Grand Digitization

The new government that came to power in the spring of 2014 made the Digital India initiative one of the key programs for national transformation. Prime Minister Narendra Modi’s faith in the power of technology is easy to understand: Modi’s massive online promotional campaign involving India’s best experts in Internet marketing contributed to him winning the elections. Two years into his term, Modi even tied his ministers’ KPI to how active they were on Twitter and Facebook.

Digital India entails creating and developing a series of programs for turning India into an information economy; by developing the infrastructure, all strata of the entire population of 1.2 billion will eventually be involved in this economy. India’s 2016/2017 budget allocates investments of over 12.8 billion rupees (a little over $190,000) for various programs within Digital India. Some of this money will be channeled into increasing computer literacy in India’s villages. The authorities plan to cover over 60 million households in three years.

“Digital India is a combination of various initiatives, whether it’s e-governance or electronic delivery of services to the citizens, or connecting people through technology, or programs like e-sign and digital lockers for record-keeping. It’s all about how you can connect and get access to a lot of people. Some of it is falling into place, but, since it involves many ministries and departments, it is taking a little longer for the action to begin on the ground,” Sangeeta Gupta, Senior Vice-President of NASSCOM, India’s National Association of Software and Services Companies, said in an interview with BRICS Business Magazine.

Apparently, the idea is not a brand new one. India’s big business has long focused on the digital area: Over the last 15 years, India has achieved great successes in the IT services, becoming the world’s largest outsourcing center. As regards development of India’s digital infrastructure, this is a more serious issue, given the volume of investments required, the huge number of bureaucratic hurdles, and the lack of clear regulations and harmonized standards.

The lack of IT infrastructure is the main obstacle to success for initiatives such as Digital India. Experts are certain that any programs intended to involve remote Indian villages in the country’s real economy and to improve the level of digital literacy will be meaningful, not to say successful, only if the government first implements the plans for creating the broadband access infrastructure in the villages and in India’s remote corners.

According to the Internet and Mobile Association of India, only 17% of the 1.3 billion-population has Internet access. The Association’s data indicates that, in 2015, India had 354 million Internet users. The number grew by over 30% in just a year, from 2014 to 2015, when India had previously required no fewer than 10 years to increase the number of Internet users from 10 million to 100 million, and three more years to get to 200 million.

This speaks to India’s great potential in mobile and Internet technologies, yet the goal of providing Internet access to the country’s entire population by 2019 appears infeasible to the most experts, owing to, among other things, the fact that investments in fiber-optic networks and other infrastructure are to be made by individual states from their own budgets; that casts doubts on whether the program will be properly implemented, particularly in the poor states, such as Haryana, Uttar Pradesh, and Bihar, which are, at the same time, the most populous.

Experts agree that the digitization project is also jeopardized by the government’s tardiness in regard to major infrastructural projects. For instance, the National Optical Fibre Network (NOFN) – which was supposed to provide broadband Internet access to 250,000 gram panchayats, or village councils, self-government bodies in Indian villages, by March 2016 – was only run for a little over 6,000 kilometers out of the required 10,000. Network completion has been postponed again until December 2016. It should be added that the project was begun back in 2011, when the Digital India slogan probably did not exist yet.

Alexander Chachava, managing partner at LETA Capital, which invests in technological companies and startups in the US, Israel, Russia, and India, believes that India’s IT market is very attractive for investors but the country’s fundamental problems (a huge percentage of poor people, low education indicators, underdeveloped infrastructure) remain the main problems for both national and foreign investors.

“These problems are typical of any developing country, but, in India, most likely owing to its size or to greater inertia, they are graver than they might have been. Of course, the country is attempting to resolve these problems and its current leadership has such intentions. Yet, so far, it is a question of results, of what has really been achieved,” Chahava told BRICS Business Magazine.

India has its own specifics, in particular, its federalism, where the states have significant powers, and it has to resolve a large number of issues related to infrastructure, to standardizing regulations, taxation, and pricing. In August 2016, India finally passed the single tax (GST) bill after nearly 16 years spent discussing this tax reform. Still, the new tax will be introduced only in 2017, so it is too early to see what effect it will have for different economic sectors, including the IT sphere and startups.

Rise up, the startup country

The future of digital India appears brightest to those who are relatively young and yet already make good money. There are many people like that, because India ranks third in the world in the number of startups and first on the list of countries with the youngest business founders. About 72% of Indian startups (they already number over 10,000) are founded by entrepreneurs under age 35.

Naturally, the authorities could not bypass this energetic component of the digital economy. In 2015, Narendra Modi came up with a new slogan: Start up India, Stand up India. This program, aimed at developing a startup ecosystem in India, consists of 19 points concerning simplified company registration process, convenience of doing business, tax reliefs, and simplified loans for startups. The initiative also entails creating business incubators throughout the country and a 100 billion rupee ($1.5 billion) fund for supporting and developing startups. This fund will bring together the capacities and resources of venture capitalists already on the market.

At the same time, investors and startup owners note that India already has a rather well-developed startup ecosystem. According to a study by Grant Thornton and Assocham, the number of new businesses founded annually in India has almost doubled. In 2010, 480 startups were founded, but by 2020, this number may reach 2,000. The number of business incubators grew by 40% in 2014 to 2015, and the number of venture funds doubled over the last 12 months.

“In the long-term, I am not sure what kind of impact these initiatives will have. There is no lack of VCs, individuals, and incubators in places like Mumbai or Delhi or Bangalore. The idea of seed funding has existed in metro cities for a long time now; I am not sure how much value the government initiatives will add, but yes, for domestic markets that might not have access to startup infrastructure, for them it will help,” says Debartha Banerjee, co-founder of Sampurn (e)arth Environmental Solutions, a startup producing waste management solutions.

Banerjee says that such government initiatives might prove more useful in those parts of India where startups are only now beginning to appear. The entrepreneur says that, in reality, there have so far been no drastic changes in startup regulation or, for instance, in simplifying financing, yet “these initiatives have given broad recognition to startup for the masses, common people now at least know what a startup is.”

Sangeeta Gupta, Senior Vice-President of NASSCOM, says that, until recently, “the laws in India were not geared towards startups as in how to open a company quickly, or close down a company, how a startup can participate in tenders. I think they are working very systematically to address these issues. And there are now dedicated people in the government, at the central and state level, who really recognize how important it is to create next-gen companies and that they should support startups at the ground level.”

Abhishek Gupta, head of Tlabs, one of India’s biggest private accelerators, agrees that the Digital India and Startup India initiatives “have laid a hot bed for startups to resolve the many pain points.”

“But yes, some of challenges we see in these initiatives are the lack of alliance between private and public sector bodies and the behavioral dynamics of citizens from Tier II and Tier III cities and villages. We have a long way to go to bring everyone on to the same page and build the need of the hour,” he tells BRICS Business Magazine.

So far, it is unclear whether these initiatives will help solve the startups’ principal problem: attracting investments. Even the most successful startups face this question today – those that made a bundle a few years ago and then encountered a clear cooling-down of investing enthusiasm. “The key challenge is the inability of startups to get proper valuations on the Indian market because of which they are constantly looking out for opportunities to list outside or invert their structures. Availability of appropriate government funding is another challenge,” Sandeep Ladda, India Technology & eCommerce Sector Leader at PwC, confirms to BRICS Business Magazine.

According to the CB Insights and KPMG report analyzing venture fund investment in the Indian market, investments into India dropped by 24% in the first quarter of 2016 year-over-year and totaled $1.5 billion. The number of deals dropped by four percent. The picture was no better in the second quarter: Startups attracted $583 million, 59% less than in the same period of the previous year. Yet there is other data; for instance, the Xeler8 analytical company counted 654 deals in early 2016 compared to 536 in the second half of 2015, and 279 deals in the first half of 2015 (the company includes deals brokered by business angels in its count).

Geographic spread

Digital India and Startup India are closely intertwined with yet another government idea: creating ‘smart’ cities with an infrastructure based not on waterways or roads but on optical fiber cables. As of today, 33 cities have won the competition to receive investments under this program (initial budgetary allocations for the SmartCities initiative are $1.2 billion). The winners include both India’s largest metropolises (New Delhi, Mumbai, Chennai) and cities of the second and third levels, such as Pune, Jaipur, Surat, Ahmedabad, Kochi, Indore, Udaipur, Bhopal, Panaji, Ranchi, and others.

By ‘smart’ cities, the SmartCities initiative means using technology for solving problems with water supply, waste processing, automation of traffic control, and safety systems. Great attention is focused on the citizens’ participation in city governance, again by providing them with Internet technologies and digitizing government services.

Interestingly, Bangalore, India’s IT capital, often called India’s Silicon Valley, was not included on the list of ‘smart’ cities. The reasons could be many, ranging from strictly formal ones (the city does not meet certain competition requirements from the point of view of management and infrastructure development, for instance: Bangalore has a very small number of public toilets) to political ones. Yet common sense suggests that the digital infrastructure in this metropolis is extremely well developed, allowing Bangalore to remain a center of attraction for ideas, talent, and venture capital.

In 2015, Bangalore made the top 20 in the Global Startup Ecosystem Ranking by Compass; it ranked 15th (Singapore, another Asian city to make it into the top 20, ranked 10th). Yet, startup ecosystems are being successfully developed in other Indian cities as well. This applies, for instance, to New Delhi’s new satellite cities Gurgaon and Noida, to Mumbai, Hyderabad, and, to some degree, to Chennai. And although there has already been talk for many years that Bangalore, whose infrastructure cannot manage the load entailed by the status of India’s Silicon Valley, will soon lose this status, experts are certain that India’s vast and fast-growing startup market will have a place in the sun for everybody.

NASSCOM’s vice president believes that India needs multiple innovation centers, not just a single specific one, and the country already has at least 10 to 12 such centers. Sandeep Ladda, India Technology & eCommerce Sector Leader at PwC, believes that even though it is still unclear whether New Delhi will manage to outstrip Bangalore in the level of startup development, Bangalore’s monopoly is clearly ending: “Today, talent is spread across various cities in India, and, because of the campaign run by the government, startups are proliferating across various cities in India.”

It is all the matter of an idea

The country’s digitization will undoubtedly be useful and will prompt further growth of its $2-trillion economy. Yet, the size of the population that hardly derives any benefits from India’s transformation into a digital economy should not be underestimated. Experts and market participants believe that the masses are already becoming part of the digitization process and not so much owing to governmental initiatives as to businesses, entrepreneurial spirit, and innovative ideas.

Sangeeta Gupta of NASSCOM says that the government is considering the possibility of using startups to resolve various problems and tasks the country faces in education, health care, sanitation, and many others. She cites the example of such startups as UrbanClap, Housejoy, and others, which use the marketplace model in the area of low-skilled labor for hire – carpenters, plumbers, electricians, etc.

The expert says that such projects use technologies to connect two different worlds: the world of customers, who are, as a rule, educated and well-off, and the world of not always educated people from the lower social strata, who do such jobs in India and to whom technologies accessible via a mobile phone with Internet connection would open a gateway to a great market of opportunities.

At the same time, Sangeeta Gupta notes that “technology in India still has an English bias. We really need more solutions in local languages for people to know, get involved. It is all about digital literacy that can be created. I think it is starting to happen because younger people living in poor sections of society have a far greater awareness of what is happening around them; they are not so isolated; but I agree that it may take a little longer for these initiatives to reach the poor and underprivileged.”

Samir Saran, Senior Fellow and Vice President of Observer Research Foundation, believes that “the ‘Digital India’ initiative offers unforeseen opportunities to small producers, farmers, artisans, and solution providers. It has the potential to ensure that we find an Indian fingerprint in every mosaic, a little bit of India in everything produced and consumed globally. It offers India an opportunity to leapfrog generations of industrial evolution and become part of global value chains. It offers the chance to make the informal sector – employing more than 90 percent of the workforce – as productive as the formal sector.”

India already has hundreds of successful companies that use business models orientated around involving small-time producers, informal sector labor, the rural population, and farmers in business processes. These are trading sites, such as Flipkart and Snapdeal, aggregators such as Ola Cabs and OEO Rooms, and mobile wallets such as PayTM, PayU, and Mobikwik.

“The major challenge still lies in bringing the right innovation to the mainstream and things that directly or indirectly lead to improving people’s lives. The right ideas (those solving the real pain points of the masses) need to nurtured and the dream of Digital Desh would no more be a dream,” says Abhishek Gupta.

Debartha Banerjee is certain that technological progress in India will reach critical mass soon, since the country has enough young and talented people who can use innovations and technologies to achieve easily what the government takes years to achieve.

Banerjee cites the example of four young graduates from Madhya Pradesh state: Shakeel Anjum, Tushar Barthare, Bhanu Yadav, and Abhishek Barthare, who created free Wi-Fi virtually in the middle of nowhere and provided Internet access to the people of Bawadikheda Jagir, Devria, and Shivnathpura, which in turn gave these people access to basic government and educational services. The investments in the infrastructure were about 200,000 rupees (less than $2,900), and each month, these four invest $100 from their own pockets to ensure stable Wi-Fi connection in the villages. It is unclear whether the young people hope for monetization of the project or whether they are counting on support from the government and private investors, but they have already made a contribution to making the Digital India idea a reality.