India Stack's success has catalyzed the aggressive acceleration of the country's startups
By Pranav Pai
India hosts the third-largest startup ecosystem globally. Over the last decade, the consistent growth of this ecosystem has resulted in 55,000 startups that have created $350 billion of value and employing over 1.5 million people. Indian startups have raised over $70 billion from 2014-2020, $11.5 billion in 2020, and $10.5 billion in the ﬁrst half of 2021 alone, a period overlapping with the Covid-19 pandemic. Industry participants and observers marked a new record in the Indian ecosystem in 2020 for unicorn creation, with 11 startups reaching the milestone. The new year has only seen an acceleration, with 6 unicorns born in one week and 18 created in just H1 2021, with an expectation of 25 more established and 70 total by the year-end.
As per “India – A Startup Nation”, a report by 3one4 Capital, by 2025, India is expected to host 100,000 startups and 150 Unicorns, cumulatively supporting 3.5 million jobs and creating $1 trillion of value. These companies create immense value for the nation and those that invest in it, be they global or domestic investors . The momentous IPO of a decacorn startup last quarter augurs well for the Indian public markets to participate in this transformation and harkens an era of full-stack capital participation in the Indian startup ecosystem. The ecosystem has been on a compounding evolution for over a decade and is built on top of pillars such as India Stack and the Digital Public Goods (DPGs), as well as innovations in low-cost internet access.
Evolution of India Stack
India Stack was synthesised to solve a fundamental issue impeding ﬁnancial inclusion: a lack of a comprehensive identiﬁer. With the launch of the Unique Identiﬁcation Authority of India in 2009, the Indian government put in motion the world’s largest one-sweep identiﬁcation system – Aadhar, a 12-digit unique identiﬁer for every Indian resident linked to demographic, residential, and biometric data. As of February 2020, 90% of the population had an Aadhar card issued to them. India now has the world’s most extensive biometric ID system and has been recognised worldwide for its comprehensive coverage, ingenuity, and ﬂexibility.
With the deep involvement of industry leaders and a long-term policy commitment to the mission, the Aadhar system was architected as a multi-platform public utility with application programming interfaces (APIs) to develop products and services on top of the system. This decision proved crucial to developing India Stack and the DPG model by allowing for interoperable modular design.
On the heels of Aadhar arrived e-KYC or Know Your Customer in 2012, enabling businesses and banks to digitally perform KYC veriﬁcation using biometrics or mobile OTP. With growing mobile penetration in India, linking mobile and Aadhar was another masterstroke of the system. The ﬁnal component of the JAM (Jan Dhan – Aadhar – Mobile) triad, Jan Dhan, was implemented in 2014 and remains one of the largest ﬁnancial inclusion initiatives in the world.
The Pradhan Mantri Jan Dhan Yojana (PMJDY) launched a platform for universal banking access, built on the unique identiﬁcation system that Aadhar makes possible. Some crucial features of PMJDY include the provision of a basic zero-balance account for every household, a RuPay debit card for online transactions, and access to credit, insurance, remittance, and pension. Mobile banking became available on even basic feature phones. The JAM architecture democratised access to ﬁnancial services, and India vaulted into ﬁnancial integration. PMJDY has provided more than 400 million Indians with a digitally accessible bank account, with over 50% being women.
Another breakthrough was the UPI (United Payments Interface), a novel interface using the Immediate Payment Service protocol to operate accounts in any participating bank at any time of day. With UPI, for the ﬁrst time globally, money could be sent by a click on mobile from one bank account to another in under 6 seconds. UPI pioneered the transfer of funds from account to account instead of the ledger entry and delayed reconciliation system that credit card networks and other protocols use. It revolutionised digital payments in India, brought numerous advantages to customers, banks, and merchants, and supported the Bharat Bill Pay System. The BHIM app demonstrated UPI’s end-to-end use case. Startups like PayTM, PhonePe, and more followed up on BHIM and integrated UPI and Bill Pay with various consumer tech networks to create ﬁntech super-app solutions. UPI transaction volume has been steadily increasing, setting a record in July 2021 at 3 billion transactions totalling over Rs 6 trillion.
The evolution of India Stack from solving the problem of identiﬁcation with Aadhar to the continual addition of interoperable modules for transactions, banking, bill payments, relief delivery via DBT, and more, demonstrates its growing value in democratising access to digital platforms.
Utility of the DPG architecture
In a country as large and diverse as India, ﬁnancial inclusion and integration were made possible by using publicly owned, regulated technology frameworks that are accessible to private developers in an organised fashion with the open-API frameworks. Open access has encouraged competition and spurred innovation and investments, thus delivering value to the end-users.
During the pandemic and national lockdowns, India Stack received further validation. The Indian government delivered relief support directly to 420+ million beneﬁciaries via DBT, including farmers, women Jan Dhan account holders, and other disadvantaged groups. Bill Pay enabled citizens to pay for utilities digitally. The UPI protocol allowed peer-to-peer transfers at a time when people couldn’t transact in person. E-Sign, DigiLocker and other facilities allowed some businesses to continue operations while in lockdown. DPGs will have immense feedforward effects for the economy, especially in the post-COVID-19 recovery trendline. McKinsey Global Institute’s report ‘India’s turning point’ concludes “ﬁnancial-sector reforms and streamlining resources can deliver $2.4 trillion in
investment while boosting entrepreneurship by lowering the cost of capital for enterprises by about 3.5 percentage points”.
India has pioneered a new system with a “tech for all” approach. Interoperability and modular architectures are the key components here. These pave the way for greater ﬁnancial integration with ﬂow-based lending, vernacular voice assistance, customised insurance, new risk capital vehicles, and ultimately real-time personalisation of services. This will serve as the paradigm for digital inclusion the world over, with India serving as the crucible for the largest, scalable drive to digital.
While the ﬁrst wave of innovation of the DPG architecture was in ﬁnancial inclusion and integration, the interoperable, modular and multi-platform system design can help reform many sectors: health, education, technologies, and labour management in manufacturing and construction. The second- and third-order beneﬁts of the system are tremendous and limited only by the ingenuity of the innovation engines in startups.
India is transforming rapidly, ably supported by the political leadership’s consistent vision for creating a Digital India. Today, India has 1.2 billion unique Aadhar accounts, 1 billion bank accounts, 1.2 billion mobile phones, and 900 million mobile connections. This has truly created an interconnected India.
This transformation is led by young entrepreneurs using technology and innovation to drive step-function change, with strong backing from the largest and most distinguished sources of capital globally. The unique interplay between state-led DPGs and industry-led productisation has set the ecosystem up for another record-setting run over this new decade. India’s startups are seizing this generational opportunity and accelerating the country’s transformation into a more inclusive and prosperous economy. A stable regulatory regime, liberalised capital ﬂows, immense talent ecosystem has enabled India to leapfrog to the third largest startup ecosystem in the world.
(Nisha Holla, Technology Fellow, Centre for Cellular and Molecular Platforms (C-CAMP), and Nruthya Madappa, Principal, 3one4 Capital also contributed to this article)
Pranav Pai is the Managing Partner, 3one4 Capital