Visa recently unveiled the report “Accelerating the Growth of Digital Payments in India: A five–year outlook”. This study, the first of its kind for India, looks at the benefits of transitioning India to a less–cash society over the next five years, and provides a roadmap for action.
According to the study, the cost of cash places a huge burden on the Indian economy equivalent to 1.7% of GDP. This high cost of cash stems from large volumes of cash flow in the Indian economy relative to its peers across the globe. For example, in India in 2015, the number of digital transactions per capita was only 10, compared to 163 in Brazil, 420 in South Korea, and 429 in Sweden.
Unveiling the report, Amitabh Kant, CEO, NITI Aayog, Government of India said, “Digital payments will pay a critical role in achieving the Digital India vision and in driving financial inclusion. Achieving this goal would not only help us to bring more people into the formal financial system, but also in reducing the size of the shadow economy and delivering an increase in jobs.”
According to a 2016 Moody’s Analytics study commissioned by Visa, increased use of digital payments cumulatively added US$296B to the GDP of 70 countries across the globe between 2011-2015. In India, the increased use of digital payments added US$6.08B to the GDP, over the same period. That’s the equivalent of 337,000 jobs added due to a combination of fast growing labour productivity and increasing card usage.
Visa’s report points to six factors for high cash usage in India – (i) a high propensity to save in and use cash; (ii) a large shadow and remittance based economy; (iii) gender imbalance in the use of payments; (iv) high cost of acceptance infrastructure; (v) regulatory limitations and (vi) insufficient focus on financial literacy.
However, India has the opportunity to reduce its cost of cash from 1.7% of GDP to 1.3% of GDP delivering savings of INR 70,000 crores (USD 10.4 billion) in the next five years. If India could sustain a reduced cost of cash of 1.3 per cent of GDP until 2025, India could save up to an additional INR 4 lakh crores (USD 59.4 billion) by FY 2024–25. In summary, the total savings by 2025 could be INR 4.7 lakh crores (about USD 70 billion) with the appropriate policy initiatives in place and followed by effective execution.
This could be done by making an investment of INR 59,300 crores (USD 8.8 billion), of which INR 58,000 crores (USD 8.6 billion) would need to be incurred by the Government of India by way of fiscal incentives provided to consumers and merchants, and lowering of import duties on point–of–sale (POS) terminals. The remaining investment would need to be made by banks to expand the acceptance network from the current 1.3 million POS terminals to 4 million over the next five years and bringing about 41 million households into the financial system.
Today, less than 5 percent of India’s INR 75 lakh crores (USD 1,114.4 billion) consumption expenditure is made using digital payments[3]. The measures outlined in Visa’s report, together with a series of other policy levers, could result in increasing digital consumption expenditure to around 35 percent in the next five years.
Demetrios Marantis, Senior Vice President, Global Government Affairs, Visa, commented, “The payments landscape in India is at a point of inflection with growing acceptance infrastructure and consumer adoption of digital payments. Continued Government initiatives to drive e-payments, including fiscal incentives for consumers and merchants to switch from cash, efforts to bolster financial inclusion, and a focus on innovation are necessary to drive change. India should look to international examples for ways to increase the adoption of digital payments such as establishing an acceptance development initiative in Indonesia and Poland, mandating payment of salaries electronically in Uruguay, and wide scale digitisation of person–to–government payments such as transit in London and Singapore. Similar initiatives could be game changers for India.”
TR Ramachandran, Group Country Manager, India and South Asia, Visa said, “We hope this report provides a timely contribution to the discussion of policy, regulatory, and infrastructure changes necessary to leapfrog and modernise India’s payment systems. We are deeply committed to supporting the government’s vision of a less-cash, technology driven, secure, and competitive digital payments industry. We look forward to working in partnership with others to drive the growth of digital payments across the country.”
The report finds that India would benefit from a three-pronged strategy to transition to a less cash society:
1. Expand acceptance infrastructure
• Establishing an India Acceptance Development Fund to incentivize banks to expand acceptance in underpenetrated merchant segments and geographies
• Incentivizing the use of digital payments by providing a tax rebate of INR 2,000 per capita per annum
• Incentivizing merchants to accept digital payments by providing them a 50 per cent tax rebate on 50 per cent of their turnover
• Lowering existing countervailing duties and levies on POS machines to 5 per cent and promoting domestic manufacturing
2. Energising innovation
• Embracing new approaches for government payments working with a virtual account, e.g. introducing government procurement and disbursement cards
• Adopting open loop payment systems for mass transit
• Actively encouraging adoption of new form factors, products and technologies, and platforms, like mobile–based payment solutions, Bharat Bill Payment Systems, and PayGov
3. Bolster financial inclusion
• Facilitating inter–ministerial collaboration to leverage existing GoI programs, for example the SMS portal for farmers mKisan, and engagement with the states for education
• Designing specific programs to meet needs of the financially underserved
• Driving financial literacy programs at schools and higher level education
• Promoting financial inclusion in collaboration with existing microfinance institutions