Union Budget 2019: Sitharaman’s Fresh Ideas To Push India’s Towards A Digital Economy

Cash in circulation (CIC) as a percentage of GDP, fell only to 11.5% in 2018 from 12% in the pre-demonetisation era (2016). Clearly, despite all the drama around the ill-thoughtout currency ban in November 2016, cash is still king in India. Today, the full budget for the year 2019-20, presented in parliament by finance minister Nirmala Sitharaman sought to enhance the Narendra Modi-led government’s focus on digital payments. This will be done through multiple means – encouraging the use of digital payments and discouraging the use of cash beyond a certain limit.

From being primarily a cash-obsessed economy, India has come a long way in digital payments. Driven by progressive regulatory policies and increased use of internet, smartphone penetration, India’s UPI transactions have grown to 754 Mn in June 2019. While, IMPS and NETC transactions stood at around 171 Mn and 26 Mn, respectively.

To discourage the practice of making business payments in cash, the government has proposed to levy a 2% tax deduction at source (TDS) on cash withdrawal exceeding INR 1 Cr in a year from a bank account. Moreover, business establishments with annual turnover more than INR 50 Cr will need to offer low-cost digital modes of payments like BHIM UPI, UPI-QR Code, Aadhaar Pay, Debit cards, NEFT and RTGS to their customers. The Finance Minister also stated that no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.

This is a huge impetus to the digital payment industry which is projected to grow at an exponential rate. According to a report by Google and Boston Consulting Group (BCG), the Indian digital payments industry is estimated to touch $500 Bn by 2020, contributing 15% to the country’s GDP.

The total number of digital transactions recorded a 58.8% growth during 2018-19, on top of a growth of 50.4% during 2017-18. Over 3,134 Cr digital transactions were done during 2018-2019, according to Digital India’s official Twitter handle. From RuPay alone, about INR 1 Lakh Cr worth transactions were completed during the same period while the same stood at INR 8.8 Lakh Cr via BHIM UPI.

ATM Withdrawals & PoS Transaction for India and Other Countries In Multiples of Virtual Transaction

Pre-Paid Payment Trend In India

Mobile Payment Trend In India

Bank Transaction Trend In India

Debit card usage at PoS

Credit card usage at PoS

This exponential growth of the digital payment sector is driven by multiple factors including convenience to pay, the ever-growing smartphone penetration, rise of non-banking payment institutions (payments bank, digital wallets, etc.), progressive regulatory policies and increasing consumer readiness to the digital payment platform like Paytm, Mobikwik, PhonePe and others.

The convenience to pay along with the availability of lucrative offers are two key factors that have been driving the growth of digital payments in India. This coupled with the increasing smartphone penetration is proving to be a boon for digital payments sector.

An interesting angle to India’s digital payment story is that it is going to be dominated by micro-transactions (tractions of value lower than INR 100). In fact, 50% of person-to-merchant transactions are to be under INR 100, says the Google-BCG report. Alternate digital payment instruments like digital wallets, UPI, payment banks, Bharat QR are expected to grow fiercely and estimated to double their contribution to 30% in the digital payment industry.

Navigating The Path To Cashless Economy

The digital payment industry growth will be led by digital/mobile wallets. According to a report by Capgemini, mobile wallets will witness a compound annual growth rate (CAGR) of 148 per cent over the next five years and will be $4.4 Bn by 2022. The digital wallets are also supposed to outshine UPI.

In order to further encourage digital payments, Nandan Nilekani led committee set up by the RBI has suggested a host of measures, including elimination of charges, round the clock RTGS and NEFT facility and duty-free import of point-of-sales machines. The committee submitted its suggestions on promoting digital payments to Governor Shaktikanta Das last month (June’19).

In consideration of the submitted report, the banking regulator last week waived-off all charges on fund transfer through the RTGS and NEFT systems, with effect from July 1. The country’s largest bank, State Bank of India (SBI), charges between INR 1 and INR 5 for transactions through NEFT – for fund transfers of up to INR 2 lakh – and between INR 5 and INR 50 for the high-value RTGS transactions. The RBI has also asked banks to pass on the benefits to customers from the same day.

The focus for the government, now, should be to keep this momentum going with more support and favourable regulatory frameworks providing impetus to the fintech startup sector.