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How India’s fastest-ever formalisation drive will shape the 2030 growth story

Priyanka Kanwar
16th May 2018
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While the government and the banking sector will continue to play important roles in regulation and financial infrastructure respectively, technology startups with modern business models and efficient distribution will drive the actual change at the grassroots level.

Monday morning starts off gloomily. I’m discussing dwindling manufacturing exports and liquidity woes over breakfast with my father, who avows to never have seen an impact on business as devastating as that of the demonetisation and GST in his 40-year career. On my way to my first meeting, the Ola driver denounces recent regulatory shocks that he believes have caused his income to dip by half over the last six months.

As I kickstart a client discussion, though, the tone changes entirely, finally bringing a glimmer of economic hope. One of India’s top FMCG companies is looking at rapid expansion—50,000 new retail outlets in six months. Except, this time, they want the entire process digitised and automated, end-to-end, from the recruitment of retailers to the payments of their bonuses.

My Monday at work reflects what I see as two glaring contradictions that exist at the heart of the Indian economy. On the one side, several major industries are witnessing a post-GST slowdown by as much as 10 percent; a demonetisation-induced liquidity crunch has caused a domino effect with the Wholesale Price Index (WPI), job creation, and consumer sentiment spiralling down; and Indian banks’ astronomical non-performing assets (NPAs) threaten an already-scarce credit flow to micro, small, and medium enterprises (MSMEs).

On the sunny side of the street, the IMF and Deutsche Bank have predicted a 7.5 percent GDP growth this year, GST compliance is improving every month with 5.5 million claims filed in April, and Silicon Valley is increasingly looking at India, with 730 million internet users by 2020, for the next wave of growth. Despite the short-term negative impact due to recent regulatory reforms, I believe in a future where we turn these positive statistics into meaningful, lasting changes in how the economy works.

Brewing underneath what some portray as a ‘silent recession’ is actually what is set to become India’s most transformative growth story ever. A growth story fuelled by the Indian market’s pressing need to formalise—Indian employers are legalising their relationship with their employees through contracts, enterprises are looking to digitise payments across supply chains, savvy consumers are demanding acceptance of e-payments, and small businesses need access to modern credit.

This is a growth story belied by statistics, but on the ground, the change is palpable. As a fintech founder, I find myself at the centre of the financial transition enabling millions of businesses, particularly in the unorganised sector, become more data-driven, accountable, and transparent than ever before. Here, I lay out the themes and challenges that I believe will shape the Indian economy’s path to formalisation and, ultimately, to a decade of rapid economic growth.

Formalisation of the employer-employee relationship

At the very centre of this transition is the CEO’s recently emerging and rather pressing emphasis on tracking every data point linked to stakeholders in their ecosystem, be it employees and contractors, vendors and distributors, or the end customer. With digital automation tools, what finance and HR teams previously dismissed as inefficiency-linked ‘business loss’ or too-unwieldy-to-deal-with pilferage is now being recorded in real-time and made accessible to decision makers on their smartphones, resulting in savings worth millions of dollars.

Everyone, from an IIM-educated sales head at a Series A SaaS startup to the fleet drivers at a publicly-listed logistics company, is being held accountable. To avoid penalties from more stringent tax laws, businesses are paying every employee’s salary digitally, right into their bank accounts. Not only is this bringing a large section of informal labour into the digital economy, but it is also putting a diverse set of businesses from Tier-II and III cities on the radar. Change is apparent all the way from metros to cities like Raipur, Kota, Ahmedabad, and Indore.

Digitisation of supply chains

Change is also making its way deeper into the supply chain. Presumably, in the immediate term following the largest tax reform in Indian history, industries with a high percentage of unorganised firms saw a sharp shift in sales towards larger, more formal units that could enable clients to receive GST input credit. In an economy where the unorganised and organised sectors are so inextricably linked, MSMEs running on paper register accounts struggled to become GST-compliant, lacking both the information and tools needed to transition.

However, close to one year after the change was implemented, smaller vendors and suppliers are retaining orders by embracing GST and deploying tools that are helping them record every transaction in their systems, be it via PoS machines, accounting software, or digital invoices. This growth in compliance reflects in the six-fold jump in profits of Tally, the SMB accounting software firm, or a massive 96.7-percent year-on-year increase in the number of PoS machines installed last year.

We’re seeing businesses in every industry, with a target to bring down cash expenditure to less than one percent, use digital payment forms like NACH, RTGS, and e-vouchers to settle payments throughout the supply chain. The digital divide plaguing the country in the last decade is finally narrowing down with regulators and the formal sector helping bridge the gap for the unorganised economy.

Compliance and digital adoption by unorganised MSMEs

However, this divide cannot be completely eliminated without the participation of all unorganised businesses, even those that are not linked with supply chains and not directly covered under government regulations (e.g. the Shops and Establishments Act or the Companies Act), such as kirana stores, dhabas, plumbers, electricians, and the like. While I’m most excited about this section’s transition to the formal economy, it also will take the most work. There needs to be a coordinated, concerted effort from both the finance sector and from the government to make formalisation a viable possibility for this section of the unorganised sector.

Tech solutions specially designed for these businesses must have features like offline capability, local language support, and affordable pricing to effectively lower the barrier to formalise. In addition, our research tells us that the government must make massive policy changes, since much of the unorganised sector fears that bribery, crony capitalism and weak institutions hamper their business—regardless of whether they’re officially registered or not.

Stronger protection and benefits for informal labour via formal contracts

Together, the organised and unorganised sectors hire over 90 percent of Indian workers through the informal economy, meaning these workers often lack a stable, regular wage and basic social security. With tightening government regulations, and more companies entering the formal economy, we expect a growing number of Indians to work under formal labour contracts. This could bring a boom to India’s social security ecosystem, which can scale through powerful digital platforms. This changing tide could tangibly reverse wealth inequality trends in India by offering viable means for wealth generation to hundreds of millions of people.

Modern credit in new data-rich digital economy

Major regulatory changes like these and the rapid expansion of tech means that the backbone of the Indian economy is changing. Capital obviously still matters, but data will become the new currency for a whole suite of industries—from finance and e-commerce to logistics and FMCG. This is an exciting time, as a data-rich economy can also mean a well-informed economy.

SMBs get business insights at their fingertips, individuals follow customised paths to sustainable financial independence, and policymakers understand the effectiveness of their interventions. This means more transparent business, more inclusive development, and more trustworthy institutions. Some startups are already attempting to leverage this more robust dataset to plug an approximately $200billion -$400 billion gap in SMB financing via innovative platforms like TReDS for invoice discounting.

The role of tech startups in making transition more equitable

It is clear that we’ve already started the transition towards a more transparent digital economy; one that will drive India’s growth story for the next decade. This growth will be marked by a significant decline in cash transactions, a massive surge in tax collections, and more businesses and employees moving into the organised and formal economy. While the government and the banking sector will continue to play important roles in regulation and financial infrastructure respectively, I firmly believe that it is technology startups with modern business models and efficient distribution that will drive actual change at the grassroots level.

Such a meaningful opportunity also brings with it an important responsibility—that of ensuring that the transition brought about by formalisation is an equitable one, including all sections of the economy. We must build customer-first, intuitive, and affordable products, ensuring that everyone—from Fortune 500 companies to small vendors; and prominent business leaders to manual labourers—has a seat at the table. By making this movement about inclusion and lasting impact, India’s largest formalisation drive in history can become a success, not only for a few at the top, but for the more than one billion people who call India home.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

 

 

 

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