Data | Hurdles to overcome before becoming ‘Digital India’

India has seen a rapid growth in digital payments since the introduction of UPI in 2016. UPI payments grew at an average monthly rate of 6%, compared to 3%, 3%, and 1.5% for NEFT, IMPS, and debit cards, respectively. The share of UPI payments in total digital retail payments rose from 20% to 27%. Financial inclusion has improved, but 38% of bank accounts are inactive. There is a gender gap in digital transactions, with 41% of men and 28% of women making or receiving payments in 2021. The rural-urban divide is also stark, with only 30% of rural Indians making or receiving payments. India has made big strides, but still has a long way to go to become 'Digital India'.

The digital payments system in India has grown significantly in recent years. Every neighbourhood kirana store now has a QR code scanner. Has the United Payments Interface (UPI) revolutionised how Indians carry out economic transactions? Has the popularity and ease of digital transactions brought about financial inclusion across the country? Where does India stand vis-à-vis other countries?

Since the introduction of UPI in 2016, transactions in this mode have grown in value and volume. It has been well documented that demonetisation in November 2016 and the COVID-19 lockdown in 2020 were major push factors for the widespread adoption of digital payments. From June 2021 to April 2023, UPI payments grew at an average monthly rate of 6%. The corresponding figures for NEFT, IMPS, and debit card payments were 3%, 3%, and 1.5%, respectively. This indicates that the popularity of UPI increased at a faster rate than all other modes of payment.

Chart 1 | The chart shows the share of immediate payment service (IMPS), national electronic funds transfer (NEFT), debit cards, credit cards and prepaid payment instruments (PPI) of the total digital payments

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The share of UPI payments in the total value of digital retail payments in the country increased from less than 20% in mid-2021 to about 27% in March 2023 (Chart 1). Conversely, the share of NEFT transactions saw a decline of about 10 points (from 64% to less than 54%) over the same period. The share of IMPS remained relatively stable (about 9%). While the share of debit card payments and prepaid payments recorded a decline, their combined share did not exceed 2.5% of the overall digital retail transactions. This suggests that that the increasing share of UPI payments has come mainly at the cost of NEFT transactions. This might be because both UPI and IMPS are real-time payment settlement systems unlike NEFT.

It is to be expected that the increasing popularity of UPI-based payments would play an important role in improving financial inclusion. The first step towards financial inclusion is to have a bank account. At first glance, it seems like India has made significant progress on this front. According to the World Bank Global Findex Survey, while 53% of the population had bank accounts in 2014, 80% of the population had bank accounts in 2017 and 2021. However, a closer look at the data reveals that of those with bank accounts, 38% have inactive accounts. India has the highest share of inactive accounts in the world compared to all the other countries in the database. This might be an outcome of the push for Jan Dhan accounts. Zero-balance accounts were opened to meet official targets, but have been lying dormant since then. More women than men have inactive accounts (32% versus 23%). While there is no urban-rural divide or income group divide in the possession of bank accounts, differences are evident when we consider the share of inactive accounts. While 31% of the population in rural areas has an inactive account, the share in urban areas is 23%. Similarly, if we consider the poorest 40% of Indians, 35% of them have inactive bank accounts, whereas the corresponding figure for the richest 60% of the population is 22%.

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