Lockdown encouraged digital payment, but fundamentals are still lacking


With the imposition of lockdown in the end of March across India, digital payment saw an increment. The volume of digital transactions in April tilted a bit due to the restrictions on movement. However, it started rising from May. The UPI and IMPS transactions touched an all-time high in July. It is said that the pandemic did what the mammoth demonetization couldn’t. However, India’s cash dependence is still huge. The current improvement seems momentary as people have been forced not to use cash. With massive digital illiteracy, low internet penetration, and rising cybercrimes, India has a big battle to fight.

Increased adoption of digital payment

There has been a significant rise in the volume of digital transactions since the nation-wide lockdown began. The online transaction system, such as the Unified Payment Interface, which allows instant transfer of funds across bank accounts, rose to all-time high of 1.5 billion in July compared to 1 billion in April 2020 in terms of volume. This indicates a sharp rebound to pre-Covid-19 level after payment transactions declined during April-May due to lockdown restrictions and a larger shift towards digital payments as people are scared to use bank notes amid the pandemic.

The transactions via Immediate Payment Service (IMPS), an online platform used for high-value payment transactions, also showed a similar trend. After dipping to a historic low in April, it has been slowly rebounding. IMPS transactions are at an all-time high of 222 million transactions in July, which is worth Rs 2.3 trillion in July.

According to an RBI report, India’s digital payments per capita- a useful metric to measure digital transaction growth in the country- has grown to 22.4 as of March 2019 from 2.4 as of March 2014. It is still much lower than China’s 96.7 and the USA’s 473.6.

A significant growth in digital transactions per capita in last five years

Source: RBI report, May 2019

Consumer driven digital revolution

The coronavirus pandemic has helped India accomplish what demonetization failed to do- digital payment adoption. During the demonetization process, there was a sudden surge in the usage of digital payments. However, it soon went to normal, with currency in circulation rising back up rapidly after the demonetization. Unlike demonetization, the current situation is consumer-driven. Despite a decent currency flow, people are motivated to use digital payment for their own safety.

India’s rising smartphone users and the pandemic has done some good for digitalizing India. As per a research report by Capgemini Research Institute, almost a quarter of surveyed people admitted to having used digital payments since the start of the pandemic, and 78% of people believe that over the next six months, it is going to be increased further.

Cash still holds the fort

India’s fondness for cash is still huge, and it seems like not going away anytime soon. The notes issued by RBI (which includes notes in circulation) as a percentage to GDP fell to a historical low after demonetization at 5.9% in December 2016. However, after more than three years since demonetization, cash bounced back to its former stature and currently exceeds level before the note ban at 12.6% of GDP in June 2020.

The two major reasons for India to remain a largely cash driven economy- India’s low internet connection and meager digital literacy. The recent growth in the digital transaction has been limited mostly to urban areas. Rural areas are still lagging behind.

Similarly, the complexity related to digital transactions, failure rate, and increasing cybercrimes have kept a majority of the Indian population from paying through digital modes.

Written by:

Guest Columnist

Amit Parhi

[email protected]indiamacroadvisors.com