GS Paper: Indian Economy

What’s the news?

• The growing chasm between wages or salaries and the cost of living has given rise to a distressing scenario: the affordability of vital food commodities is under threat.

Central idea

• In Mumbai, the cost of a vegetarian thali surged 65% in five years, while income for laborers and salaried workers in urban Maharashtra increased only 37% and 28%, respectively. This discrepancy is making essential food items unaffordable, leading to compromised meals.

What is Thalinomics?

• Thalinomics is a term coined by an Indian economist and former Chief Economic Adviser to the Government of India, Arvind Subramanian.
• It refers to a concept that involves analyzing changes in the cost of a vegetarian thali (a meal consisting of a variety of dishes served on a single plate) to gain insights into the trends and dynamics of food inflation and affordability.
• It involves tracking the prices of key ingredients that constitute a thali, such as cereals, pulses, vegetables, and other essential items.
• This concept is particularly relevant in countries like India, where food affordability and inflation are significant concerns for a large population.

Key insights: A case study of Mumbai and urban Maharashtra

• Rising Cost of Thali: The cost of preparing a home-cooked vegetarian thali in Mumbai has increased significantly by 65% over the past five years. This increase is attributed to rising prices of essential ingredients like rice, dal, vegetables, and other items that constitute a thali.
• Income Growth: Over the same five-year period, the average wage earned by casual laborers in urban Maharashtra increased by 37%, while the average salary of regular salaried workers increased by 28%. These income growth rates reflect the changes in earnings for these two categories of workers.
• Disparity Between Costs and Income: While the cost of a thali increased by 65%, income growth for casual laborers and salaried workers was significantly lower, at 37% and 28%, respectively.
• Affordability Challenge: The disparity between rising costs and income growth has resulted in essential food items becoming increasingly unaffordable for households. This affordability challenge can lead to reduced portion sizes or a compromise in the variety and nutritional quality of meals.
• Impact on Budget Share: The study also analyzes the portion of monthly wages or salaries required to afford two thalis every day for a month. This share increased from 22.5% of a casual laborer’s monthly earnings in 2018 to 27.2% in 2023. For salaried employees, it increased from 9.9% to 12.8% over the same period.

• Incomplete Data: Data limitations, particularly regarding the absence of certain ingredients like spices and ghee in the analysis, This suggests that the actual cost of making a thali could be even higher than the calculated figures.

Key aspects of the relationship between thali prices and inflation

• Inflation and Ingredient Prices: The prices of ingredients like rice, dal, vegetables, and oil can be affected by inflation. If the prices of these essential ingredients rise due to inflationary pressures, the overall cost of preparing a thali would increase.
• Food Inflation: The cost of a thali, which is composed of various food items, is directly influenced by food inflation. If there’s high food inflation, it can significantly impact the affordability of thalis and other meals.
• Supply and Demand Dynamics: Inflation can be driven by supply and demand imbalances. If there’s a shortage of certain ingredients due to supply disruptions (e.g., poor harvests or transportation issues), prices can rise. Similarly, changes in consumer demand patterns can affect the prices of specific ingredients, further impacting thali costs.
• Monetary Policy: Central banks often use monetary policy tools to control inflation. Interest rate adjustments, money supply regulation, and other measures can impact inflation rates. High inflation rates can lead to increased production costs for farmers and manufacturers, which may trickle down to the prices of thali ingredients.
• Income Effects: Inflation can impact consumers’ purchasing power. When inflation outpaces income growth, households might need to allocate a larger portion of their income to cover basic expenses like food. This can particularly affect lower-income households, leading to affordability challenges for items like thalis.
• Regional Variation: Inflation rates can vary regionally and even locally. Different regions might experience different rates of inflation due to factors like supply chain disruptions, local economic conditions, and government policies.
• Government Policies: Government policies such as subsidies, import/export regulations, and agricultural policies can influence ingredient prices and, consequently, the cost of preparing a thali. These policies can impact the supply and availability of key ingredients.

Implications of the higher cost of a thali

• Nutritional Impact: The rising cost of thali ingredients can lead to compromised nutritional intake as households might cut back on certain items to manage expenses. This can result in inadequate diets and potential health implications.
• Affordability Strain: As thali prices escalate, households may face financial strain by allocating a larger portion of their income to food expenses. This can limit their ability to save, invest, and engage in non-essential expenditures.
• Dietary Diversity: Increased thali costs can potentially lead to reduced dietary diversity as households might opt for cheaper, less nutritious alternatives, affecting overall dietary quality.
• Balanced Meals: Higher thali costs might lead to smaller portions or fewer items in the thali, disrupting the balance of a typical meal and potentially impacting satiety and nutritional completeness.
• Quality of Life: Reduced dietary quality due to affordability challenges can have broader implications for individuals’ quality of life, health, and overall well-being.
• Economic Struggles: For households with limited disposable income, the burden of increased thali costs can exacerbate economic struggles and hinder progress.

Way forward

• Policy Interventions: Implement policies to address the widening gap between thali costs and income growth, ensuring that essential food remains affordable.
• Income Enhancement: Focus on raising wages for casual laborers and salaried workers to match the rising cost of thalis.
• Affordability Measures: Establish measures to mitigate the impact of expensive thalis on households, considering subsidies or targeted assistance.
• Nutrition Awareness: Launch campaigns to educate households about maintaining nutritious diets even when faced with affordability challenges.
• Gender-Inclusive Approach: Address gender disparities by formulating policies that empower women economically.
• Data-Driven Approach: Base policies on accurate and up-to-date data on food prices, wages, and consumption patterns.
• Food Security Initiatives: Strengthen food security programs to ensure access to nutritious food despite thali cost increases.
• Policy Evaluation: Continuously assess the effectiveness of policies in addressing thali affordability and overall well-being.

Conclusion

• The shifting dynamics between escalating costs and relatively stagnant income pose a serious challenge to maintaining a nutritionally balanced diet. As prices continue to rise, a more comprehensive approach is crucial to ensuring that affordable nutrition remains within reach for all strata of society.

 

What’s the news?

• India’s Non-Banking Financial Company (NBFC) sector is on a path of recovery after a turbulent period following the collapse of IL&FS and the challenges posed by the COVID-19 pandemic.

Central idea

• India’s NBFC sector’s revival aids credit flow in tandem with banks, bolstered by upgraded outlooks from ICRA due to enhanced oversight, wider bank credit, robust market performance, reduced NPAs, and higher provisions. However, Ind-Ra and Fitch’s caution highlights concerns over certain NBFCs’ unsecured credit exposures.

Non-Banking Financial Company (NBFC)

• A NBFC is a financial institution that offers various financial services similar to those offered by traditional banks, but it does not hold a banking license and cannot accept deposits from the public.
• NBFCs provide services such as loans and credit, investment and wealth management, insurance services, money market operations, and other financial products.
• They play a crucial role in extending credit to sectors of the economy that might not be served by traditional banks, contributing to financial inclusion and overall economic growth.

What is credit inadequacy?

• Credit inadequacy refers to the insufficiency of available credit or loans to meet the financial needs and investment requirements of various sectors within an economy.
• In the context of India, it signifies a situation where the amount of credit available from traditional banking sources is limited and falls short of what is required to support economic growth, business expansion, and other investment activities.

What are credit sources?

• Credit sources refer to the origins or channels through which funds are made available for lending or borrowing purposes.

Credit sources within the Indian financial system

• Credit Flow through Financial Intermediaries (Banks and NBFCs):

• This channel involves banks and Non-Banking Financial Companies (NBFCs) acting as intermediaries between savers and borrowers.
• Banks collect deposits from individuals and businesses and then lend these funds to borrowers in the form of loans.
• NBFCs, while similar to banks, cannot accept deposits but can still provide credit by borrowing from other financial institutions or markets and lending those funds to borrowers.

• Market credit through bond markets:

• This channel involves borrowing and lending directly through the financial markets.
• Various participants, like mutual funds, insurance companies, and banks, engage in the bond market.
• Borrowers issue bonds, which are essentially debt instruments, and investors purchase these bonds, effectively lending money to the issuers in return for interest payments.

Evolution of credit and banking sector challenges

• Historical Credit Growth:

• Between 1991 and the early 2000s, annual bank credit expanded by 15% on average.
• From 2003 to 2008, the growth rate surged to 28%, driven by optimistic disbursements for the commercial sector due to positive growth outlook.

• Challenges and Non-Performing Assets (NPAs):

• The rapid credit expansion of 2003-2008 led to an increase in non-performing assets (NPAs) during the early 2010s.
• The Reserve Bank of India (RBI) introduced asset quality reviews in 2016 as NPAs rose from 3.4% to 10% between 2013 and 2017.
• The rise in bad assets hampered banks appetite for commercial sector exposure, leading to a shift towards retail loans.

• Credit Slowdown and NBFC Emergence:

• Bank credit growth declined after 2016, reaching 10% annually pre-Covid, and further dropping to 7% during the pandemic.
• This slowdown created an opportunity for Non-Banking Financial Companies (NBFCs) to step in and bridge the credit gap.
• NBFCs compensated for reduced bank credit, particularly in MSMEs and real estate, where they contributed 60% of incremental credit flows between 2014 and 2018.

• Disruption and Liquidity Crisis:

• A major infrastructural lending-focused NBFC’s collapse in 2018 created a sector-wide contagion.
• Both commercial banks and NBFCs experienced a sharp decline in incremental credit, resulting in liquidity challenges.
• This crisis highlighted the vulnerability of NBFCs due to concentrated liability books and disrupted funding sources.

Significance of NBFCs in a capital-constrained nation like India?

• Filling the Credit Gap: In a country where credit flow is limited, NBFCs step in to bridge the credit gap, particularly in sectors like MSMEs and real estate. They contribute 60% of incremental credit flows to these sectors, supporting their growth and development.
• Niche Expertise: NBFCs possess specialized sectoral expertise and flexibility in underwriting. They can evaluate borrowers based on unconventional parameters, extending credit to segments that traditional banks might consider riskier.
• Financial Inclusion: NBFCs extend credit to underserved and remote regions where traditional banks have limited reach. This contributes to financial inclusion by providing loans to individuals and businesses that might otherwise be excluded from the formal credit system.
• Timely Investment: With quick and efficient loan processing, NBFCs enable timely investment and economic activity. This agility is crucial in addressing credit needs promptly, supporting growth in various sectors.
• Alternative Funding: NBFCs raise funds through diverse channels such as bank borrowings, market issuances, and commercial papers. This alternative funding approach ensures that credit is available even when traditional banking sources face limitations.
• Complementary Role: NBFCs complement traditional banks by extending credit and financial services. They serve as an alternative credit avenue, ensuring a broader spectrum of borrowers can access the funds needed for their ventures.
• MSME and Real Estate Focus: NBFCs’ emphasis on MSME and real estate financing fills a critical gap. These sectors, vital for India’s growth, often face challenges in accessing credit from traditional banks due to perceived risks or constraints.
• Sectoral Growth: NBFCs, with their specialized approach, contribute to sectoral growth. For instance, they supported 60% of incremental credit flows to MSMEs and real estate developers between 2014 and 2018, facilitating expansion in these key sectors.
• Diversified Credit Landscape: NBFCs enhance the overall credit landscape by offering an alternative credit channel. Their presence helps distribute credit more evenly across sectors, promoting balanced economic growth.

How can NBFCs be used to address the problem of credit inadequacy in India?

• Targeted Credit Access: NBFCs can cater to segments that traditional banks might find riskier or less viable, such as MSMEs and real estate developers. Their specialized approach, nimbleness, and sectoral expertise allow them to provide tailored credit solutions to these underserved sectors.
• Financial Inclusion: NBFCs extend credit to areas where traditional banks have limited reach, fostering financial inclusion. They can provide loans to individuals and businesses in remote and underserved regions, contributing to economic growth across the nation.
• Flexibility in Underwriting: NBFCs often adopt innovative and tech-enabled approaches for assessing creditworthiness. This enables them to evaluate borrowers based on unconventional parameters, extending credit to those who might not meet traditional banking criteria.
• Quick and Efficient Processes: NBFCs, with streamlined operations, can offer faster loan approvals and disbursements. This agility in processing loans can bridge the credit gap more rapidly, supporting timely investment and economic activities.
• Sectoral Focus: NBFCs can concentrate on specific sectors or niches, catering to unique credit requirements. For instance, they can offer specialized real estate financing or support to micro and small businesses, contributing to sectoral growth.
• Liquidity Channels: NBFCs can raise funds through various channels, including bank borrowings, market issuances, and commercial papers. This diversity in funding sources enables them to overcome liquidity challenges more effectively.
• Diversification of Funding Sources: For sustainable growth, NBFCs can diversify their funding sources to reduce reliance on specific channels, reducing vulnerability to liquidity shocks, as highlighted in the article.
• Complementing the Banking System: NBFCs complement traditional banks in extending credit and financial services. Their presence provides an alternative credit avenue, ensuring that credit is available to a wider spectrum of borrowers.

Conclusion

• In a country where financial inclusion and access to bank credit remain challenges, NBFCs play a vital role in reaching underserved segments. Learning from the crisis of 2018–2021, diversifying funding sources, and implementing short-term liquidity buffers can fortify NBFCs against future shocks.

What’s the news?

• Countries worldwide are pursuing de-dollarisation to reduce reliance on the US dollar in international trade, exploring bilateral currency agreements and strategies like rupeefication.

Central idea

• In the past century, a single currency has dominated the global economy, transitioning from the pound sterling to the US dollar, now comprising 59.02% of COFER. The US dollar’s prevalence is due to its pivotal role in international trade. India’s push for the Indian Rupee’s use in trade showcases this trend, aiming at bolstering economic autonomy.

What is meant by Dollarisation?

• US dollar as a substitute for domestic currency: Dollarisation refers to the phenomenon where countries adopt the US dollar as a substitute for their domestic currency to varying degrees.
• This practice can take several forms:

• Financial dollarisation (substituting domestic assets/liabilities with foreign ones)
• Real dollarisation (pegging domestic transactions to exchange rates)
• Transactional dollarisation (using the US dollar for domestic transactions)

• Poor performance of the domestic currency:

• Dollarisation typically arises due to the poor performance of the domestic currency, caused by factors such as political instability or economic uncertainty.
• It can also result from financial market liberalization and economic integration, leading to reduced exchange rate risk and increased capital inflow.

• The US dollar’s dominance: The US dollar’s dominance as an anchor currency for international trade contributes to its widespread acceptance and high demand, thereby driving dollarisation trends.

What is meant by De-dollarisation?

• De-Dollarisation refers to the global trend of countries reducing their reliance on the US dollar in international trade and financial transactions.
• This movement involves shifting towards bilateral currency agreements, using domestic currencies for trade, and promoting alternatives to the dollar.
• The aim is to achieve greater economic autonomy, reduce risks associated with dollar fluctuations, and challenge the dominance of the US dollar in the global financial system.

What is meant by Rupeefication?

• Rupeefication refers to the process of internationalizing the Indian Rupee (INR) by promoting its use in international trade and financial transactions.
• This strategy involves enabling trade partners to transact in INR, issuing financial instruments denominated in INR to foreign entities, and facilitating greater access to the INR in global markets.
• The objective of rupeefication is to enhance the INR’s status as a global currency, reduce dependence on the US dollar, and strengthen India’s economic resilience and autonomy on the global stage.

De-dollarisation in motion

• Brazil’s Bilateral Currency Trade: Brazil is expanding bilateral currency trade agreements, notably with Japan and China. These agreements involve using domestic currencies for trade, reducing reliance on the US dollar.
• China’s Leadership in De-Dollarisation: Following sanctions against Russia, China has been at the forefront of reducing dollar reliance. China’s actions have prompted other BRICS nations to follow suit in decreasing dollar usage.
• Indonesia’s Local Currency Trade System: Indonesia has adopted a Local Currency Trade (LCT) system to lower the role of the US dollar in its current account transactions. This shift aims to promote greater usage of domestic currency.
• Africa’s Consideration for Intra-Africa Trade: African nations are contemplating replacing the US dollar with domestic currencies for intra-Africa trade. This approach aligns with the broader global trend of de-dollarisation.
• BRICS Summit and Integrated Payment System: The upcoming BRICS Summit will address the challenges of de-dollarising trade and establishing an integrated payment system. This reflects the growing global emphasis on reducing dollar dependence.
• India’s Multi-Faceted Approach: India, while pursuing de-dollarisation, also considers bilateral currency agreements. However, it might opt out of a common BRICS currency due to existing trade commitments with the US and Europe

How is India actively advancing its systems to bypass the US dollar and fortify the INR?

• Bilateral Currency Agreements: India is engaging in bilateral currency agreements with multiple nations. These agreements encourage trade partners to transact in INR instead of the US dollar, reducing the reliance on the dollar in international trade transactions.
• Special Rupee Vostro Accounts (SRVAs): India has established Special Rupee Vostro Accounts with various countries, including the UK, Russia, Sri Lanka, and Germany. These accounts enable foreign entities to transact in INR directly with Indian banks, promoting the use of the Indian currency.
• Currency Internationalization: By promoting the use of INR in international transactions, India aims to increase the acceptance of its currency in global markets. This strategy involves initiatives to make INR more widely recognized and used beyond its borders.
• Reducing Dollar Dependency: India’s efforts to develop systems that bypass the dollar aim to reduce the country’s dependence on the US dollar for international trade and financial transactions. This can enhance India’s economic autonomy and mitigate the risks associated with fluctuations in the value of the dollar.
• Enhancing the INR’s Global Role: Strengthening the INR involves making it a viable alternative to the US dollar in global transactions. By creating systems that support the use of INR in trade and finance, India aims to increase the currency’s global significance.

Advantages of rupeefication

• Risk Mitigation for Exporters: Rupeefication provides exporters with a means to limit their exposure to exchange rate risks. By invoicing trade in INR, exporters can avoid the uncertainties associated with fluctuating US dollar exchange rates, enhancing predictability in their earnings.
• Deepened Markets and Wider Access: The adoption of rupeefication can lead to increased market access and deeper trade relationships. As the INR gains wider acceptance, exporters can tap into new markets and expand their customer base.
• Lower Borrowing Costs for the Private Sector: Rupeefication enables the private sector to access international financial markets with reduced borrowing costs. This can result in enhanced profitability and investment opportunities for businesses.
• Public Sector Financing Flexibility: The public sector benefits from the ability to issue international debt denominated in INR. This provides an alternative source of financing for government projects without depleting official US dollar reserves.
• Strengthened Economic Autonomy: By promoting rupeefication, India can gradually reduce its reliance on the US dollar, leading to increased economic autonomy. This reduces vulnerability to external economic shocks and fluctuations in the value of the dollar.
• Microeconomic Growth and Livelihoods: A focus on rupeefication encourages the growth of the private sector, leading to increased economic activities and job opportunities. This approach can contribute to the improvement of livelihoods across various sectors.
• Enhanced Monetary Policy Autonomy: As rupeefication gains traction, India can exercise more control over its domestic monetary policy. This autonomy allows for tailored economic measures that align with the country’s specific needs.

Potential challenges associated with its implementation

• Exchange Rate Volatility: Shifting towards rupeefication could expose businesses to exchange rate volatility if the INR’s value fluctuates significantly against other major currencies. This could impact the predictability of earnings and increase risks for exporters.
• Limited Acceptance in International Markets: Achieving widespread acceptance of the INR in global markets might be challenging. Many international transactions are still predominantly conducted in the US dollar, which could hinder the seamless adoption of rupeefication.
• Global Economic and Political Factors: External economic and political events can impact the feasibility of rupeefication. Global factors such as economic crises or geopolitical tensions could influence the willingness of other nations to engage in transactions using the INR.
• Trade Balance and Reserves: A swift shift to rupeefication might impact India’s trade balance and foreign exchange reserves, potentially necessitating greater reserves of foreign currencies to manage trade deficits.
• Gradual Implementation: Rapidly transitioning to rupeefication might lead to economic disruptions.

Way forward

• Gradual Transition: To address the challenges and uncertainties associated with shifting towards rupeefication, a gradual and phased approach is recommended. This allows businesses, financial institutions, and the economy as a whole to adapt to the changes smoothly.
• Macroeconomic Stability: Maintaining macroeconomic stability is crucial. Efforts should be directed toward ensuring the stability of the INR’s value to inspire confidence among trade partners and investors.
• Promoting INR Use: Initiatives to promote the use of the INR in international transactions should be continued. This could involve diplomatic efforts to foster bilateral agreements, increasing awareness about the benefits of INR invoicing, and addressing concerns about exchange rate risk.
• Collaborative Approach: Collaborating with other nations and international organizations is essential. The adoption of rupeefication requires cooperation and coordination among various stakeholders to establish the INR as a viable global currency.
• Balancing Trade and Reserves: Balancing trade and managing foreign exchange reserves remain crucial. Gradual rupeefication should align with maintaining a stable trade balance and adequate reserves to manage potential deficits.

Conclusion

• While the journey towards de-dollarisation and rupeefication is multifaceted and not devoid of challenges, India’s persistent efforts to limit dollar reliance while nurturing the international status of the INR underscore its commitment to greater economic autonomy. By gradually integrating the INR into the global financial landscape, India aims to bolster its economic resilience, promote growth, and enhance its position as a global economic player.

Also read:

The Future of the US Dollar As a World Reserve Currency

Central idea

• In recent weeks, a notable surge in vegetable prices has acted as a harbinger of a potential increase in overall inflation, as gauged by the consumer price index. This inflationary trend, if sustained, could breach the upper threshold of the Reserve Bank of India’s (RBI) targeted inflation framework.

Inflation Trend Analysis

• Initial Indications of Upward Movement: The recent surge in vegetable prices over the past few weeks served as an early signal of an impending inflationary trend. These signs prompted expectations of an escalation in overall inflation, as gauged by the consumer price index, during the months of July and August.
• Confirmed by Official Data Release: The National Statistical Office’s data release on Monday solidified these apprehensions. Headline retail inflation surged to a 15-month high of 7.44 per cent in July, marking a substantial increase from the 4.87 per cent recorded in June.
• Food Prices as the Main Catalyst: Dissecting the data, it becomes evident that the major driving force behind this surge has been the elevated food prices. The consumer food price index soared to 11.51 per cent in July, significantly up from the 4.55 per cent reported the previous month.

• Core Inflation and Goods/Services Inflation Trends:
  • Core Inflation: Excluding the volatile food and fuel components, core inflation has shown a moderation trend, as noted by ICRA.
  • Goods and Services Inflation: Both goods (excluding food) and services inflation have demonstrated a softening trend, indicating a certain degree of stability.

Food Categories and Their Impact

• Vegetables: This category experienced a staggering price rise of 37.3 per cent, serving as a primary contributor to the overall increase.
• Spices: Prices of spices surged by 21.6 per cent, further accentuating the inflationary pressure within the food segment.
• Pulses and Products: With an inflation rate of 13.2 per cent, pulses and related products added to the upward trend in food prices.
• Cereals and Products: A rise of 13 per cent in this category also contributed to the overall surge in food inflation.

Central Bank’s Perspective

• Early Warnings Heeded: Recognizing the potential implications for overall inflation, the Reserve Bank of India (RBI) took swift action during its recent monetary policy committee meeting.
• Proactive Forecast Revision: In a preemptive move, the RBI adjusted its inflation projection for the second quarter upwards. The initial estimate of 5.2 per cent was revised to 6.2 per cent, reflecting the central bank’s readiness to address the imminent inflationary pressure.
• Confirmation through Data: The RBI’s perspective received validation with the release of official data by the National Statistical Office. The subsequent surge in headline retail inflation to a 15-month high of 7.44 per cent in July, from the previous month’s 4.87 per cent, bolstered the central bank’s concerns.
• Food as a Key Driver: The central bank’s analysis correctly identified that the main driver behind this inflationary surge was the escalating food prices. The consumer food price index’s significant rise to 11.51 per cent in July, compared to 4.55 per cent in the previous month, reinforced the central bank’s focus on this critical aspect.

Impact of the inflation trends

• Consumer Affordability: The surge in vegetable prices contributes to overall inflation, impacting consumers’ ability to afford essential goods. As prices rise, individuals might need to allocate more of their budget to food, potentially reducing spending on other items.
• Budgetary Strain: Higher food prices, particularly vegetables, strain household budgets, affecting families’ purchasing power. This burden is often more pronounced for lower-income households, potentially leading to trade-offs in spending and impacting overall consumption patterns.
• Cost-Push Inflation: The rise in food prices, driven by vegetables and other factors, can lead to cost-push inflation. This occurs when higher production costs are passed on to consumers, causing a general increase in the price level across various sectors.
• Wage Pressure: Elevated inflation can lead to demands for higher wages by workers to maintain their real income levels. Businesses might face challenges managing increased labor costs, potentially affecting profitability.
• Monetary Policy Adjustment: The Reserve Bank of India (RBI) might need to consider adjusting its monetary policy to address the rising inflation. This could involve raising interest rates to control demand and curb price increases, potentially impacting borrowing costs and investments.

Conclusion

• Despite optimism about a forthcoming correction in vegetable prices, the economy remains vulnerable to external shocks such as crude oil price fluctuations. The committee’s continued vigilance and strategic policy responses will be pivotal in managing inflationary pressures and maintaining economic stability.

Central Idea

• The digital payments landscape in India has experienced a remarkable transformation in recent years, with the United Payments Interface (UPI) playing a pivotal role in this revolution. With every neighborhood kirana store now equipped with a QR code scanner, the popularity of digital transactions has soared.

Modes of payment and their growth trends

1. UPI (United Payments Interface):
   • Introduction: UPI was introduced in 2016.
   • Growth: Transactions in UPI have grown in value and volume since its introduction.
   • Push factors: Demonetisation in November 2016 and the COVID-19 lockdown in 2020 played a significant role in the widespread adoption of digital payments, contributing to UPI’s popularity.
   • Growth rate: From June 2021 to April 2023, UPI payments grew at an average monthly rate of 6%.
   • Share of total digital retail payments: The share of UPI payments increased from less than 20% in mid-2021 to about 27% in March 2023.
   • Comparison with other modes: UPI’s growth rate outpaced all other modes of payment, including NEFT, IMPS, debit card payments, and prepaid payments.
   • Impact on NEFT: The increasing share of UPI payments came mainly at the cost of NEFT transactions, which experienced a decline of about 10 points (from 64% to less than 54%) over the same period.
   • Real-time payment settlement: UPI’s popularity might be due to its real-time payment settlement system, similar to IMPS, unlike NEFT.
2. NEFT (National Electronic Funds Transfer):
   • Growth rate: NEFT transactions grew at an average monthly rate of 3% from June 2021 to April 2023.
   • Declining share: The share of NEFT transactions in the total value of digital retail payments declined from 64% to less than 54% over the same period, with UPI gaining popularity.
3. IMPS (Immediate Payment Service):
   • Growth rate: IMPS transactions grew at an average monthly rate of 3% from June 2021 to April 2023.
   • Stable share: The share of IMPS transactions remained relatively stable at about 9% in the total value of digital retail payments.
4. Debit card payments and Prepaid payments:
   • Growth rate: Debit card payments and prepaid payments experienced slower growth, with an average monthly rate of 1.5% from June 2021 to April 2023.
   • Combined share: The combined share of these modes of payment did not exceed 2.5% of the overall digital retail transactions.

Analysis: Financial Inclusion

1. Bank Account Penetration:
   • India has made remarkable progress in bank account penetration, with 80% of the population having bank accounts in 2017 and 2021, up from 53% in 2014.
   • However, a concerning issue is the high percentage of inactive accounts, which stands at 38%. This indicates that a significant portion of the population remains excluded from actively utilizing banking services.
2. Gender Gap:
   • There is a substantial gender gap in digital transactions, with only 28% of women conducting any digital transaction in 2021, compared to 41% of men.
   • The difference of 13 points between men and women in digital transactions is higher than many other comparable countries like Vietnam, Brazil, China, and Kenya, signaling a need for targeted measures to empower women in accessing and using digital payment methods.
3. Rural-Urban Divide:
   • The rural-urban gap in digital payments is evident, with only 30% of Indians in rural areas making or receiving any digital payment in 2021, compared to 40% in urban areas.
   • In contrast, countries like Bangladesh and Kenya display less discrepancy between rural and urban digital payment rates, with over 70% of their populations engaged in digital transactions.
4. Overall Digital Transaction Figures:
   • Despite the increasing popularity of UPI, only 35% of the population reported carrying out any digital transaction in 2021, indicating that a considerable proportion of the population is not actively participating in digital payments.
   • India’s figures for digital transactions are lower compared to the average of 57% for all developing countries and the world average of 64%

Way forward

• Promote Digital Literacy: Provide training programs and workshops to enhance digital literacy, focusing on women and vulnerable populations.
• Reduce Gender Disparities: Implement targeted measures to bridge the gender gap in digital transactions, encouraging more women to participate in digital payment ecosystems.
• Enhance Digital Infrastructure: Expand internet connectivity and improve digital infrastructure in remote and rural areas to ensure equitable access to digital payment facilities.
• Encourage Active Usage of Bank Accounts: Develop financial literacy programs to educate people about the benefits of using their bank accounts actively, thereby reducing the prevalence of inactive accounts.
• Enable Business Participation: Encourage businesses, especially small and medium-sized enterprises, to adopt digital payment methods by providing incentives and simplifying the onboarding process.
• Strengthen Security Measures: Enhance cybersecurity protocols and fraud prevention mechanisms to build trust and confidence among users in using digital payment platforms.

Conclusion

• The UPI has undeniably revolutionised India’s digital payments landscape. However, the journey towards achieving Digital India is far from complete. To address the persisting issues, policymakers must devise targeted interventions to ensure that the benefits of digital payments reach all sections of society. Only then can India truly harness the potential of digital payments and attain the goal of a cashless economy.