Igniting Hundreds of Experiments

How India’s digital infrastructure will usher in a new era of innovations

- Written by Swati T Satpathy on behalf of iSPIRT

IDEAS CONCLAVE NOVEMBER 2015

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

PREFACE

Chapter 1: Challenges of Linear Innovation

Chapter 2: Opportunity for Non-Linear Innovation Chapter 3: Building A Framework for Experimentation and Innovation

3.1 India Stack as Enabler 3.2 Regulatory Policy as Enabler 3.4 Market Making Policy as Enablers 3.5 Why Will This Framework Work Now? 3.6 Current Status of Enablers

Conclusion

APPENDIX

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ACKNOWLEDGEMENTS

This paper has been written in close, daily collaboration with Sharad Sharma (Co-founder and Governing Council Member, iSPIRT). Sharad is the key driver behind the paper and has spent numerous hours in providing thoughtful input, structuring and revising the content to its final form.

This paper would not have been possible without the generous help and support of Nandan Nilekani (former Chairman UIDAI), Sanjay Jain (former Chief Product Manager UIDAI) and Pramod Varma (Chief Architect and Technology Advisor UIDAI) - each of whom shared materials directly used in this paper and explained complex concepts in simple, insightful terms that can be grasped by the layperson. The latter is particularly important as the sheer scale and impact of their UIDAI vision can be intimidating to most casual readers. We are also grateful to Prof. Rishikesh Krishnan (IIM Indore), Shashank ND (co-founder Practo) and Kabir Kumar (World Bank) for their kind

review and advice on the paper.

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PREFACE

The Government of India launched its Digital India programme on 1st July 2015 with three key objectives : (a) creation of digital infrastructure, (b) delivering services digitally and on demand, (c) 1

building digital literacy and empowerment. The primary objective of this program is to facilitate e-governance that provides transparent, accountable, leakage free services to all Indian citizens. Critical infrastructure requirements to lead this change include: (a) unique identity via Aadhaar; expected to cover 1 billion citizens by 2016 (b) universal bank account via Jan Dhan Yojna, already over 190 2

million accounts ; (c) smartphone availability; currently over 150 million in use expected to grow to 750 3

million by 2020 (d) mobile broadband internet access; expected to cover 95% of citizens by 2020 . The 4 5

trinity of Jan Dhan, Aadhaar and mobile access (referred to as JAM) forms the basis of digital infrastructure building.

http://www.digitalindia.gov.in/content/vision-and-vision-areas1

Tarun Khanna and Anjali Raina, Aadhaar: India's 'Unique Identification' System, HBR, Jan 11, 20122

http://www.pmjdy.gov.in/account-statistics-country.aspx, 21-10-20153

India - Ericsson Mobility Report Appendix, June 20154

Broadband in India, Ericsson White Paper, Uen 284 23-3247, October 20145

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About 2.5% of India’s GDP is spent on subsidies - yet - as they make their winding way through the 6

hands of intermediaries, leakage, corruption and inefficiencies eat away large parts. With Aadhaar helping in direct biometric identification of disadvantaged citizens and Jan Dhan bank accounts and mobile phones allowing direct transfers of funds into their accounts, it may be possible to cut out all the intermediaries and deliver benefits directly to the truly needy. In the last year, nearly 13,000 crores were saved by direct benefits transfer, using JAM, in LPG subsidies alone! Use of JAM, has also 7

widened the reach of accident insurance and universal pension schemes, a paradigm shift in India’s public welfare mission.

The paper proposes that the digital foundation of JAM needs to be effectively harnessed by the common citizen for the next bold, unprecedented chapter in nation building. The old system of centralized, top-down approaches to solving long standing challenges in key sectors like finance, health, education, agriculture is not enough. In order to bring about bottom up, transformative impact there needs to be vibrant climate for hundreds of experiments by small and large entrepreneurs and innovators. These experiments will result in the large scale innovations that are needed to solve India’s biggest problems. The paper proposes a framework of regulatory, financing and digital infrastructure enablers for democratising experimentation. Some of these are already in place, while some others need urgent action. The positive interaction between these enablers and early successful experiments will also reinforce the climate of widespread risk taking and innovation.

The Wall Street Journal, India, July 7, 20146

Finance Minister in TOI article July 6, 20157

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DISCLAIMER

This paper is for the casual reader or layperson. The paper is a collation of viewpoints - and is intentionally simple and broad in its approach. It introduces some of the enablers to India’s digital transformation but is not meant to serve as a comprehensive guide or exhaustive reference point for any of the initiatives or government agencies mentioned herein.

Chapter 1: Challenges of Linear Innovation

Selvam Pudukottai, a farmer from a remote area of Nagapattinam, is 55 years old and treks to the nearest town centre to get an eye examination that is dependent on availability of trained ophthalmologist, expensive equipment and requires queuing up for hours at a time. Even when he gets his turn with the eye doctor, Selvam is often required to schedule another appointment for another series of tests. Every trip or additional test adds to his treatment time and costs. He delays his appointments till he can save enough cash for the trip. Additionally, since his eye reports are offline records, he needs to carefully store and carry them for each appointment. On the other hand, his doctor is swamped with conducting basic eye examinations instead of focusing on addressing critical cases.

To solve this problem, Forus created a low cost, cloud enabled screening device that provides accessible eye health diagnosis (5 key tests in one device) to remote and economically challenged demographics in India and elsewhere; potentially impacting 30 million cases of preventable blindness worldwide. By providing an accurate, efficient, easy to operate (by any GP) device it does away with the need to visit eye specialists for diagnosis. As a domino effect, eye specialists can focus their attention on patients that require urgent care, significantly reducing wait times for treatments and load on public health service systems. Forus hopes to follow a pay-per-use business model for its device, which can help sustain maintenance, upgrades and essential research.

However Forus’s product (3nethra) adoption has been relatively slow in India, where it has struggled achieve scale beyond private sector clinics, NGOs and CSR groups. Enabling this kind of private sector innovation is key to step change in health care services in India. It is vital for government to play the role of ‘market maker’ to generate at scale demand for innovations like Forus, so that

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innovators get economic incentives of rapid demand growth and consumers get speedy access to their products. This approach is successfully followed in South Korea, Israel, US

and China - where an Indian innovation like Forus has found better traction than in our own 8

country.

Chapter 2: Opportunity for Non-Linear Innovation

Rajni is a vegetable seller who lives in the slums of Bhopal; she is 37 years old and has 3 children. Every morning she borrows Rs 300 from her local money lender to buy the vegetables from the mandi. Every evening she repays that loan with a 1% - 4% interest rate, and the remainder is her earnings for the day. In addition to this Rajni also needs to borrow money for healthcare and school expenses. She wants to grow her business by selling bottled water and SIM cards, but is unable to negotiate suitable loan terms with the local money lender. In the last year, Rajni has obtained an Aadhaar number, a bank account and a smart phone.

Despite her steady pattern in daily loan repayment, reasonably stable location and personal profile, a conventional credit/debit card will not solve her problem. Providers like Visa/MasterCard charge a fixed percentage per transaction (typically 1.5% for debit and 3% for credit ), irrespective of value of 9

transaction - this makes the daily small ticket transactions like Rajni’s too expensive for lending by merchants. Further, the customer acquisition and customer authentication processes of current credit card providers, do not account for the informal labour force like Rajni. Getting to Rajni and sustaining her transactions, is too expensive and cumbersome for incumbents. And if these resource rich market players cannot get to Rajni effectively and cheaply, how can small innovators dream of doing so?

India has 30 million potential customers like Rajni currently not serviced by the current credit lending system. Lack of fair credit creates a vicious cycle of dependence on usurious money lenders, limits participation in the economy (through investments and/or purchases) and impacts GDP.

China’s Ministry of Health used Forus innovation for diabetic retinopathy implementation8

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The market is ripe for disruptive innovation on the back of Rajni’s newly acquired triad of tools - bank account, Aadhaar id, and mobile phone (aka JAM). But this is not enough. Innovators also need access to customers like Rajni, via a well structured information highway that is freely available to them. They can then focus on customer facing solutions (i.e. run trucks on the highway) and not worry about building expensive and customized processes to reach Rajni (i.e. they need not build the highway itself).

Chapter 3: Building A Framework for Experimentation and Innovation In the examples above we see critical product (Forus eye examination device) and services (credit availability) faltering due to the “Ravan” roadblocks of market scale, cost of technology investments and poor customer paying power. Incremental expenditure on welfare schemes and subsidies will not kill this Ravan. Neither will a pure e-governance focus (which is aimed at solving for leakages in government distribution). These attempts are not new; each well intended but formulaic attempt stops Ravan only briefly - he merely grows a head back to replace the one that got chopped. We need a new framework to give birth to the game changing product/service innovations or Ram, who can kill this Ravan permanently.

So how shall such a Ram be born? For the multivariate problems we described above, we are not envisioning a single cure-all but many innovative market driven solutions. These solutions do not follow a prescribed path to discovery but are born out of hundreds of experiments. Thus, the Ram we desire will be born from an ecosystem that fosters prolific experimentation and rewards those that solve India’s hard problems.

The experiments that will lead to successful ‘Ravan killing’ solutions may not necessarily come from the labs of a few resource rich incumbents. We need to widen the funnel to include the small entrepreneurs and innovators. But how will these challengers get access to the infrastructure and financing needed for effective experimentation? Government, thus, needs to adopt and evangelize pro-challenger tools and policies that reduce barriers to experimentation, level playing field and encourage innovating around national issues. In other words, we need to identify and democratize the key enablers for these hundreds of experiment to take place.

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In this chapter we propose a framework that identifies (a) Digital infrastructure (India Stack) (b) Government sponsored market making (c) Regulatory policy as key enablers for creating the climate for hundreds of experiments. Successful outcomes from these will further improve the plasticity of this framework and reinforce the volume and nature of risk taking and experimentation in the country.

Framework for Enabling Experimentation and Innovation

The three enablers create right climate for widespread experimentation. These experiments when launched are filtered by market forces (e.g. demand, pricing, ease of use, customer service etc.) and only the best players emerge as viable solutions to hard customer problems. The successful outcomes win outsized rewards of scale. These successes then reinforce experimentation for next wave of innovators.

3.1 India Stack as Enabler

The rapid adoption of Aadhaar, Jan Dhan Yojna, and smartphones (JAM) has created a fundamental layer of customer identification and access, on which multiple other digital transactions can be built. The combined initiative of UIDAI, CCA and NPCI has created a unified, integrated layer of digital tools and services (or information system highway) that is called as India Stack. Similar to the creation of the Internet (based on TCP/IP stack), where browsers and apps form the front end for access, here too the

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private sector players can focus on building customer facing solutions that ride on India Stack. A good analogy of the kind of innovation possible is Uber which uses the building blocks of GPS, Google Maps, electronic payment and smartphone - none of which Uber built nor owns - to create a customer friendly transportation solution.

For small startups, India Stack is a freely available digital platform (or the ‘highway’ referred to in Chapter 2) to connect to customers like Rajni, using cashless (online payment), paperless (online documentation and authentication), presenceless (on smartphone) transactions. 10

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World over systems that provide information like India Stack are controlled by private companies leading to issues of monopoly e.g. Apply Pay is based on one click two factor authentication, Facebook Connect provides ID for a billion people, M-pesa provides digital payments on mobile to most of Kenya. In India, the entire stack is an open API stack built as a ‘public good’ that can be leveraged by the smallest startup. The focus has been to create this ‘open’ plumbing and let innovation happen on the customer end of any solution. The explosion of innovation possible on this freely accessible digital foundation is extraordinary. This sets the stage for

Refer to APPENDIX for more details on how each layer in the stack works10

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the hundreds of experiments or what Nobel Prize winning economist Edmund S. Phelps calls as ‘mass flourishing’ on the basis of widespread, indigenous innovation.

India Stack has simultaneously solved the demand side and supply side of the problem for demographics like Rajni. As discussed earlier, demographics like Rajni, could not access current financial systems due to various friction points around paper based identity proof, access and interaction with physical bank, availability of hard cash. India Stack - starting from the basic foundation of JAM and building on the other layers - has completely eliminated these friction points and made this demographic accessible; thereby solving the demand side. More importantly, by becoming a free infrastructure service available to the smallest entrepreneur it has opened up the number of suppliers ready to innovate and fulfill demand from this demographic.

In our view, India Stack is the key enabler for lowering barriers to entry for experimentation. Regulatory policy and market making policy further support private sector entrepreneurs to align and innovate around India’s long standing Ravans (while leveraging infrastructure of India Stack).

3.2 Regulatory Policy as Enabler

The RBI seeking to encourage low cost cashless transactions and financial inclusion for demographics like Rajni, has unbundled credit and payment, by issuing payment bank licences to 11 non-bank players. In order to promote freethinking innovations around lending to India’s poorest it was important to allow non-banks to experiment. These new players will not have the legacy burden of current large market players like SBI, HDFC, ICICI and can leverage India Stack for an asset light route to customer acquisition and servicing.

By allowing these new banks to operate as payments only, the RBI has effectively made anyone with a mobile phone and Aadhaar id, a payment bank account holder. This will reduce dependence on physical bank branches/ATMs, reduce cost and simplify mechanics of cashless transfer between payment banks, reduce leakage in direct benefit welfare schemes like LPG, fertilizer, and food subsidies. Further, the RBI has created policy for “small bank” licenses where new players are allowed to lend to small borrowers, This policy, in combination with the data mining possible on India Stack infrastructure, will enable the new players to come up with customized lending solutions based on customers past payment behaviour.

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Similarly, recent SEBI easing of IPO listing norms for startups is a positive reinforcement for challengers. In addition, by allowing paperless, web based IPO it has reduced risk for investors, and reduced cost and time of IPO listing.

These pro-challenger policies enable the ‘hundreds of experiments’ discussed in our framework, by leveling playing field for new entrants and encouraging experimentation around the unmet need of a large market. We cannot stop here, more needs to be done to fully realize key benefits for the digital entrepreneur - for instance, easier tax regulations via GST and privacy laws around customer data mining - are crucial inputs to the experiments based ecosystem we propose.

3.4 Market Making Policy as Enablers

While digital infrastructure and regulatory policy are critical enablers for widespread experimentation, as illustrated by the Forus story, they are not enough. The government needs to work in mission mode to align startups and entrepreneurs around national scale problems. This is possible by (a) creating large pool of capital that actively seeks innovations around specific problems, (b) build market for innovations by placing purchase contracts, and (c) enabling autonomous and outcome driven support for innovations via corporate participation.

Recent initiatives by SETU (Self Employment and Talent Utilization) that promote innovation hubs in partnership with universities and corporates (Make in Universities program) and the India Aspiration Fund (Rs 2000 crore earmarked for fund of funds) are steps in the right direction. These are still in the early days of inception and none of these effectively address the need for ‘market making’ by the government.

World over government sponsored challenge grants have led to cutting edge innovations that promise 12

to transform the consumer experience. Driverless cars (originating from DARPA) and Virgin Galactic spaceline are notable examples. Closer home the TB adherence and Team Indus lunar mission (part of Google X) are examples of grants that led to impactful innovations and captured imagination of the nation. Even so, these successes are few and far between - Indian policy lags in aligning innovators to national problems and Indian innovators often choose to incubate on foreign soils. A cohesively designed challenge grants program can rally entrepreneurs as well as researchers

Challenge grants are often structured as government initiatives that focus attention and effort on specific 12

problems that plague common citizens by disbursing funds to teams that successfully come up with innovative solutions for the challenge

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around national priorities and become the basis of the ‘hundreds of experiments’ that the framework proposes.

But just awarding money for innovations is not enough; to help innovators realize scale (and related financial rewards) and common citizen access innovation benefits at speed, Indian government needs to commit to adopt the innovation in its applicable purchase contracts. This “market making policy” is particularly important in a country like ours, where the GoI is still the largest procurer of infrastructure related products and services. However the current L1 clause in government procurement contracts requires that there be 2-3 large vendors of the product - a requirement that goes directly against adopting unique innovative products that come from small startups. Also the procurement RFP mechanics is beholden to consultants that work for vested interests of large incumbents. These are key procedural bottlenecks that need to be addressed urgently.

In support of this key enabler, the National Institution for Transforming India (NITI) Aayog recently earmarked Rs 150 crore under the Atal Innovation Mission (AIM) . They now need to urgently 13

identify, structure and evangelize the specific challenge grant programs under AIM. This will incentivize entrepreneurs, research bodies to experiment and innovate around specific national concerns.

3.5 Why Will This Framework Work Now?

We have always had some experimentation at the periphery of national scale problems - but these were never backed by the enablers we discuss in this paper (until now) - leading to their premature death. Entrepreneurship was confined to the rich or the very brave. Innovation was hard to scale. Experimentation was not prolific. The few experiments that made it to pilot stage, could not scale without structural support of distribution and financing.

For the first time in the country (and in the world) there is an opportunity to combine the sweeping tide of multiple technological forces into a unifying digital platform of change. For the first time, more than 1B Indian customers have access to the trinity of tools viz. mobile phone, Aadhaar id and bank account. For the first time, innovators and entrepreneurs have access to a free, at scale, backend information system like India Stack, for launching digital products and services. For the first time, there will be a systemic injection of financing and regulatory support for the small guy to experiment.

Times of India, Feb 28, 201513

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This combination of enablers will dramatically increase both the volume and nature of experimentation in the country. Successful pilots will scale quickly, at lower cost and provide outsized rewards to winners. This will further multiply the number of experiments and deepen the pipeline for successful outcomes. India will no longer be the graveyard of pilots, simply because pilots are now going to be, both, exponentially higher in number and better set up for success.

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3.6 Current Status of Enablers For the Rajni story discussed earlier, digital infrastructure and RBI regulatory policy are already in play. Payment banks like PayTM and new credit players like Indifi Technologies, Instakash and Vote4Cash are taking advantage of the unbundling of payments and credit. Due to the low cost of direct transfer established by IMPS (42 paisa versus Visa’s 3%), they can directly make small loan offers to 14

Rajni’s mobile. Rajni can effectively use her Lumia phone to authenticate herself and accept credit financing in her bank account. This credit (amount and terms) is customized to her financial behaviour, as captured in her payments bank account. The entire process is without middlemen and needs no additional documentation or visits to physical bank branches. Further, Rajni can directly pay the mandi vendor using his Aadhaar number.

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Innovations on India Stack can access a whole new tranche of customers digitally. This opens up the gates to investment participation, via small value high volume transactions across the financial sector. The potential 10X expansion of mutual funds sector, based on reduced cost of transactions, is a good example.

Currently the cost of customer acquisition for MF schemes is Rs 1500 (per customer) and the agent 16

makes 50 basis points ; thus the breakeven investment value is Rs 3L and covers only 31M Indians who 17

can afford to invest such amount in MF. But the cashless, paperless, instant authentication, mobile enabled features of the India Stack reduces this cost of onboarding to Rs 100. The breakeven investment then becomes Rs 20,000 and covers 340M people - a 10X increase in market size. 18

It is not hard to extrapolate the exponential, cascading impact this kind of increase in financial participation can bring to the market and to the end consumer.

Conclusion

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iSPIRT presentation to SEBI Chairman Oct 201517

iSPIRT presentation to SEBI Chairman Oct 201518

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India has always had pockets of linear innovation, but these have always encountered Ravans of market scale and poor purchasing power. Instead of a top down formulaic solution to these problems, the government needs to foster a climate of prolific experimentation that rallies entrepreneurs and innovators around nation building. Such a climate requires a pro-challenger regulatory policy, open-access digital infrastructure investments like India Stack and market-making financial grants for key sectoral problems. These enablers will serve to lower barriers to entry and level the playing field for new entrepreneurs and change makers.

We are at an inflection point in India’s history; we stand at the edge of unprecedented digital innovation across customers’ needs and demographics. These innovations will leapfrog any existing solution worldwide, as they are backed by freely available cutting edge digital infrastructure and large scale demand - a fortuitous convergence that is unique to India.

While this document has spoken primarily of financial inclusion via lending/payment innovation - the climate is ripe for experimentation and disruptive wins in sectors like agriculture and education. For example, in agriculture, crowd sourced digital soil sampling and satellite based precise land mapping can personalize the farming/fertilizer subsidy per customer. In education, Aadhaar based enrollment and paperless digital documentation in combination with mobile based learning can reduce inflated enrollments, absenteeism, learning gaps and false certification. Further, these innovations will fuel economic engine of growth in a self perpetuating cycle that will lead to many more can-do entrepreneurship and inclusive prosperity. It is time to leapfrog. It is time to win.

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APPENDIX These set of 5 slides provide more details on timeline and how each layer of India Stack works, as referenced in section 3.1 of the document.

Timeline of India Stack 19

Aadhaar 20

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Source: http://www.cca.gov.in/cca/?q=eSign.html20

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eSign 21

! Digital Locker 22

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https://digilocker.gov.in21

http://www.npci.org.in22

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Unified Payment Interface 23

Consent Layer of India Stack 24

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