Data | Hurdles to overcome before becoming ‘Digital India’

While digital transactions have increased substantially, India’s performance is unimpressive compared to that of other developing countries

August 01, 2023 04:13 pm | Updated August 02, 2023 08:44 am IST

Digital wave: India is emerging as a leader in the digital payments market as banks and other players get into the space. Digital transactions grew close to 90% in a three-year period, from FY19 to FY21

Digital wave: India is emerging as a leader in the digital payments market as banks and other players get into the space. Digital transactions grew close to 90% in a three-year period, from FY19 to FY21 | Photo Credit: KAMAL NARANG

The digital payments system in India has grown significantly in recent years. Every neighbourhood kirana store now has a QR code scanner. Has the United Payments Interface (UPI) revolutionised how Indians carry out economic transactions? Has the popularity and ease of digital transactions brought about financial inclusion across the country? Where does India stand vis-à-vis other countries?

Modes of payment

Since the introduction of UPI in 2016, transactions in this mode have grown in value and volume. It has been well documented that demonetisation in November 2016 and the COVID-19 lockdown in 2020 were major push factors for the widespread adoption of digital payments. From June 2021 to April 2023, UPI payments grew at an average monthly rate of 6%. The corresponding figures for NEFT, IMPS, and debit card payments were 3%, 3%, and 1.5%, respectively. This indicates that the popularity of UPI increased at a faster rate than all other modes of payment.

Chart 1 | The chart shows the share of immediate payment service (IMPS), national electronic funds transfer (NEFT), debit cards, credit cards and prepaid payment instruments (PPI) of the total digital payments

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The share of UPI payments in the total value of digital retail payments in the country increased from less than 20% in mid-2021 to about 27% in March 2023 (Chart 1). Conversely, the share of NEFT transactions saw a decline of about 10 points (from 64% to less than 54%) over the same period. The share of IMPS remained relatively stable (about 9%). While the share of debit card payments and prepaid payments recorded a decline, their combined share did not exceed 2.5% of the overall digital retail transactions. This suggests that that the increasing share of UPI payments has come mainly at the cost of NEFT transactions. This might be because both UPI and IMPS are real-time payment settlement systems unlike NEFT.

Financial inclusion

It is to be expected that the increasing popularity of UPI-based payments would play an important role in improving financial inclusion. The first step towards financial inclusion is to have a bank account. At first glance, it seems like India has made significant progress on this front. According to the World Bank Global Findex Survey, while 53% of the population had bank accounts in 2014, 80% of the population had bank accounts in 2017 and 2021. However, a closer look at the data reveals that of those with bank accounts, 38% have inactive accounts. India has the highest share of inactive accounts in the world compared to all the other countries in the database. This might be an outcome of the push for Jan Dhan accounts. Zero-balance accounts were opened to meet official targets, but have been lying dormant since then. More women than men have inactive accounts (32% versus 23%). While there is no urban-rural divide or income group divide in the possession of bank accounts, differences are evident when we consider the share of inactive accounts. While 31% of the population in rural areas has an inactive account, the share in urban areas is 23%. Similarly, if we consider the poorest 40% of Indians, 35% of them have inactive bank accounts, whereas the corresponding figure for the richest 60% of the population is 22%.

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While the popularity of UPI has increased substantially in recent years, only 35% of the population reported carrying out any digital transaction (making or receiving a payment) in 2021. While this was an improvement from previous years (22% in 2014 and 29% in 2017), India’s figures are unimpressive when compared to the average of 57% for all developing countries and the world average of 64%.

Chart 2 | The chart shows the gender-wise change in digital transactions in 2014, 2017, 2021 across select countries

Although digital transactions have grown in value and volume, their growth has not been equal. There is a sharp gender gap in digital transactions. While 41% of the male population carried out any digital transaction in 2021, the corresponding figure among women was only 28% (Chart 2).

Not only are these figures low to begin with, but the significant difference of 13 points between men and women is high when compared to most countries including Vietnam (48% of men and 44% of women), Brazil (80% of men and 73% of women), China (87% of men and 85% of women) and Kenya (82% of men and 74% of women), which are at comparable stages of development as India. India’s figures are also lower overall compared to the figures in these countries. Although Bangladesh reported a greater gender gap, its statistics (58% of men and 34% of women) are higher than India’s.

If we look at the rural-urban gap in digital payments, India again stands out when compared to countries such as Bangladesh and Kenya. Only 30% of Indians in rural areas made or received any digital payment in 2021 as opposed to 40% in urban areas. This again indicates that a substantial share of the population has been bypassed. There was no rural-urban divide in Bangladesh (both rural and urban figures were 45%). In Kenya, 74% of the rural population carried out digital transactions, while the corresponding figure in urban areas was 87%. While there was a significant digital divide between urban and rural areas in Kenya, the fact that more than 70% of the population was a part of the digital payments ecosystem is impressive. Therefore, while India has made big strides, it still has a long way to go in becoming ‘Digital India’.

Arnab Chakrabarti and Anwesha Basu are Assistant Professors in the Department of Economics, FLAME University, Pune

Source: Global Finder Index, World Bank, Resrerve Bank of India

Also read: Data | UPI payments: relief for users, a headache for banks

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