About 15 months ago, a seemingly counter-intuitive LinkedIn post of Abhishek Patil had quickly spiralled into a talking point. In the post, the GrowthX founder had made a case about how United Payments Interface (UPI) was killing the toffee business.
This, he argued, was because in a predominantly cash-driven world, neighbourhood grocery stores could be often seen offering toffee as a de facto alternative to loose change or coins. 'Chutta Nahi Hain’ (There’s no change), had become a standard tag, which customers too had come to accept and walk away with toffees in lieu of coins without much of a fuss.
The post, which later triggered a public debate of sorts, may have been based on anecdotal observations. It, however, did bring to light a momentous change that was altering how Indians transact.
In about eight years, India’s indigenously developed UPI, has evolved into the default option to transact—from small ticket purchases at roadside shops to settling utility bills to restaurant bills, to now IPO stock purchases and mutual fund payments.
This transformation, which has now become a global template that many other countries are emulating, is founded on multiple edifices powered by a behavioural change among hundreds of millions.
For the record, in December 2023, total transactions valued at Rs 18.23 trillion took place through UPI. The monthly volume stood at 12.02 billion.
While UPI has made sending and receiving money at the tap of a mobile phone app, the bigger question is how has it added to India’s broader economy? Importantly, what has been the specific incremental contribution of UPI or India’s rapid digitalisation of payments to India’s gross domestic product (GDP).
GDP, by definition, is the total value of goods and services in the country. Someone’s spending is someone else’s income. In the final national accounting analysis, the sum total of everyone’s expenditure is equivalent to the aggregation of everyone’s income.
So, how has UPI, which has brought about remarkable ease and convenience in spending, helped in adding to GDP? Fundamentally, transactions that were earlier done on cash have moved digital. So, how can it add to GDP?
The answer to this is two-fold. One is the opportunity cost. Two is through enabling easier credit-driven spending.
Lower Cash, Lower Transaction Cost
Ease and convenience of spending lowers the economy-wide cost of transaction. The resultant saving triggers incremental spending at the aggregate level, adding to GDP.
A proxy marker for this would be to analyse the drop in the cash-on-demand (COD) payment. UPI is becoming the primary mode of payment for e-commerce and taking away the share from COD orders. In terms of value, the share of UPI payments has increased from 26 percent to 52 percent between 2019 and 2023; while the cash payments have now reduced to mere 9 percent.
Every COD order leads to an additional cost of about one dollar (about Rs 80). The industry processed nearly two billion orders in 2022. The COD orders have fallen by about 10 percentage points during this period – a reduction of 10 percent equalling 200 million orders. This shift from cash to UPI has effectively helped the e-commerce ecosystem save costs of nearly USD 200 million in 2022.
According to the Economic Survey 2023, in 2018-19, UPI accounted for 17 percent of the country's total 31 billion digital transactions. The next fiscal year saw UPI’s share rise to more than 27 percent as it processed 12.50 billion transactions out of 46 billion digital transactions. In 2021-22, UPI accounted for 52 percent of the total 88.40 billion financial digital transactions.
On average, between 2019 and 2022 (calendar year), growth in UPI-based transactions grew in value and volume terms by 121 percent and 115 percent, respectively.
Real-time payments are likely to boost India’s GDP by USD 45.9 Billion in 2026 as real-time payments transaction volumes are set to exceed 206 billion by that time.
In 2021, India accounted for the largest number of real-time transactions at 48.6 billion, almost threefold that of China (18 billion transactions) and almost seven times greater than the combined real-time payments volume of US, Canada, the UK, France, and Germany (7.5 billion).
According to a 2022 report by ACI Worldwide, in partnership with GlobalData and the Centre for Economics and Business Research (Cebr), real-time payments helped India unlock USD 16.4 billion of additional economic output in 2021, equivalent to 0.56 percent of formal GDP.
According to a Reserve Bank of India (RBI) occasional paper, there has also been an increased interest by retail investors in the equity markets in digital brokerages since the outbreak of the pandemic resulting in high turnovers in the equity markets. This increased activity in the equity market could have in turn given a boost to UPI and card transactions since these are the preferred mode of payment to load money into trading accounts. The transaction limit for payments through UPI for Retail Direct Scheme and IPO applications has been increased from Rs 2 lakh to Rs 5 lakh.
The share of small denomination notes has been on a decline. This has been in part due to the substitution of small-value cash payments by the UPI; the share of UPI payments in total volume of retail payments increased to 73 percent in 2022-23 from 63 percent a year ago.
The average per transaction value for person-to-merchant (P2M) transactions through UPI stood at nearly Rs 750 in 2022-23, while it was below Rs 500 for prepaid mobile wallets.
A PhonePe and the Boston Consulting Group (BCG) joint report in 2022, which has projected that India’s digital payments ecosystem will nearly triple to $10 trillion by 2026 from $3 trillion in 2022, said that the UPI-based autopay today facilitates Systematic Investment Plan (SIP) from payment platforms and offers three primary benefits.
First, there is increased awareness through active promotion by third party application providers (TPAPs). Second, autopay offers greater convenience, ensuring on-time payment of SIPs without intervention and helps avoid late fees. Third, it allows the customer to customise their investment choices and determine the frequency and amount for each mandate based on the requirement.
The total mandates executed via UPI have reached approximately 32 million mandate transactions in March 2022. Similarly, top five remitter banks have seen 30-70 percent growth in their IPO volumes processed through UPI. “This can be primarily attributed to UPI attracting a wider demographic that is not necessarily limited by net banking access”, the report said.
This additional household savings in financial asset classes would have contributed to incremental GDP, too.
Easier Loans, Greater Spend
UPI’s spread and wide acceptability has also opened up a unique opportunity to bring millions into the formal credit market system. UPI transactions’ history now serves as a mainstream proxy to measure people's loan repayment capacity based on their spending ability, which broadly mirrors their income levels.
Lenders, particularly non-banking finance companies (NBFCs) now use this data to offer unsecured, small ticket, short-term credit to offer easy, convenient loans.
Innovative payment systems are an important antecedent to the emergence of the NBFC and fintech sector across countries. Globally, countries with high usage of digital payments also exhibit high fintech activity.
A central factor determining the pickup in fintech lending in India has been the introduction of UPI, which has enabled an almost-universal system of digital payments and eased many logistical and geographical barriers to credit flow.
Barring the short-lived decline in fintech lending during the Covid-19 pandemic, UPI and fintech lending growth have both been rising in tandem.
According to a November 2023 report of Centre for Advanced Financial Research and Learning (CAFRAL), an RBI-promoted organisation, “UPI uptake has allowed lenders to access alternate data to determine creditworthiness, and the fintech sector is more likely to do this as it operates primarily within the digital realm. UPI transactions also reduce the effective distance between borrowers and lenders, eliminating frictions and increasing banks’ willingness to lend. Overall, the results indicate a stronger relationship between UPI and fintech lending, relative to lending from scheduled commercial banks”.
It is a fair hypothesis to run that additional lending enabled by UPI’s spread would have triggered higher spending, particularly in consumer durables such as appliances and also non-durables such as clothes. Such loans’ contribution to additional GDP cannot be disputed, even as its exact extent is a matter of detail.
The PhonePe-BCG report has echoed similar views. It said that “a seamless payment journey embedded across e-commerce has become an obvious outcome of increased participation and engagement in digital payments with several benefits to users and merchants”.
This, according to the report, has led to not only payments enabling financial services (embedded payments) such as UPI enabling equity and mutual fund investments but also, progression from embedded payments to embedded finance with the advent of BNPL (Buy Now, Pay Later) where financing is embedded during the payment stage at check-out.
Gaurav Choudhury is consulting editor, Network 18. Views are personal, and do not represent the stand of this publication.
(This is the first in a series of articles by the author on the digital economy.)
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