Digital payments have taken off in a big way in India over the last five years and the country needs regulatory infrastructure to support the digital revolution, a report by the State Bank of India (SBI) has said.
Despite record purchases of Rs 1.25 lakh crore during Diwali 2021, the currency in circulation (CIC) remained constant over the previous year, which has happened for the first time since 2014, the report titled 'A guide to formalisation of economy since FY18' by SBI Research said.
"Indian consumers now prefer convenience in payments through the click of a button...consumers have now migrated big time to better technology platform like UPI that does not require the intervention of a POS machine and factor authentications," it said.
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It said as many as 3.5 billion transactions worth Rs 6.3 trillion were recorded through UPI in the month of October 2021, making a jump of 100 per cent, while transaction value jumped nearly 103 per cent compared to October 2020. The UPI transactions have jumped 69 times since 2017, while debit card transactions have commensurately stagnated, indicating people's preference and shift to UPI mode, said Soumya Kanti Ghosh, SBI's Group Chief Economic Adviser.
However, as convenience in payments takes centre stage, the future will evolve increasingly towards use of huge swaths of data through use of artificial intelligence and machine learning by banks to redefine financial intermediation. This will imply further scaling up of large investment in cloud platforms, the report said.
"This might also necessitate regulatory interventions of both central banks and government so that database can be harnessed and stored and also used for real time policy making," it said.
It cited the power of UK government for requisition of telecommunication and related data for public policy purposes. Besides, it said, the Monetary Authority of Singapore enables setting up of public cloud services for harnessing and analysing data by financial institutions.
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The report also claimed that the efforts to formalise economy are bearing major fruits in terms of currency to GDP ratio. "We estimate that without pandemic GDP collapse, CIC/GDP ratio would have been 12.7 per cent in FY21, as against 12.4 per cent in FY11."
The Indian GDP contracted by 7.3 per cent during FY21, hit by the outbreak of COVID-19 and the pandemic-induced lockdowns. The CIC in FY21 post-pandemic stood at 14.5 per cent of GDP.
SBI's research wing said that as per its estimates, people may have been holding as much as Rs 3.3 lakh crore in cash for precautionary motive since the beginning of FY21 due to the pandemic. Adjusting for such currency transactions, the currency to GDP ratio for pure payment purposes may have actually declined in FY21 compared to earlier years, it said.
Meanwhile, the tax to GDP ratio jumped from 10.5 per cent in FY16 to 11 per cent in FY19, the report said. However, it has retreated since then as the tax exemption limit was raised to Rs 5 lakh in FY20 budget. "But critics miss such tax changes and ascribe a declining tax/GDP ratio beyond FY19 as an example of less formalisation," it said.
In its recent Ecowrap report, SBI Research had said that the share of the informal economy might have shrunk to 20 per cent currently from 52 per cent in FY2018.
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