Insights / September 24, 2019

India’s Virtuous Circle of Amazing Progress

Digitalization, Financialization and Formalization

In India, the Hindi term “jugaad” is used to describe an improvised fix, or a clever solution born of adversity. In other words, jugaad characterizes a way of life— an attitude of doing more with less.

We like to think of jugaad as representative of the “old India” in which ingenuity was largely confined to low-tech solutions for difficult problems. An example would be using wooden planks, old Jeep parts and the engine from an irrigation pump to make a cost-effective vehicle for transporting people and supplies. The point is that, generally speaking, Indians are creative and are continually working hard to improve their lot in life.

In today’s “new India,” this same spirit of creativity and hard work is being applied to the much more complicated megatrends of digitalization, financialization and formalization. As a result, a virtuous circle of amazing progress is rapidly occurring in India — which makes the country the fastest-growing major economy in the world and one of the most-fertile emerging markets for finding attractive investments.

Reflecting India’s continued progress in the modern age, a new term — jugaad innovation — has been popularized by the likes of Navi Radjou, a Silicon Valley-based researcher and author who grew up in Pondicherry, a former French colony in southern India made famous by the book and movie Life of Pi.

A recent example of the new wave of innovation has occurred in Kozhikode, a coastal city in the Indian state of Kerala. The city is using a cloud-based digital solution developed by the eGovernments Foundation to get building plans approved — including site inspections— in as little as 15 days, down from as much as one year.

Similarly, an Indian driver’s license can now be obtained through a mobile- phone app, which replaces filling out paperwork and waiting in long lines at the Regional Transport Office. Moreover, the license itself is stored along with other government records in a DigiLocker, which eliminates the need for tangible documents and lessens the burden of a person’s physical presence to accomplish many tasks. Consequently, India’s government bureaucracy — which used to be a major impediment— has now been streamlined into a competitive advantage compared to other countries, even developed countries like the United States.

These and countless other examples in India’s virtuous circle of progress have been made possible by digitalization, financialization and formalization — which are the subjects of this white paper. The way to think about India’s progress is as a new, self-reinforcing paradigm or, in Charlie Munger’s words, a “lollapalooza result.” What this means is that an outcome is much bigger than the sum of its parts and that the previous pace of development no longer holds — perhaps going from linear-type growth to exponential-type growth.

Consider Moore’s Law, which in 1965 correctly predicted the approximate doubling in the number of components per integrated circuit every year for at least a decade. That’s exponential-type growth because doubling each year is much more powerful than growing linearly by the same amount. Exponential growth is what can totally transform an economy in relatively short order — whether during the Industrial Revolution that began in the late 1700s, the Computer Revolution that began in the 1950s or India’s virtuous circle that we’re seeing today.

Despite the challenges present in all emerging markets, including India, we think it’s more important to focus on the positive developments. And if we’re correct in our basic investment premise, the headroom for growth should be enormous.

At Wasatch, we’ve traveled to India for more than 15 years. And we meet on site with as many as 100 Indian company management teams annually. Based on this bottom-up, on-the-ground research, our investment premise centers largely on the aforementioned digitalization, financialization and formalization. Moreover, we believe these megatrends should benefit our Indian holdings in particular.

Digitalization involves the electronic storage, retrieval and distribution of information, and the ability to communicate, collaborate and be productive with the help of electronic devices. Digitalization means that India is making great strides in the identification of its citizens (with data integrity and security) and in the expansion of the internet and mobile-phone services — often more progressively than developed-market counterparts. Another result is that more can get done electronically with less need for a person’s physical presence and with fewer tangible items (like handwritten paper authorizations).

Financialization entails the creation and distribution of banking, investment, credit, payment and insurance services. As we explore below, financialization is at the foundation of any well-functioning modern economy. Moreover, digitalization is a critical element of India’s rapid financialization — and the interaction of the two is part of India’s virtuous circle.

Formalization refers to the greater transparency of economic activities and a better regulatory framework. One element of formalization is a simpler and fairer tax system that reduces layers of “petty corruption” and gets tax money to where it’s intended — to building infrastructure, for example. Another element of formalization is making personal and business transactions with electronic devices, rather than with tangible currency notes. This way, transactions are conducted more honestly and equitably — and with less “regulatory cholesterol” that clogs economic systems.

Among the changes within digitalization, financialization and formalization, some of the most important are Aadhaar, Reliance Jio, and the Goods and Services Tax (GST), all of which are explained below. We also believe that India’s relatively young population, as indicated in Figure 1 below, plays a critical role in the country’s willingness to adopt these changes so readily.

Aadhaar (a public, government-sponsored initiative) uses biometric data to electronically identify almost all of India’s adult population. Aadhaar is at the foundation of much of India’s digital, financial, legal and regulatory progress.

Reliance Jio (a private enterprise) is India’s extremely low-cost provider of mobile-phone service that delivers much higher voice and data capacity and uses less bandwidth compared to outmoded technology. With its “4G Long-Term Evolution (LTE)” service, Reliance Jio has for the past few years been improving the general population’s access to the internet and instant communication.

The Goods and Services Tax (GST) simplifies and coordinates India’s state- and central-government tax system to make it easier to pay taxes, to increase compliance, to eliminate multiple layers of taxation, to reduce corruption and to ensure that tax revenues are more likely to be used for their intended purposes.

Returning to India’s virtuous circle, it started with a relatively young population’s willingness to embrace technology, transparency and the rule of law. Extremely rapid progress has ensued from there.

India Population

A young population is important because radical change is more likely to be accepted by people who haven’t lived long lives under an obsolete paradigm. In fact, with over 65% of its total population under age 35, India has the largest group of young people on the planet. In the next decade, as shown in Figure 2, the estimated change in India’s working-age population (ages 15 to 64) will be 110 million— making India’s workforce the world’s biggest at about one billion people, many of whom speak English.

Technology has allowed India to leapfrog outmoded stages of development in the ways people communicate, the ways they live and the ways they work. Just imagine going from having no indoor plumbing or electricity to having a mobile phone and a bank account almost overnight.

Transparency — protected, of course, by world-class security — has allowed technology to function properly. Without transparency, technology would be limited in its ability to improve peoples’ lives. For instance, the Indian government wouldn’t be able to help the poor as effectively if people weren’t willing and able to disclose their identity, their circumstances and their needs.

Moreover, transparency is a vital aspect of the rule of law, which is a basic element of a thriving economy. People need to know that corruption will be exposed and that what they earn and save won’t be stolen through malicious schemes. The rule of law encourages people to engage in productive work and pay their taxes.

So while India is far from perfect, Prime Minister Narendra Modi is trying to set the right tone with, for example, his ongoing pronouncement that’s roughly translated as: I will not take a bribe, and I will not allow anybody to take one. Regarding the continuation of progressive government initiatives, it’s encouraging that— in voting during April and May 2019 — Modi was overwhelmingly re-elected for another five-year term.

As for digital technology, perhaps the most-significant development is the implementation of Aadhaar — a public, government-sponsored initiative that uses biometric data (i.e., fingerprint and iris scans) to capture citizens’ data and that fosters digital storage and retrieval of information. The program promotes efficient, electronically enabled communications, collaboration and commerce. Think of Aadhaar like a Social Security/ID card that’s permanently attached to everyone’s fingertip.

Aadhaar is the Hindi word for foundation, and the Aadhaar program is built to cover India’s more than 1.3 billion people— over a sixth of the world’s entire population. The program has already registered over 90% of India’s adult citizens and is indeed forming the foundation for many government, business and personal priorities. To get a sense of the scope of the program, India enrolled more than one billion people in Aadhaar in about five years, which is approximately three years faster than it took Facebook to reach one billion users.

Under Aadhaar, almost every adult Indian’s biometric data, photo and basic personal details are tied to a unique 12-digit identification number. The program then makes it easy — even for the relatively uneducated masses— to sign up for bank accounts and mobile-phone plans, and to make and receive payments via smartphones.

Aadhaar helps cut out the middlemen who previously charged exorbitant fees to facilitate transactions and loans. Moreover, the program enables citizens and businesses to receive government benefits and subsidies — again with less graft and corruption.

Related to Aadhaar is India Stack — a set of standardized application programming interfaces (APIs) or building blocks— which allows programmers to more easily create technological solutions for governments, businesses and individuals. The goal of India Stack is to form a digital infrastructure that lessens or eliminates the need for paper records and tangible currency, and that uses biometric identification to vastly reduce requirements for peoples’ physical presence.

To put this initiative in perspective, India Stack is the largest open API in the world. In fact, almost all adult Indians will soon have DigiLockers to hold electronic government documents such as birth certificates, tax statements, driver’s licenses, motor-vehicle registrations and exam scores.

While the importance of Aadhaar and India Stack cannot be overstated, they aren’t enough. They work hand-in-glove with phone and internet services, which are addressed by Digital India — a coordinated state- and central-government campaign launched in 2015 under Prime Minister Modi. The goal of Digital India is to enhance the country’s standing as an efficient, knowledge-based economy. The campaign is supported by the so-called “pillars” of growth.

The first pillar is the creation of Broadband Highways to enhance the already-strong broadband service in the country. For rural areas, broadband highways are well on their way to covering hundreds of thousands of villages. For urban areas, virtual network operators are being used to provide infrastructure and ongoing service, which are required to be present in new buildings and urban developments.

India’s telecommunications network is already one of the largest in the world, serving over one billion mobile and landline subscribers. To enhance this network, the second pillar of Digital India is Universal Access to Mobile Connectivity, which aims to provide coverage for tens of thousands of villages in India that don’t currently have mobile-phone service.

One of the main initiatives designed to increase low-cost mobile-phone penetration is coming from Reliance Jio, a private-enterprise mobile-network operator using the “4G Long-Term Evolution (LTE)” high-speed wireless standard. Voice over Long-Term Evolution (VoLTE) has much higher voice and data capacity and uses less bandwidth relative to 2G and 3G services. VoLTE is used for mobile phones, data terminals, wearables and other internet-of-things (IoT) devices. Another advantage of VoLTE is that it doesn’t rely on obsolete circuit-switched voice networks.

Reliance Jio spent about $32 billion and launched its mobile network in September 2016. The phones that the company offers are very inexpensive, and ongoing service costs next to nothing. Because Reliance Jio launched its network without any legacy 2G or 3G customers, it has a much more efficient system for providing mobile data. The company’s long-term plan is to make money on its ecosystem of apps and entertainment.

In 2015, there were about 340 million internet users in India. This total rose to approximately 560 million in 2019, and new users are being added at a rate of about 10 million per month. Reliance Jio alone accounts for approximately 300 million users. In fact, Indians are now some of the most voracious consumers of mobile data in the world.

These numbers indicate that about half of India’s adults currently use the internet (mostly through mobile phones). To expand this penetration, the third pillar of Digital India is Public Internet Access, which will be implemented through common service centers to increase reach to about 250,000 villages. Over the longer term, 150,000 or more post offices will be converted into multi-service centers — which will include internet access.

A specific development related to internet access is e-Choupal, a private-enterprise service that links ITC Limited via the internet to a previously fragmented network of rural Indian farms. ITC is a multinational conglomerate that markets a broad array of products and services.

Farms in India have historically been burdened by weak infrastructure and inefficient and costly intermediaries. With e-Choupal, farmers (like the one pictured above) can negotiate and arrange procurement for agricultural and aquacultural products such as soybeans, wheat, coffee and prawns. In addition, e-Choupal provides information about pricing and better farming methods, and allows farmers to order agricultural inputs like seeds and fertilizers.

As discussed, digitalization, financialization and formalization are all interrelated in India’s virtuous circle of progress. For example, digital storage of data makes it possible to bring broad financial services — including bank accounts and electronic funds transfer — to poorer citizens. And without these financial services, large parts of India’s economy would continue to operate in the shadows — devoid of formal oversight.

To understand the speed of progress made possible by the virtuous circle, consider that one Indian bank launched a fully digital app through which ordinary people can use a mobile phone to open an account in less than two minutes. This app helped the bank add approximately eight million new accounts in 18 months, about doubling its customer base.

Because most of India’s more than 1.3 billion citizens have a unique Aadhaar identity and because the country has made financial inclusion a priority, approximately 80% of adult Indians now have a bank account, up from about 35% in 2011. And the improvement is especially striking in rural areas, which had previously been excluded from much of the formal economy.

But financial inclusion goes way beyond these statistics. Opportunities to affordably obtain credit (including mortgages and personal, business and farm loans) and insurance are also much more prevalent. Again, this is being accomplished with less-usurious interference from corrupt middlemen. Figure 3, shows India’s housing mortgages as a percentage of GDP compared to other countries, indicating the tremendous headroom for growth in India. Similarly, other forms of credit in India also stand to grow from current low levels.

Of all the recent legal changes and regulatory reforms in India, the most important has probably been the Goods and Services Tax (GST) Act of 2017. Under the GST, which took 17 years to become law, stateand central-government taxes are simplified and coordinated around the entire country. To understand what it was like before the GST, imagine the confusion if states and the federal government in the U.S. didn’t coordinate on tax policies and payments.

The basic advantages of the GST relative to the old tax regime are the reduction of “cascading taxes” (taxes on top of other taxes), easier compliance with stateand central-government levies, increased adherence to tax rates, more money in the hands of governments to spend on much-needed infrastructure and other priorities, and lower prices for businesses and individuals.

How has the tax overhaul been accomplished? Again, technology has played a big role. For example, electronic waybills are being used to track taxes owed to state and central governments, as well as to track the value added at each stage of production. This helps eliminate some of the cascading taxes. Moreover, the electronic tracking encourages compliance because participants are held accountable for their own actions and are more confident in the actions of others.

The Goods and Services Tax Network (GSTN) is another high-tech development. The GSTN allows state and central governments and taxpayers to use a single GST system for retrieving and inputting information. For example, taxing authorities can track down individual transactions, while taxpayers can download information for their tax returns. The GSTN set up the entire infrastructure for the GST system and is responsible for ongoing operations, maintenance and improvements. In Figure 4, you can see that Aadhaar, government tax authorities, mobile apps, tax professionals, commercial banks and the Reserve Bank of
India — along with widespread internet access — all play vital roles in the integrated GST system.

In the year before the GST was implemented, the Indian government under Prime Minister Modi announced another reform: the 2016 demonetization of two high-denomination forms of tangible currency notes. What this meant was that Indian citizens and businesses were forced in relatively short order to exchange their large tangible currency notes for electronic bank deposits.

The benefits of demonetization have been several-fold. First, demonetization has reduced corruption because swindlers have been reluctant to take the risk of being caught trying to exchange counterfeit currency notes. Second, demonetization has helped formalize the economy and— with electronic tracking— bring transactions out of the shadows. Third, demonetization has improved labor practices because it’s harder to pay workers under the table. Fourth, demonetization has improved tax collection because transactions are more open and transfers of tax payments to government entities have been streamlined.

The developments surrounding demonetization are additional examples of key elements in the virtuous circle of progress. It’s important to note that Aadhaar— along with widespread electronic bank accounts, internet connectivity and mobile-phone service — made demonetization possible. And demonetization made the benefits described in the preceding paragraph much easier to achieve.

While it’s difficult to quantify precisely the virtuous effects of digitalization, financialization and formalization, we can make some common-sense observations. For one, the government pays all sorts of benefits to Indian citizens. Most of these benefits, estimated at about $46 billion in the 2018 – 2019 fiscal year as shown in Figure 5 below, are earmarked for the poor. Unfortunately, large portions of the benefits have historically landed in the coffers of unintended recipients.

This has been changing with a financial-inclusion program known as Direct Benefit Transfer (DBT), which was launched in 2013. Because most Indians now have bank accounts, benefits can be transferred directly into these accounts — improving the timeliness of payments, cutting out the middlemen, reducing fraud and putting more money in the hands of those who need it most. Beyond DBT, we think the implementation of many government programs will soon become even more efficient than the implementation of similar programs in developed markets.

In contrast to the negative effects of “cascading taxes” before the GST, we think of digitalization, financialization and formalization as providing “cascading benefits.” When people believe they’re being treated fairly, they’re more able to focus on being productive, rather than on “gaming the system.”

Now consider the “petty corruption” and “regulatory cholesterol” that are being reduced in India. Today, obtaining a driver’s license and paying a traffic ticket, for example, are less susceptible to bribery and delays due to the recent involvement of more digital processes and fewer manual operations. Similarly, complying with stateand central-government laws is easier and fairer because the laws are often being coordinated and enforced with high-tech devices and procedures.

Regarding infrastructure, India has been building almost 30 kilometers of highways per day. And this number is soon expected to jump to approximately 40 kilometers per day. The country is also on track to build cutting-edge metro systems in all of its major cities. Moreover, India has allocated around $60 billion to construct about 100 new airports over the next 10 to 15 years.

A person from a developed region visiting India might be surprised by our enthusiasm for the country’s potential. After all, India is still plagued by poverty, pollution and poor infrastructure. But as we like to say, these things only represent the country’s “hardware,” or what can be seen on the surface.

We believe the country’s “software,” what can only be seen by looking deeper, is in much better shape. India’s software is mostly responsible for the country’s jugaad innovation and virtuous circle of amazing progress that are occurring at breakneck speed. This is why we think a country’s software is much more important than its hardware for winning in the 21st century.

When we say software, we’re not necessarily referring to computer software — although computer software is certainly a big part of the equation. More generally, we’re referring to the types of improvements that have been described in this white paper.

In a broad sense, India’s game-changing software is the country’s strengthening embrace of technology, transparency and the rule of law— despite still being far from perfect. Narrowing the focus, India’s software relies on the specific initiatives within the long-term megatrends of digitalization, financialization and formalization.

As mentioned, India has a relatively young population. For example, more than 65% of Indians are younger than age 35. This has been one of the reasons why Indians have been so quick to adopt technology and to reject corruption and the outmoded ways of doing business.

We believe the combination of a young population and new “software” will create significant benefits in relatively short order. Tax collection and India’s fiscal picture will improve, which will lead to world-class infrastructure development. High-quality education will become more widespread. Productivity will skyrocket. More money will land in the possession of citizens whose savings and purchasing power will create better prospects for banks and consumer-products companies. Meanwhile, living conditions will start to catch up with those in developed markets.

In addition to banking and consumer-products, insurance is another example of an industry with strong investment prospects. As you can see in Figure 6, India’s insurance penetration rate is still very low. With improved, technology-based recordkeeping and distribution— and an expanding middle class— the headroom for growth in insurance is enormous. For largely the same reasons, expenditures on health care are also expected to rise dramatically. This, too, should create long-duration investment opportunities.

Beyond banking, consumer products, insurance and health care, we believe the developments highlighted in this white paper will benefit almost all industries and sectors in India. In other words, we think India’s “software” will play a major role in improving the country’s “hardware.” And we’ll be there to scoop up attractive investments along the way.


Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investing in small and micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.

Diversification does not eliminate the risk of experiencing investment losses.

Information regarding market or economic trends or the factors influencing historical or future performance reflects the opinions of management as of the date of this document. These statements should not be relied upon for any other purpose.

Past performance is no guarantee of future results, and there is no guarantee that the market forecasts discussed will be realized.

ALPS Distributors, Inc. is not affiliated with Wasatch Global Investors.


Gross domestic product (GDP) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year.