June 2023

Key Insights for this month in Digital Assets : India, Web3 and $5Tn Economy

India recently overtook UK to become the World’s 5th largest economy in GDP terms. This is a monumental achievement for a country that is just 75y old and was in absolute doldrums when the British left us in 1947. 

Agriculture / Industry / Services contributed 20% / 26% / 54% to India’s GDP, and this proportion is virtually unchanged in the last 10 years. We have a very ambitious target of reaching $5Tn GDP by 2024-25. At the average rate of growth of the previous 10 years, we will probably get there by 2027. 

However, our GDP per capita is just above $2.2k while our median income (that adjusts a bit for outliers, unlike mean) is just at $1.3k – both of these put us outside the Top 100 countries. We need to create 10 million jobs per year to tackle unemployment but we have not been able to create that number, resulting in an increasing unemployment figure.

Our demographics are our strongest tailwinds, especially the age distribution. As per Government estimates, in 2021, 35% of our population was under 30 years of age, and around 90% under 60. By 2040, these figures will become 25% and 84%. Therefore, by 2040 we will start moving into an aging economy. Startups contributed just 2.5-3% to our GDP and this is anticipated to rise up to only 4-5% in the next 5 years. However the global startup economy is nearly $3 Trillion, or larger than the entire Indian economy.

Web 3 market cap (not the most accurate comparison to economy size) is around $1 Tn as of 13 Jan 2023, and the contribution of India based companies to this is under $50Bn (~ 5%) and the large ones have already moved to Dubai and other foreign regions. Mckinsey has done an excellent job in explaining the potential of Web 3.

Now, let’s convert these statistics into meaningful sentences and key takeaways

  • India needs to grow fast, and is doing so very well on a macro GDP scale
  • Our proportion of GDP is unchanged in the last decade and heavily dependent on services, rather than products
  • We have an ambitious GDP target that we will almost certainly miss without swift changes in growth from high output sectors like technology
  • The productivity/efficiency is low (GDP per capita) and the income distribution is unequitable (median income)
  • We are creating lower number of jobs than we need, and we need upskilling (for higher productivity/efficiency in output)
  • Our age distribution is our strongest tailwind but this will not last forever. We need to elevate the status and health of the country before our strength starts becoming a weakness (like Japan/EU now and China soon – but they have much stronger economies)
  • For that, we primarily need to improve our productivity and efficiency and this can be significantly enhanced with technology
  • Start-ups and R&D are the key to technology progress in any country (mostly funded by VC), however contribution of start-ups to Indian economy is fairly low.
  • Encouraging startups and creating necessary incentives for them to prosper and generate economic and human capital within the country is imperative to the sustainable growth of our economy. 
  • Startups are at the forefront of innovation and progression into newer frontiers, therefore their success improves the global importance and therefore image of the country. Imagine if all the Indian-CEO tech companies were founded in India. 

How does Web 3 fit into all this?

Let us first understand Web 3. This article by Consensys addresses it in multiple ways.

In our words, Web 3 is re-creating the internet where users have a lot more control on their data and privacy, and code disintermediate “gatekeepers”. Networks and applications can use digital assets to provide ownership and governance control to its users. As it is open-source and borderless, products can spin up anywhere in the world and cater to a global audience. You can watch this webinar on ‘Demystifying Digital Assets’ here for a deeper discussion on Web 3.

Web 3 is inevitable. It is still far from perfect but the overall ecosystem has developed network effects and even if slower than a year ago the space is still growing, and in India as well. A lot of traits of the technology underpinning Web 3 can also be used to increase productivity and efficiencies in existing sectors (such as capital markets, music and entertainment, gaming, healthcare, etc).

Our biggest worry is that we, as a country, are moving too slow and being risk-averse and probably waiting for the technology to evolve. But once that happens and it has reached mass-appeal we will again become “takers” rather than “makers”.

There are already a lot of tailwinds for Web 3 in India:

  • Web 3 is open source – We can build products from India for the world. Imagine becoming a product powerhouse where the next iteration of the internet produces the world’s largest tech companies out of India.
  • English speaking developers – We produce over 500,000 software developers each year. Web 3 is still in its infancy and in dire need of quality developers. Imagine the employment and earning opportunities that we can create for Indians who can even “work from home” for any global Web 3 company. There is of course upskilling that’s necessary but where there is a market the opportunity takes care of itself.
  • Age demographics – Over 35% of the country is under 30 years of age and over 54% of the population has smartphones. This is the largest consumer market in the world for Web 3 penetration (other than China). Imagine the FDI we can expect and the consumption we can generate.

Through Web 3 (and adjacent) proliferation, a lot of the problems above – faster GDP growth, increased productivity/efficiency, job creation, increased median income, improved status and influence of the country – can be addressed. It may not be the only option but it can surely be a substantial one.

What do we need to improve upon?

The Web 3 ecosystem in India is persevering – founders, developers, users, enthusiasts – but we need a structured approach from outside the ecosystem to provide impetus. I have outlined some of these below:

  1. Regulatory clarity – This is probably the most important assistance. While it is proving to be a global challenge to regulate this space, recent incidents with entities such as 3AC and FTX have made it obvious that the space needs regulation. Policies and frameworks need to be put in place to tackle issues such as tax evasion, money laundering, protecting retail customer interests, and preventing any impact on local currency. With appropriate regulation, the ecosystem can be better structured, prosper, and bring more talent and users within safety nets. With the G20 presidency, India can set the way in global regulations for Web 3 and digital assets, whereby innovation is encouraged while bad actions are prevented.
  2. Regulatory Sandboxes – A great way for regulators to get familiar with the technology and its implications is through regulatory sandboxes whereby ideas can be tested in controlled environments before releasing to the public. This can be extended to utilisation of the technology within capital markets, cross-border payments, CBDCs etc. MAS has been working with the industry on use cases. It has provided digital asset custody licenses, and recently launched a pilot for cross-border currency exchange on a permissioned blockchain by forking the code of an established decentralised exchange. The FCA has also been accepting applications within digital assets and decentralised finance and recently appointed a Head of Digital Assets.
  3. Reverse Brain Drain – As we had noticed with Web 2, there is also a spate of exodus of Indian talent in Web 3 to countries such as UAE and Singapore, who are openly inviting startups with progressive policy.  Ultimately, any technology is just an enabler and needs human capital to conceptualise/build/distribute. If we don’t reverse the brain drain soon then we will again see a spate of Indian CEOs of Web 3 companies from afar, without any direct benefit to the country.
  4. Support for Innovation – Blockchain is a bedrock technology and can work well alongside other deeptech/advanced technologies such as AI, ML, IOT, etc. As such, encouraging R&D in these fields in our premier institutes and corporates can go a long way in developing local products and solutions for the world. Premier global institutes such as BerkeleyUPennStanford etc have research departments and student bodies dedicated to research and applications of blockchain and digital assets. We need to encourage such approach in our premier institutes as well (but I guess that’s a whole new topic on its own!).

A bear market is a great time to build, consolidate, and restructure. This applies as much to the system as it does to the ecosystem.

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