Active Stocks
Fri Apr 19 2024 15:56:00
  1. Tata Steel share price
  2. 162.10 1.31%
  1. Tata Motors share price
  2. 963.20 -0.84%
  1. NTPC share price
  2. 350.90 -0.14%
  1. ITC share price
  2. 424.80 1.40%
  1. Power Grid Corporation Of India share price
  2. 281.70 0.54%
Business News/ Opinion / Why India must leverage digital finance tech
BackBack

Why India must leverage digital finance tech

It could have significant benefits for inclusive growth, but many challenges remain

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

In the Reserve Bank of India’s 2005 annual policy statement, the then governor, Y.V. Reddy, introduced the term ‘financial inclusion’ into the lexicon of Indian policymaking. In the decade since, it has rightly been prioritized by successive administrations and the central bank. A parallel development has taken place in the same time-frame—the acceleration of Internet penetration, to a significant extent on the back of smartphone growth. Against the backdrop of the upheaval caused by the financial crisis, this has enabled the rise of an ambitious economic manifesto with Harvard economist Kenneth Rogoff as its prophet. In a 2014 paper, and now in The Curse of Cash, he has laid out at length the case for moving towards a digital economy.

The convergence of these various trends was inevitable. The latest McKinsey Global Institute report, Digital Finance For All: Powering Inclusive Growth In Emerging Economies, released last week, now lays out just how important that convergence is.

As per the report—based on field research carried out in Brazil, China, Ethiopia, India, Mexico, Nigeria and Pakistan—widespread digital finance could boost the annual gross domestic product (GDP) of emerging economies by $3.7 trillion by 2025. That’s a 6% increase “versus a business as usual scenario". Of this, the most benefit would accrue to lower-income countries such as India—an estimated 10-12% boost to their GDP.

These are optimistic numbers; there will inevitably be a gulf between the neat outcomes of statistical modelling and the messy realities of real-world economic growth mediated by politics and global economic factors. But they point to the sheer potential of digital finance and financial inclusion—properly implemented—along two main axes. The first is improving private sector and government efficiency. This can take multiple forms, from minimizing leakages through direct benefits transfer—as we have strongly advocated in these pages—to reducing cost of service for financial institutions. The latter would boost profitability as well as enable greater risk-taking in reaching out to hitherto marginalized segments of the population. The second is a pure numbers game—the additional investment that financial inclusion of individuals as well as micro and small enterprises would bring.

And then there are the knock-on effects that Rogoff and many others have detailed. Digital payments leave a data trail. That means less scope for tax-evading transactions and more efficient tax administration. Crunching the data would also yield useful insights for policymaking—a granular picture of spending patterns of the poor, for instance, enabling better formulation and targeting of services and subsidies.

Digital payments also unlock new finance and business models; think peer-to-peer lending and e-commerce. Those, in turn, enable integration of small enterprises into the formal economy—China’s Taobao villages are a fine example of this—and access to credit for individuals and enterprises that would otherwise have been limited to traditional, informal avenues.

Creating the policy, regulatory and physical infrastructure for financial inclusion and digital finance is, of course, a tall task. The Narendra Modi government, its predecessor and the central bank all deserve praise here for putting the building blocks in place. Modi’s Pradhan Mantri Jan Dhan Yojana (PMJDY) has raised the profile of financial inclusion efforts over the past two years, building on the United Progressive Alliance’s work. And the Unified Payments Interface—perhaps the most ambitious initiative of its kind—will form the backbone of any digital payments initiative.

These, however, are first-generation challenges. The second generation will be as important—but the solutions there are likely to be less obvious. For instance, enabling access to the banking system and digital payments in rural areas is well and good. But that will not necessarily change behavioural patterns and preferences. The Indian Express investigation revealing that public sector bank officials had deposited Re1 each in many PMJDY bank accounts in order to show that they are not zero balance illustrates the folly of believing that putting infrastructure in place is enough.

Will behavioural economics provide the answer? Research carried out in Bolivia, Peru and the Philippines has shown that household savings rates can increase by as much as 10% when “nudges" via text messages are used. And what of the regulatory innovation needed to tackle the various business and financing models that digital payments will enable? Various state governments have shown themselves singularly lacking here.

The McKinsey report shows the pot of gold at the end of the rainbow. But getting there is going to take some doing.

Will India be able overcome the regulatory hurdles in its shift to a digital economy? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 25 Sep 2016, 10:14 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App