late 2018), largely led by the drive to link bank accounts with Aadhaar, and the payment of wages directly into the workers’ bank accounts. This has influence over people’s propensity to spend.
The number of transactions relying on UPI (united payment interface, which requires 5-10 seconds to implement), has reached c.800 million per month in the 3 years since launch. Thanks to UPI, information on people’s transactions can be centralised and collected into a ’digilocker’, which can then be used as proof for a loan, an employer, land records etc. This paves the way to unleashing long term purchasing power.
Formalising the economy
Digitalisation has been instrumental in India’s implementation of the GST (Goods and Service Tax) from 1st July 2017. The GST’s aim was to reduce the size of the informal economy and raise tax collection for the government, and although progress has been slower than projected on both accounts, players in a number of sectors (e.g. health and personal care, home improvement) report a slight reduction in informal competition. In the long term, this will help large, compliant businesses (a number of which are listed) to gain share. With an estimated 80% of the Indian economy still informal, the potential for these larger players is huge.
On the other hand, India’s cash/informal economy was historically the single largest creator of jobs, given its size. In the 12 months following GST implementation, the forced formalization dealt a severe blow to employment and entrepreneurship, which in turn slowed consumption trends (particularly in rural areas). Investors should take into account that although the long-term direction is clear and positive, such deep changes may disrupt macro growth temporarily.
Transforming the retail landscape
Indian retail includes an estimated 8 million points of sale, of which only 10% are considered as “modern trade” (according to the largest consumer brands’ split of sales) and the remainder of which are largely kiranas (small neighbourhood retail stores). An initiative by Reliance – although recent and experimental – could trigger widespread disruption in India’s retail industry. (Note in passing that Reliance’s Jio offering of cheaper mobile phones and data massively disrupted India’s telco industry in the last 2.5 years). Reliance’s technology initiative aims at B2B, bringing offline retailers online via a POS containing a Jio SIM, and helping them supply key merchandise through Reliance Retail warehouses. Hindustan Unilever is a partner for initial trials.
More generally, rising access to affordable mobile data is starting to translate into a rising share of e-commerce – large consumer brands are currently reporting a small (<5%) but fast-rising share of online sales. Although there are few direct opportunities for equity investors to play this trend, private equity and strategic foreign players are clearly investing heavily. Walmart has acquired a stake in Flipkart (India’s dominant online fashion retailer after the acquisition of Myntra and Jabong) from Naspers; Amazon acquired part of Shoppers Stop (India’s largest network of department stores); Alibaba owns c. 25% in Big Basket (India’s largest online grocer) and c.30% stake in PayTM (India’s largest wallet app). In May 2019, Ctrip (China’s leading Online Travel Agency) acquired c.50% in Make My Trip (India’s leading Online Travel Agent with 63% market share in 2017). In time, we would certainly expect a number of these companies to come to the market.
Aadhaar timeline
