Over the past eight years, India’s homegrown Unified Payments Interface (UPI) has evolved remarkably, making it the go-to choice for transactions. Its usage has expanded significantly, from small transactions at local vendors to handling utility bills and restaurant expenses and, most recently, facilitating IPO stock purchases and mutual fund payments.
This noteworthy transformation, now recognised as a global model, is built upon several pillars driven by a substantial shift in behaviour among hundreds of millions of users. The success of UPI in India has sparked interest and emulation from various countries looking to adopt a similar approach.
In December 2023, the total value of transactions conducted through UPI reached a substantial Rs 18.23 trillion, with a monthly volume of 12.02 billion.
While UPI has undeniably simplified sending and receiving money through a simple tap on a mobile phone app, a more significant question arises: how has this convenience translated into a broader impact on India’s economy?
Specifically, what cumulative contribution has UPI and India’s swift digitalisation of payments made to the country’s Gross Domestic Product (GDP)?
GDP, as defined, represents the total value of goods and services within a country.
Recognising that someone’s spending is essentially someone else’s income is essential. In the intricate analysis of national accounting, the cumulative expenditure of all individuals corresponds to the aggregation of everyone’s income.
How is UPI contributing to the national GDP?
The ease and convenience offered by UPI in spending play a crucial role in reducing the economy-wide cost of transactions. The resulting savings trigger incremental spending at the aggregate level, thereby contributing to the overall Gross Domestic Product (GDP).
One indicative measure of this trend is the Cash-on-Demand (COD) payments analysis.
UPI has emerged as the primary mode of e-commerce payment, gradually displacing COD orders. In terms of value, the share of UPI payments has witnessed a remarkable surge from 26 per cent to 52 per cent between 2019 and 2023. In contrast, cash payments have dwindled to a mere 9 per cent.
A key observation is the reduction in COD orders, each incurring an additional cost of approximately one dollar (about Rs 80). Considering the industry processed nearly two billion orders in 2022, the decline in COD orders by about ten percentage points represents a substantial reduction of 10 per cent, equivalent to 200 million orders. This shift from cash to UPI has effectively led to the e-commerce ecosystem saving costs of nearly USD 200 million in 2022.
According to the Economic Survey 2023, UPI’s growth trajectory is evident. 2018-19, UPI accounted for 17 per cent of the country’s total 31 billion digital transactions. In the subsequent fiscal year, we witnessed a rise in UPI’s share to more than 27 per cent, processing 12.50 billion transactions out of 46 billion digital transactions. In 2021-22, UPI’s dominance further increased, accounting for 52 per cent of the total 88.40 billion financial digital transactions.
Between 2019 and 2022, the growth in UPI-based transactions exhibited a substantial increase in value and volume terms, with a remarkable 121 per cent growth in value and 115 per cent growth in volume, on average, during this period.
Projections indicate that real-time payments are poised to significantly contribute to India’s GDP, with an estimated boost of USD 45.9 billion anticipated in 2026. The transaction volumes for real-time payments are expected to surpass 206 billion by that time.
In 2021, India led the world in real-time transactions, totalling 48.6 billion, nearly three times more than China’s 18 billion transactions and almost seven times greater than the combined real-time payments volume of the US, Canada, the UK, France, and Germany, which stood at 7.5 billion.
A 2022 report by ACI Worldwide highlighted that real-time payments were crucial in unlocking an additional USD 16.4 billion of economic output in India in 2021. This accounted for 0.56 per cent of the formal GDP.
Furthermore, a Reserve Bank of India (RBI) occasional paper noted an increased interest among retail investors in the equity markets, particularly in digital brokerages, since the pandemic outbreak.
UPI’s Catalyst for Increased Transactions
This surge in equity market activity could have contributed to an uptick in UPI and card transactions, as these are preferred modes of payment for loading funds into trading accounts. Notably, the transaction limit for payments through UPI for schemes like Retail Direct and IPO applications has been increased from Rs 2 lakh to Rs 5 lakh, reflecting the evolving dynamics of digital transactions in the financial markets.
The declining share of small denomination notes is attributed, in part, to the increasing use of UPI for small-value cash payments. The share of UPI payments in the total volume of retail payments surged to 73 per cent in 2022-23, up from 63 per cent the previous year.
In 2022-23, the average per transaction value for person-to-merchant (P2M) transactions through UPI reached nearly Rs 750, surpassing the corresponding figure for prepaid mobile wallets, below Rs 500.
A joint report by PhonePe and the Boston Consulting Group (BCG) in 2022 projected significant growth in India’s digital payments ecosystem, estimating it to nearly triple to $10 trillion by 2026 from $3 trillion in 2022.
The report highlighted that approximately 32 million mandate transactions were executed via UPI in March 2022. Moreover, the top five remitter banks experienced substantial growth, with 30-70 per cent increases in their IPO volumes processed through UPI. The report attributes this growth to UPI’s ability to attract a broader demographic not necessarily limited by net banking access.
This surge in household savings in financial asset classes, facilitated by UPI-based transactions, is believed to have also contributed to incremental GDP.
