Amongst many achievements, what stands out for the Narendra Modi government, since 2014, is the steady digitisation of the Indian economy through several building blocks, starting with Aadhar and now with the Open Network for Digital Commerce (ONDC).
The foundation of this digitisation was in the Aadhar programme. Inherited from the Congress era, who themselves inherited the idea from the Vajpayee era, the programme was dragged into several privacy issues. In hindsight, the privacy debate was without merit.
Aadhar has been instrumental in achieving the objective of financial inclusion across the country. Be it the Aadhar enabled payment system or the linking of the Jan Dhan Yojana accounts, over 430 million of them, or the Direct Benefits Transfer (DBT) programme that has enabled over 300 welfare schemes, both cash and subsidy, and fixed monetary leakages worth thousands of crores of rupees, the biometric identification programme has revolutionised the economies at a micro-level.
The same impact is also being felt in the healthcare sector with Ayushman Bharat and, most recently, with the Covid-19 vaccination drive and CoWIN portal.
India's Pursuit Of A Digital Economy
The litmus test for India’s economic digitisation, however, was in enabling online payments and ease of access of credit to facilitate trade and entrepreneurship. While the JAM trinity ensured the building blocks were in order, it was the widespread adoption of the UPI system, first due to demonetisation in 2016, and then due to the pandemic in 2020-21, that acquainted the Indian population and businesses with the actual potential of the digital economy.
Such was the success of the Jan Dhan Yojana and UPI that Visa Inc formally registered a complaint with the United States government, stating that the government of India’s ‘formal and informal’ endorsement of local rival RuPay was denting the prospects of the company in the world’s biggest free market. The potential Visa-Mastercard dominance had been shattered before it could be established, thanks to UPI, and the RuPay cards issued through Jan Dhan accounts.
UPI, once touted as a platform that would only cater to a few urban pockets, has quickly become ‘the’ payment interface for India, from buyers to sellers, from merchants as big as jewellers to as small as coconut sellers.
While going from 21 banks, and 0.09 million transactions and Rs 0.38 crore in transaction value in July 2016, to 316 banks, and more than 5.5 billion transactions, and more than Rs 9.83 lakh crore transaction value today, UPI, as a payment interface, is a universe apart from peaking, and by virtue of the projected internet penetration and growth in India, especially rural India, merely a 10 per cent of where it could be in the next five years — at 50 billion transactions per month.
In The Works: The Account Aggregator Framework
The buck does not stop with payments alone, for the Reserve Bank of India, in September 2021, came out with the Account Aggregator framework. The aggregators, which will be licensed by the Reserve Bank of India (RBI), will be critical in bridging the credit gap between financial lenders and millions of borrowers in India with limited or lack of credit history.
Structured as non-banking financial companies, they will significantly lower the barriers for first-time borrowers, either individuals or companies, given the challenges they have to face because of a lack of credit history or the size of the loan required. For instance, for every single rupee accessed as credit through formal sources in India, six more rupees are accessed through informal sources, and this demand for credit runs into almost Rs 70 lakh crore.
The aggregators draw information pertaining to a single borrower or company, only after the informed consent of that borrower, and share it with the financial service providers, which may include banks, creditors, wealth managers, personal wealth managers, and other financial consultants a borrower may wish to work with. More about it here.
And now, to the final building block for the e-commerce revolution in India.
The Challenges For Small Enterprises In India Wanting To Go Online
Think of an aspiring woman trader in a remote part of India. A Jan Dhan account was her first tryst with formal banking. Assume she begins selling fruits at the local market. UPI, the second building block, was her gateway to digital payments, critical during demonetisation and the pandemic.
Over the years, the woman has gone from making sales of a few hundred rupees per day to a few thousand, and now wants to expand her trade. This is where reaching out to the banks through the account aggregators may help her secure a micro-loan, but what if she wants to go online?
What about a woman entrepreneur who wishes to run a cloud kitchen for low-cost meals? What about an entrepreneur in the business of low-cost jute products, or handicrafts, or running a boutique? What about the countless aspiring entrepreneurs wanting to go online as the trillion-dollar retail industry goes digital?
The lowest hanging fruit is Amazon or Flipkart. Even with the workable entry barriers, the challenges for most sellers include a hefty commission and delivery cost that they have to incur. If a profit is somehow managed, there is always the possibility of price undercutting by a seller backed by the platform, as was the case with Amazon for the longest period of time. For instance, many smartphones, sold on Amazon and Flipkart, were priced in a manner that left the offline retail stores without any leverage, and thus, around the festive season, they were left to suffer.
The story is somewhat similar in the food industry as well, where Zomato is the leading player. The commission is the first problem, and more often than not, leaves the restaurants with little profits, or almost none. Factor in the discounts and often eateries end up in the negative on many orders.
The second issue is that of data sharing. The platforms are alleged of misusing customer data, and there is a prolonged conflict on data ownership. Amongst the restaurant owners, there is the prevailing fear that with the data collected by the likes of Zomato, they can decode an ordering pattern for a region, and then disclose it to a competing restaurant through non-personalised data sets. Worse, they can start operating their cloud kitchens to directly cut through the business interests of the restaurants.
Even within the FMCG sector, many issues remain unaddressed. In a recent conflict between the traditional distributors for mom-and-pop stores and Reliance, that owns JioMart, issues of price undercutting surfaced. Most of the FMCG companies dictate the minimum retail price to these distributors and have strict warehousing and employee requirements.
However, none of these terms exist for the new monopolies in the business, like Amazon or Tata or Reliance. Thus, the opaqueness in pricing by the FMCG companies when it comes to traditional distributors and retailers versus the new monopolies hurts the former’s interests.
For instance, a bottle of soda, sold at an MRP of Rs 100, if it costs the traditional distributor Rs 75, the retailer Rs 85, then the new monopolies may be getting them at anywhere below Rs 65, or perhaps, even lesser, depending on the product.
Given the money muscle the likes of Reliance come with, for the local retailer in a neighbourhood, competing online is impossible. There is also the possibility of monopolies white labelling products, thus further making it difficult for smaller enterprises to compete.
Now, coming back to the woman who merely wishes to run a cloud kitchen for low-cost meals in her neighbourhood?
Working with Amazon, Tata, Reliance, Zomato, or any other company running a super-app (an app that hosts several services) would warrant her to pay a hefty commission, pay a steep fee for the delivery partner, compete with the monopolies on the pricing front (for instance, Swiggy POP that offers meals for Rs 100-odd), and not have access to the data of her customers. Similar would be the story for every new entrant.
The Holy Grail For E-Commerce Made Public
This is where the Open Network for Digital Commerce or ONDC comes into play.
Put simply, ONDC is to e-commerce what UPI is to payments. The scan code used to make UPI payments today can be accessed through any app, be it BHIM, Google Pay, PhonePe, or any other app, and the payment can be made from any bank account linked to the UPI ID.
Thus, it is not necessary for the buyer and seller to have the same bank account for transactions, or access the scan code from the same app. One is not required to have different UPI IDs, or bank accounts, for different applications. The interoperability amongst banks and apps is what makes the UPI system a success.
Compare this to the current system of e-commerce. A seller, in order to access the market of different platforms, must list their products on all the platforms. Thus, a product listed on Amazon is not available on Reliance’s JioMart, or a seller listing himself on Swiggy does not automatically get listed on Zomato. For each platform, both the sellers and buyers need to access a different app, and have a unique access credential.
The ONDC solves this problem by moving from a platform-centric model to a transaction-centric model. As with UPI, a set of open protocols will govern the interoperability between the apps on the buyers and sellers side. Thus, as long as the buyer and seller, both, are visible, it would not matter which app they use to conduct the transaction.
Thus, as long as the buyer and seller are connected to any of the apps on the ONDC network, they'll be able to transact between themselves. Think of it as making a payment through GooglePay on a scan code within the Paytm app.
The government’s role here will not be of creating an app for the buyer or seller, but by creating the open protocol or gateway around which several such apps can be built by third-parties, as was the case with UPI as well.
However, in the beginning, the technology partners for the ONDC may roll out some apps on the sellers and buyers side. Also, there would be third-party logistics partners available as per the region and order. A sample transaction on the ONDC network is explained here.
What’s in for the sellers?
One, they get access to more buyers and attain greater discoverability at a fraction of the cost. Compare listing one’s business on five different apps against one network, and therefore, the barriers to listing one’s business online will come down.
Two, given they are visible on a network with several seller and buyer apps, they are not bound by the regulations of any one platform, as is the case for businesses working with Amazon or Zomato.
Three, the margins will improve, for the commission will be out of the question.
Lastly, there is potential for the growth of value-added services, especially in the logistics sector.
Whats’ in for the buyers? They get more options to choose from, better pricing, and access to the local retailers who would otherwise be absent from the likes of Amazon or Reliance.
For a buyer looking to buy something as meagre as a kilogram of onions, there would be the option of choosing their seller, even if the seller owns nothing but a small cart and operates alone in some isolated corner of the street.
A third-party delivery partner will fulfill the order, or even the seller, if they wish to, or else, the buyer will also have the option to choose their delivery partner.
On the technical, interface, and implementation side, a lot of questions remain, but as the pilot project, initiated in five cities, starts yielding results, answers would be found. The ONDC cuts through the unfair monopoly of the likes of Amazon.
The ONDC aims to accomplish, for the smallest of sellers and buyers, the ease of transacting without being constrained by the platform. The platform, a closed network, is being replaced with an open network, to sum it up.
In hindsight, the criticism against both the Jan Dhan Yojana and UPI have proven to be immature. Today, the Jan Dhan accounts, together, hold Rs 1.6 lakh crore in deposits. UPI transactions, increasing steadily every month in volume and value, are driving payments at the most micro level, even for sales that are less than five rupees.
Account aggregators are set to change the way loans are availed, irrespective of their value or utility, and with ONDC, the one critical gap remaining between a local business and the infinite potential of e-commerce would be addressed.
The history of the other three building blocks gives plenty of reasons for one to be optimistic about the ONDC, and to hope it will boost the e-commerce sector and, consequently, the digital economy in India.
Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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