A special series of macro data analyses by the Centre for New Economics Studies’s InfoSphere team aim to study the performance and state of the Indian economy (arthvyavastha) as part of its operational dynamics across different contributing areas and sectors.
This particular explainer assesses the nature of progress made over the last decade on India’s digital infrastructure and its widespread access translating to growth opportunities, particularly within cities and tier-2 towns, where internet connectivity has been built.
Digital Infrastructure plays a pivotal role in generating new growth for a widely asymmetric labor market across the country. If we look at the numbers, the penetration of digital infrastructure across India is impressive, with a rise in internet users building itself up from 4 per cent in 2007 to over 52 per cent in 2022. The surge in digital payments is a clear signal of how robust digital infrastructure is now powering India's financial transformation.
India has been able to build its own digital payments network through UPI (Unified Payments Interface), which has been rapidly driving cashless transactions in our country, with an increase in transactions from less than 25 million rupees in 2019 to over 130 million in 2022. The UPI model of digitising payment systems is a template for any developing or developed country to harness the potential of technology in improving and enhancing its financial network and the velocity of transactions (which generates more growth).
Still, while the penetration of cellular mobile connections, access to digital services, and mobile banking have increased manifold, the quality of data connectivity and service delivery has been grossly insufficient and poor, unable to cater to the rising demand. The pace at which the current infrastructure setup is progressing is not sufficient to meet future demands and combat potential threats.
Innovative Disruption of Digital Payment Systems in India
UPI has become an efficient payment alternative due to the widespread use of smartphones, government initiatives, affordable data, and high internet penetration. UPI payments resulted in cost savings of $12.6 billion and added $16.4 billion to the Indian economy in 2021. There has been a steady growth in the percentage of digital payments over the years, as highlighted in the graph below.
UPI's Zero-MDR Mystery
UPI is operated by the National Payments Corporation of India (NPCI), which facilitates digital transactions through various banks and TPAPS (third-party application providers) like G-Pay, PhonePe, and Paytm. The transactional costs are typically borne by the Merchant Discounting Rate (MDR), and the revenue derived is distributed among the stakeholders. However, the Indian government has adopted a zero-MDR framework for UPI since 2020, removing charges for both consumers and merchants and increasing UPI's market penetration.
According to NPCI data, the total amount of UPI transactions in FY 2021-22 was Rs 84 lakh crores suggesting that at an average of Rs 10 lakh crore, the annual UPI transactions would cross Rs 120 lakh crore while subsidy by the government for UPI transactions was just Rs 1,300 crores. Earlier, the Reserve Bank of India (RBI) and the other banks were expected to recoup their expenditures by savings from more digital payments, but in January 2022, the Payment Council of India announced a loss of Rs 5,500 crores because of insufficient cost savings.
In its early years, UPI saw widespread adoption among startups. However, the landscape has dramatically shifted with the zero-MDR rate. This has led to foreign tech giants such as Google and Walmart's PhonePe gaining control over UPI innovation, while transaction costs burden small startups. These tech giants can provide substantial discounts and cashback without immediate profit concerns, due to their diversified businesses.
The committee on Deepening Digital Payments constituted by the RBI in 2019 under the chairmanship of Nandan Nilekani had recommended that market forces should drive transaction prices (MDR) for the inclusion of small startups and incentivising innovation. Later, in the minutes of a meeting between banks and the NPCI on February 14, 2020, it was emphasized that the RBI should also account for the expenses related to UPI infrastructure. It underlined that while banks have a role in contributing to the payment system, the government and the RBI should also share the cost burden in promoting the country's digital payment system.
The NPCI’s subsequent recommendation in March 2023, proposed an interchange fee of up to 1.1 per cent on merchants when person-to-merchant (P2M) transactions above Rs 2,000 are carried out through Prepaid Payment Instruments (PPIs) like digital wallets on UPI. The impact will be felt by larger merchants whose customers will conduct online transactions using digital wallets. The merchant may raise their pricing to compensate for the additional costs. However, this will increase revenue.
Can Digital Infrastructure Overcome Gender and Rural-urban Gaps?
Gender Disparities
The National Family Health Survey (NFHS) 2020 reveals a substantial gender disparity in mobile phone usage among women in India. Goa emerges as a standout state, with 91.2 per cent of surveyed women owning and using their own mobile phones, showcasing high accessibility. In contrast, Madhya Pradesh exhibits a stark contrast, with only 38.5 per cent of surveyed women owning mobile phones.
This significant divide in mobile phone ownership among women has broader implications for digital inclusion, particularly hindering their ability to adopt and use digital payment apps. The overall NFHS data underscores a national trend, indicating that merely 25 per cent of adult women in India possess smartphones, compared to 41 per cent of adult men. The graph below is indicative of the clear divide.
Bridging this digital gender gap is imperative for promoting women's participation in the digital economy. Addressing such disparities requires targeted policies, focusing on improving mobile phone accessibility, and digital literacy, and fostering a conducive environment for women to engage with digital technologies. Closing these gaps will contribute to a more inclusive and equitable digital landscape in India.
Urban-Rural divide
According to the National Family Health Survey 2020 there is a clear urban-rural divide in the country in terms of internet usage and accessibility. While a study conducted by the National Sample Survey between 1983 and 2005, there was a significant narrowing of the differences in education attainment, occupation distribution, and wages between individuals in rural India and their urban counterparts, the rural-urban divide is still prevalent in India.
Although certain states like Kerala with a rural internet usage rate of 37.4 per cent and an urban internet usage rate of 60.1 per cent and Delhi with a rural internet usage rate of 22.6 per cent and an urban internet usage rate of 63.5 per cent perform relatively better with an even distribution most of the states perform much worse.
We see across states that better coverage of the internet has been instrumental in the surge of digital payments, steering away from conventional cash transactions.
Overall, India's digital journey is promising, but overcoming challenges and promoting inclusivity is crucial for maximizing its benefits for all. The role of government schemes and the future of digital growth in India is further explored in part 2 of the series.
[Deepanshu Mohan is Professor of Economics and Director, Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, O.P. Jindal Global University. The author would like to thank the InfoSphere team (Aditi, Amisha, Aryan, Vasudevan, Jheel, Aman) for contributing to this edition. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.]
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