India's cashless transition and the role of the public sector

31.03.2024| Christian Kreutz
The Unified Payment Interface -  a part of India's digital public infrastructure
Photo by International Monetary Fund @ Flickr

The transformation of India's economy from cash reliance to digital transactions marks a remarkable departure from trends in Europe and the USA.

As recently as 2019, cash was king in India, with 70% of all trade turnover conducted in banknotes. Fast forward to just three fours later, and this figure has dramatically dropped to 27%. This drastic shift means that now, two out of three payments in India are digital—a significant change for a country where only 20% of the population used the internet in 2018, according to the World Bank.

This contrasts sharply with other nations. While China leads the charge toward a cashless future, Japan and the EU still see a substantial portion of transactions in cash, at 60% and around 50%, respectively. (Source)

Catalysts Behind Digital Payment Adoption

Key to this digital surge is the proliferation of mobile phones and affordable mobile internet. Jio Platforms, for example, cut data costs by 95% since 2013, boosting Indian data consumption twentyfold.

Critical developments in digital public infrastructure, such as the Unified Payment Interface (UPI), have laid the groundwork for India's digital payment ecosystem. UPI mandates that all financial institutions must adopt it for digital payments, facilitating real-time fund transfers between bank accounts on a mobile platform.

UPI, introduced in 2016, has surpassed the use of credit and debit cards in India. Nearly 260 million Indians use UPI — in January 2023, it recorded about 8 billion transactions worth nearly $200 billion. Rest of World

However, this success story has its downside. The UPI system, while innovative, is now dominated by two entities: Google's GPay and Walmart-owned PhonePe (80% of transactions), raising concerns about market concentration and foreign dominance in India's digital payment landscape.

Moreover, digital payments have been a boon for small businesses with innovations like voice-operated transaction systems have made digital payments accessible even to illiterate merchants, underscoring the inclusive potential of digital finance.

At the 2023 G20 summit, India showcased UPI, advocating for its global adoption and the principle that key internet services should remain under public sector stewardship—a stark contrast to the US's private sector-led model. Nepal and Bhutan have also launched UPIs.

Benefits and challenges of the cashless transition

The rise of digitalization and electronic payments has contributed to an increase in tax revenues, providing more avenues for combatting corruption. It has also made it safer and more convenient to transfer money without carrying physical cash. This advancement has opened up a wealth of opportunities for small business owners. In addition, the introduction of digital payment options and mobile banking accounts have significantly decreased the number of unbanked individuals in India. According to the World Bank's Global Findex Database, 10% of Indians now have access to a mobile money account, compared to only 35% in 2011. Furthermore, the percentage of Indians with bank accounts has risen from 35% in 2011 to 78% in 2021.

The numbers may seem impressive, but how exactly are these digital payment transactions being conducted? According to the Global Findex Database, only 25% of Indians used digital payments in 2021. This method can exclude those who do not possess or cannot afford a smartphone. It's important to consider that a cashless society means all transactions are traceable, including sensitive ones like purchasing medication or intimate products. This level of tracking is not desirable for citizens and raises concerns about privacy.

Overall, India and Brazil have been successful with their digital payment systems (such as Brazil's PIX), but it is worth noting the important role of government in controlling such critical digital public infrastructure. In contrast, the United States relies entirely on the private sector, which may not be the most ideal approach for the future.