Ever since last November’s cash ban, there has been a push by New Delhi to formalise economy and tax, through as many activities as possible. Digital technologies are enabling this shift and, at the same time, getting benefits out of it. But, it is not a neat handover from the old ways to the new, and supply-chains have been disrupted. Extra spending of $7 billion to deal with the crisis of jobs and growth is making investors nervous. A higher fiscal gap tends to lead to a deeper current account hole in India. Doubts are emerging in the nation’s stock market, but abundant domestic liquidity makes it impossible for mutual fund managers to not deploy their cash bonanza even at stretched valuations. The source of this liquidity is also partly digital—because real-estate transactions and financing of informal businesses used, and spewed, cash.
Financial assets are frothy the world over. But the Indian stock market appears to have become particularly unhinged from a slowing economy where even a sustained nationwide fiscal deficit of around 7% of GDP is failing to trigger an investment boom. Part of the reason is debt-fuelled overcapacity in traditional industries. These soured loans are clogging the balance sheets of both firms and banks. India’s digital transformation is exciting the likes of Google, which recently rolled out an online payments app custom-built for the country. But behind the gloss lies the reality—there is a huge number of unskilled workers. Their main sources of employment—small businesses that connect directly with consumers or via large firms—are drying up. YES Bank has cut 12% of its workforce, mostly salespeople. When Reliance Industries starts a new bank soon, it won’t have any branches. Shop attendants that sell its phones will double as bankers. It makes sense, since the Jio Payments Bank will largely exist online anyway.
These are just two of the many examples of a digital revolution in India that’s either destroying old jobs or not creating enough new ones. But, it is a welcome change. If the same amount of banking services are being delivered by 50 people instead of 500, then labour productivity is 10 times higher. The trouble is, advances in digital technologies have arrived amid a crisis in job creation in more traditional industries. Digitalisation is a clear indication of the change in trend and how corporate banks have started to streamline their transaction banking teams in favour of payment and mobile-wallet friendly platforms. With banks struggling with stressed assets, without any loan-loss cover, now exceeding $96 billion, it’s just the start of what looks like a bruising battle for traditional lenders.
Investments in natural language automation have already started reflecting in performance indicators—with the share of digital transactions rising massively, staff base falling and higher growth in lending over digital platforms. Accounts are being opened over the counter, courtesy Aadhaar. Loans are getting cleared in minutes and technologies like blockchain are reducing human intervention in operations. Now, the job profiles in high demand include those who are adept in the digital banking, stressed assets and restructuring practice areas. This is resulting in a lot of senior executives drifting towards NBFCs. In fact, NBFC services are increasingly sought after in India due to constraints in local banks’ lending abilities. Moreover, the current banking scenario leaves a lot of opportunity for fintech and change in trend from a lazy banking system, obsessed with the collateral it’s lending against rather than the business it’s lending for. Ultimately, they are conceding a lot of ground to fintech.
There are two pillars on which India’s digital leap, which is the phrase we use, is happening. The first is JAM—Jan-Dhan, Aadhaar and Mobile. A lot of that has been built in the last three years. While the momentum on these three factors has come in the last three years, people tend to forget that, in four or five years from now, there will be 700 million smartphones in India and a billion people with internet access. This is a huge change from where we were, say, three years ago. Almost every household in India will have a bank account and, of course, we have biometric identified 1.2 billion people, and the implications of that go beyond the stock market. In fact, they go beyond the economy. They go into areas such as security and I am convinced that a lot of countries will reach out to India and will want to understand our Aadhaar architecture because it is a big breakthrough in terms of technology. Clearly, going forward, banks will adopt a strategy that includes “disciplined capital management” and further capital efficiency.