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India’s Innovation Corpus Must Invest in India’s FinTech R&D

February 15, 2024

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By Rohit Taneja, Founder & CEO, Decentro 

The interim budget shows that the government is pushing for greater investments in R&D and innovation in economic growth, but where should we invest the corpus?

Research & Development (R&D) hasn’t always got more investments from the private sector in India because it suffers from market failures. They have positive externalities, benefiting people outside the transacting parties. This has required government intervention to promote it. Every single high-income country had government investment in R&D during the initial stages to boost private investment at a later stage. India is finally taking this route. The finance minister announced in her interim budget that the government would create a corpus of INR 1 lakh crore to provide 50-year no-interest loans to finance R&D and innovation. As significant as this step is, the real challenge is for the government to decide where to invest this corpus and promote which type of innovation to maximise benefits. Financial Technology might be an instrumental sector where this money can be invested, and here is why.

Rohit Taneja – Founder, Decentro

The finance minister said in her budget speech that the country’s “vision for Viksit Bharat is that of Prosperous Bharat in harmony with nature, with modern infrastructure, and providing opportunities for all citizens and all regions to reach their potential.” The R&D investments must fulfill three primary criteria. First, innovation must have a significant positive impact on a large section of society. Second, the investment must have a multiplier effect, which has the potential to compound the investment made in it. Lastly, it must optimise business function across the value chain to improve the economy’s productivity. FinTech infrastructure is one industry that can meet all three criteria and pole-vault the country into economic progress.

Why is FinTech infrastructure critical, and how should India invest in it?

FinTech has been one of the fastest-growing sectors in India, powered by high levels of adoption among consumers and businesses. India’s FinTech sector ranks 2nd in deal volume, accounting for a 14% share of Global Funding[1]. Moreover, India has the highest FinTech adoption rate at 87% as against the global average of 64%[2]

These factors have led to FinTech becoming a major economic growth and optimisation driver. Hence, the investment strategy for FinTech through this corpus must be three-fold.

Firstly, there must be more investment to strengthen the technological infrastructure for financial services. While we have a robust digital public infrastructure in NPCI, ONDC, Account Aggregator, DigiLocker, etc., these still need to become globally interoperable, like the SWIFT ecosystem. To achieve this, we need to deepen the infrastructure by consolidating the data and investing in innovations to help create advanced analytics to optimise financial services functions from payments, credit, supply chain financing, investing, verification, etc.

Secondly, investment must be made in making FinTech and FinTech algorithms ethical. The advent of AI and its use in underwriting has created a possibility of biased outcomes that can significantly hurt the underserved segment. Hence, we need to invest in technologies that can make the data set being analysed secure by factoring in the exclusion criteria in the algorithms and build models to counter them as and when they arise. This will help us widen the reach of financial services.

Finally, the third investment must be developing products that democratise financial services. Most FinTech innovations are geared toward the smartphone-owning audience, but many Indian populations still use feature phones. This large market has not been tapped because it is not seen as lucrative, and the financial infrastructure is not mature enough to handle the large volumes in this segment. With investments in the first two areas, investments can flow into startups that can create FinTech solutions for feature phone holders and get these people into the formal financial fold.

The foundation is significant, but the road ahead is more extensive. The faster we tap into this opportunity, the better our chances of becoming an advanced economy with the most robust financial ecosystem.

1https://www.investindia.gov.in/sector/bfsi-fintech-financial-services#:~:text=Indian%20fintechs%20were%20the%202nd,from%20535%20to%201019%20respectively.

[2] https://www.investindia.gov.in/sector/bfsi-fintech-financial-services

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