IMF Praises India’s Digital Infrastructure

The IMF has issued a working paper ‘Stacking up the Benefits Lessons from India’s Digital Journey.’ In it, the IMF describes the achievement of India in creating a Digital Public Infrastructure (DPI) that delivers significant benefits. The paper describes what has been done, what remains to be done and how others could emulate India’s achievement.

The DPI consists of five elements that make up what is known as the ‘India Stack’:

• Unique identity (Aadhaar)

• Complimentary payment systems (Unified Payment Interface – (UPI)

• Aadhaar Payments Bridge

• Aadhaar Enabled Payment Services

• Data exchange (DigiLocker and Account Aggregator).

The combination of these elements has delivered digital access that is open, paperless, cashless and which respects privacy. The goal of the India Stack has been to foster innovation and competition and increase financial inclusion, government revenue collection and public expenditure efficiency.

To achieve this a number of policies and actions have been implemented:

• The modular approach of the stack has allowed solutions to be built on a common core. Interoperability is key.

• The DPI has been used to deliver social benefits which have increased its adoption, thereby creating an attractive market for service providers to access. Utilities have also accessed customers through it.

• Tax administration created a Tax ID (PAN) based on the Stack.

• A category of not-for-profit companies with a public purpose (National Information Utilities) was created. An example of this is the National Payments Corporation of India (NPCI), a creation of the Reserve Bank of India and the Indian Banks Association which unites and operates India’s retail payments and settlements system.

• In 2014 no frills, low cost banknote accounts were created. By August 2022, 462.5 million accounts had been opened.

• To create a competitive, open and affordable telecommunications market, foreign investment was liberalised and discriminatory data tariffs were prohibited. In 2016 a new operator entered the mobile data market and costs fell 90%. In 2015 154 MB/month were used. By 2021 15.8GB/month.

Not every country has India’s IT capability, and the IMF suggested that using open source software under the format of digital public goods shared between countries could be an alternative approach.

The result of India’s DPI is that today 68% of payment transactions by volume are made using UPI, the cost of e-KYC compliance has fallen from $12 to six cents, 8.8 million new taxpayers registered for General Sales Tax between July 2017 and March 2022 and about 4.5 million people and businesses now have access to financial services through the account aggregator.

On one hand digital literacy remains low, comprehensive data protection legislation is not in place and work remains to make UPI accessible on feature phones and offline. On the other, digitalisation has supported the formalisation of the economy and Aadhaar has helped direct transfers of payments to those who need them with less leakage, corruption and increased coverage. Financial inclusion has significantly increased.

UPI enables PPI usage

Prepaid Payment Instruments (PPIs) are widely used online to buy financial services, pay remittances and transfer funds in India. Previously these payments had to be made using debit cards. The uptake of PPIs has seen debit card usage fall and UP payments rise. In February 2023, for example, UPI transactions rose 66.4% year-on-year to 7.5 billion, while debit card transactions fell 20% to 220 million.

The National Payments Corporation of India (NPCI) has issued interoperability guidelines for PPI wallets so that people don’t have to have and use multiple cards. Using a PPI means people don’t have to enter their card numbers online, thereby reducing the risk of fraud and theft and making PPI usage more attractive for customers.

The other advantage of PPI cards is that they work with QR codes, so merchants don’t have to have point of sale equipment.

NPCI’s wallet interoperability standards allow PPI wallets to work as part of the UPI ecosystem, but the downside for merchants is that they are charged a 1.1% interchange fee for transactions over ₹2,000. The issuer of the PPI also has to pay a fee of $0.15 for loading transaction volumes over ₹2,000.

Given that less than 5% of UPI transactions have a value of over ₹2,000, there is a question mark whether PPI transactions worth less than ₹2,000 are viable without a subsidy. Will banks and merchants want to accept them?

Paytm’s UPI small merchant ecosystem

Paytm is a major payment service provider in India offering innovative solutions for small merchants and street vendors for digital payments such as All-in-One QR and Soundbox. It is now introducing Paytm UPI Lite, which aims to make UPI payments even more accessible.

Paytm UPI Lite allows lightning-fast small-value payments of up to ₹200. The company claims the approach used means payments will not fail, giving merchants confidence to accept digital payments.

Consumer reaction to demonetisation

A new paper by Yewon Kim, Assistant Professor of Marketing at Stanford Graduate School of Business, Pradeep K Chintagunta of the University of Chicago Booth School of Business, and Bhuvanesh Pareek, Indian Institute of Management Bangalore, looked at what happened following the 2016 demonetisation programme in a recent paper published in Marketing Science.

The paper looked at transactions between individual consumers and retailers, which typically aren’t examined closely when evaluating monetary policy. Their analysis of data from a large retail chain suggested that consumers chose to spend over $1 billion as demonetisation was implemented.

More than 7 million transactions from a big-ticket, durable goods retailer with stores across India were analysed from the year before and after demonetisation. The data was plotted on a graph showing the number of transactions by date, revealing a huge number of additional transactions around the time of the demonetisation.

The data shows that people were buying items with the soon-to-be discontinued denominations with the specific intention of returning them later in exchange for new bills. Some of the retailer’s stores saw returns increase by nearly 300% in the days following demonetisation.

Given the debate about the impact of the demonetisation, the researchers attempted to qualify whether the behaviour shown in the data had an impact on the demonetisation exercise. Extrapolating up to the entire retail market, the study estimated $1.5 billion was spent so that it did not have to be explained to the tax system.