BackDigital finance to add $700 billion to India’s GDP, create 21 million jobs by 2025: McKinsey
Nearly two-thirds of India's GDP increase will come from improved productivity of businesses and governments as a result of digital payments, said a McKinsey report
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Hyderabad: Digital finance could boost India’s gross domestic product (GDP) by $700 billion by 2025 and create 21 million new jobs across sectors, the latest McKinsey Global Institute (MGI) report said.
The report, titled ‘Digital finance for all: Powering Inclusive Growth in Emerging Economies’, which is the first to comprehensively quantify the full economic impact of digital finance, estimates that digital finance is expected to boost the GDP of all emerging economies by as much as $3.7 trillion by 2025, an increase of 6% from current levels.
Digital finance, delivered through mobile phones, internet or cards linked to a digital payment system, will benefit individuals, businesses and governments across the developing world, boosting GDP and widening financial inclusion, the MGI report said.
For India, the report said, nearly two-thirds of the GDP increase will come from improved productivity of businesses and governments as a result of digital payments and one-third from the additional investment that broader financial inclusion of people and micro, small and medium-sized businesses will bring. The balance comes from the time saved by individuals which enables additional hours to be spent on work.
In Norway, digital payments are 78% of all payments. While the figure is 4% in China, in India, Nigeria, Pakistan and Ethiopia, it’s less 1%.
Around 53% of Indians above 15 still do not have a bank account and many more do not use accounts actively and lack access to appropriate savings, credit and insurance products.
MGI estimates that Indians lose more than $2 billion a year in forgone income simply because of the time it takes travelling to and from a bank.
Faster adoption of digital services means banking services will be available to an additional 1.6 billion people across the emerging world, more than half of them women and many in the middle class. In India, 344 million people could gain access to financial services. For everyone, convenience, cost and the range of financial products available will improve.
Financial inclusion will sustainably unleash $689 billion in India in new loans to individuals and small businesses, while governments of South Asia could gain $32 billion by reducing “leakage" in expenditure and tax collection. Financial services providers would also benefit from the shift from cash to digital payments, expanding their balance sheets by as much as $799 billion in India by offering customers digital accounts, which can be 80-90% lower than using physical branches.
“Using traditional brick-and-mortar banks, we’ve seen financial inclusion improve slowly as a country’s income rises. But we don’t find any correlation between mobile-money usage and income," said Susan Lund, a partner at the MGI.
“Rather than waiting a generation for incomes to rise to close the financial inclusion gap, developing countries can use mobile phones to provide digital financial services for the vast majority of its citizens within a decade," Lund said.
The report said around 62% of people in emerging economies have a mobile phone, while only 54% have financial accounts—and mobile phone penetration is growing far more quickly than access to financial services.
“Shifting from cash to digital payments will lower financial-service providers’ cost structure, open up profitable new ways to enlist new customers, and create trillions of dollars in new deposits. But whether those new deposits go to banks or non-traditional players is up for grabs," said Olivia White, a partner in McKinsey’s Global Banking Practice.
The economic gains from digital finance, in fact, could exceed the report’s estimates, as the analysis does not quantify many long-term benefits, including the formalization of informal economies that tends to boost productivity, and the fact that women with access to finance are more likely to spend household income on food, education and healthcare, building the human capital of the future.
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