The India technology stack is underpinned by the Aadhaar and the Jan Dhan program (a scheme that facilitated the opening of bank accounts with zero balances for the unbanked population). This infrastructure has accelerated the take up of UPI and created a cascade of innovation in e-commerce and fintech.
UPI is a digital payment system providing an application programming interface (API) to technology developers. It uses a mobile number and bank account to increase financial inclusion by making and receiving payments easier and is experiencing rapid growth. In July 2023, 9.9 billion transactions were recorded, up 50% from the prior year and threefold from two years ago.1 This compares with a 27% increase in global mobile transaction volumes in 2021.2
The National Payments Corporation of India (NPCI) estimates individual digital payment users will grow to 750 million by 2027 and merchant users could double to 100 million. Currently 473 banks are part of the UPI, double the number from two years ago.3 The NPCI currently supports 17 e-payment solutions built on the India stack.4
An example of leveraging the India stack to broaden the spread of beneficiaries is the government’s Direct Benefit Transfer program. This scheme digitizes the transfer of state benefits and subsidies including pensions, scholarships and LPG subsidies directly into the bank account of the beneficiary.
Using Aadhaar with the Jan Dhan program enables this. It is specifically targeted at reducing fraud and corruption, which was a serious obstacle to getting state benefits and subsidies into the hands of the rural poor. Innovations based on the India stack and the non-profit Open Network for Digital Commerce have the potential to further accelerate the development of new business models through increasing access to the infrastructure behind e-commerce.
Investors are beginning to take note of India as a pivotal player in emerging market equities. Let’s take a closer look at some of the big picture themes driving inflows into India mutual funds and India ETFs.
Following a quintupling of venture capital investment in 2021 to US$39 billion, capital supplied for Indian startups declined in 2022 to US$26 billion.5 A cooling in enthusiasm for consumer technology investments mainly caused the slowdown. Investments in fintech maintained their market share as investors continued to favor the sector.
Investment in electric vehicles in fiscal year (FY) 2022 rose significantly as investors were attracted by forecasts that the industry could achieve revenue of US$100 billion by 2030 as the government prioritizes investment in electric motorcycles and an electric car for the masses.6
India continues to punch above its weight in the creation of unicorns (privately held startup companies with values of over US$1 billion), with 23 added in 2022, pushing the total number to 100, the third highest globally after the US and China.7
In a recent report, Bain cited8 four factors supporting the take-off of Indian venture capital financing in recent years:
Looking ahead, Bain highlights three drivers of increased venture capital funding: the India stack, India’s growing status as the “workplace of the world” and the rapid formalization of workers in the economy. The latter is driven by “digital rails”9 (including the Open Credit Enablement Network), which are attracting people to become part of the formal economy to enable access to consumer credit.
Household access to credit has been a weak link in India’s growth story. However, innovation coupled with fintech firms identifying an underserved segment of the economy are breaking down the barriers. The Aadhaar and Jan Dhan programs have boosted the number of people holding bank accounts from 17% in 2009 to over 80% in 2023.10 This has created the infrastructure for low-income households to access credit in the formalized economy.
Bain forecasts 13% growth in consumer credit between FY 2019-2026, valuing it as high as US$800 billion.11 Fintech and non-bank financial companies will largely drive this. The former is expected to grow its market share from <1% in FY2019 to 10% by FY2026.12
Source: Bain. There is no assurance any forecast, projection, or estimate will be realized.
Democratizing access to credit also includes small- and medium-sized enterprises (SMEs) in India, which account for 84% of total employment.13 Some of the challenges faced by SMEs include: a lack of bargaining power, local as opposed to national market focus and access to credit.
E-commerce is opening up a wider market for the goods SMEs produce, giving them greater insight into pricing trends and increasing their bargaining power with suppliers.
Of even more significance are fintech firms who are working with SMEs to electronically capture their transactions on e-commerce platforms. This data is, in turn, provided to lenders (for a fee) who now have access to real time cash flow data.
This can, in turn, enable collateralization of their accounts receivables, resolving one of the biggest challenges for SMEs accessing credit, namely collateral.
Franklin Templeton is a pioneer in emerging markets equity investing. With a heritage spanning over 30 years, we believe we’re uniquely positioned to offer meaningful insights into emerging markets. We offer market leading active and passive solutions.
*The total expense ratio of a fund (TER). The on-going charges are the fees the fund charges to investors to cover the costs of running the Fund. Additional costs, including transaction fees, will also be incurred. These costs are paid out by the Fund, which will impact on the overall return of the Fund. Fund charges will be incurred in multiple currencies, meaning that payments may increase or decrease as a result of currency exchange fluctuations.
Footnotes:
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Past performance does not guarantee future results.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.
Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.
