2 min read.Updated: 09 Nov 2020, 09:18 PM ISTLivemint
App-based payments look set for rapid expansion now that WhatsApp Pay has joined the fray online. If a market boom ensues, it might even have implications for monetary policy
Cash is not obsolete. If India had nearly ₹18 trillion worth of currency in circulation on the eve of demonetization in 2016, it has about 50% more four years later. But our economy has expanded, too, and cashless transactions over the internet finally look set for a boom in the post-covid era. After a long phase of beta testing, WhatsApp’s payment feature was given a go-ahead last week by the National Payments Corp of India (NPCI). The Facebook-owned chat platform must keep users of its new service under 20 million for now, though it has an overall domestic user base of some 400 million, many of them riveted to it. Its web sprawl could grant it an edge over India’s two main payment apps, Google Pay and Walmart’s PhonePe, each of which has an estimated 40% slice of a pie that can expand exponentially. These apps can transfer money among themselves, thanks to NPCI’s Unified Payments Interface (UPI), an enabler of inter-bank transfers. Last month, UPI set a record of over 2 billion transactions, worth nearly ₹3.9 trillion. As more Indians shop online, its adoption curve could steepen.
The growth of app-based UPI payments, however, may not go very smoothly under the rules designed to guard against the rise of a monopoly. NPCI has capped the volume of transactions by such apps at 30% of UPI’s total (on a three-month rolling basis). To comply, both PhonePe and Google Pay would have to lose market share by 2023. Should WhatsApp make most of those gains, then a broadly stable three-way split will have to be maintained thereon, effectively holding each app back from outpacing the rest. Since it is a volume cap, it also distorts their incentive to reach out and penetrate the Indian market. These apps may prefer to skim the cream of high-value transfers instead. But then, we cannot afford to let a single player dominate this space, and so it makes sense to sacrifice some UPI potential for the sake of robust competition.
While the country has attracted global praise for its relatively early adoption of an open system for e-payments, regulators must keep a close watch. A cashless boom in the years ahead could conceivably impact our conduct of monetary policy. Over time, the very ease of making e-payments might raise the “velocity of money", a loose indicator of how fast money moves around in an economy. It is often interpreted as how many times the average rupee changes hands over the span of a year. Back-of-the-envelope arithmetic suggests a slowdown since 2016-17 on that score. By an estimate made just before demonetization, we then had a national income of ₹5.4 for every rupee held in liquid form (either as actual cash or in a demand deposit). By the end of 2019-20, we had almost ₹40.9 trillion of currency and demand deposits in public hands, and with the year’s output placed at ₹203.4 trillion, that figure was below ₹5. If our economy shrinks by about one-tenth this year, then a liquid-money count of ₹42.5 trillion, as reported by India’s central bank for the fortnight ended 23 October, would point to an even less impressive ratio. The past four years, though, have been riddled with disruptions. We are still in a slump right now. But if e-money were to zoom ahead from here onwards, then the rupee itself might silently gain pace. Inflation watchers may need to keep track of this, just in case a point arises after which we have too much money chasing too few goods and services.