Accelerating Digitisation in the Indian Economy
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The document discusses the potential of digitization in the Indian economy, emphasizing that increased internet penetration and digital adoption by small businesses could raise their contribution to GDP significantly by 2020. It highlights the strategic importance of micro, small, and medium enterprises (MSMEs) in India, noting their growth, employment contributions, and the need for improved digital payment infrastructure to enhance financial inclusion. The document proposes several measures to accelerate the adoption of digital payments, including fiscal incentives, regulations, and targeted programs for underserved segments.
Accelerating Digitisation in the Indian Economy
- 1. Overview Accelerating Digitisation in Indian Economy Rising internet penetration and greater uptake for digital by small business enterprises could help increase their contribution to India’s GDP by 10% points, taking it up to 46 - 48% by 2020. Digitally enabled small business enterprises grow profits up to twice as fast as offline counterparts. Nearly 51% of digitally enabled small businesses cater to customers beyond city boundaries as compared to 29% of offline small business enterprises. Digital SMEs employ up to 5 times more employees compared to those of do their business offline. 1 2 3 4 1 2 3 4 Opportunity The government’s 12th five year plan includes a vision to lift annual GDP growth to 8% and to create additional 50 million job opportu- nities in non profit sector. The importance of Micro, Small and Medium sized Enter- prises (MSMEs) skill development has been repeatedly high- lighted and the plan of improvising the internet connectivity to achieve these goals. As per the annual report published by MSME in 2015-16, India is home to 51 million MSMEs. It has also been stated that MSMEs contributed 37.5% to India’s GDP & 37% of the manu- facturing output un- derlining their strate- gic importance to the Indian economy. MSMEs employed 117 million people i.e. 14% of India’s work- ing age population. As per TRAI - BCG Google Study, India has 1.03 billion mobile subscrip- tions and 350 mil- lion internet users. Contribution of SMB’s in The Indian Economy 46% 37.5% 37% 117 Mn Source MSMEs Annual Report, Ministry of Micro, Small and Medium Enterprises, Government of India, 2015-2016 Changing Landscape of Indian SMBs Digital Adoption by Indian SMBs SMBs’ growth is being driven by increasing consumer demand which is expected to rise by 55 per cent by 2020. This has also helped fuel greater investment by foreign players in the Indian market, and the emergence of a start-up culture among the youth who account for 42 per cent of India’s population. In addition, digital technologies are transforming the landscape in which Indian SMBs operate. This is led by consumers moving online; especially on mobiles. These users increasingly expect to discover and transact with businesses online. This represents a sig- nificant opportunity for SMBs to engage with customers beyond local boundaries, and grow their busi- ness online. “A staggering 68 per cent of Indian SMBs are completely offline, with only 2 per cent actively selling or promoting their business online.” In 2007, the Indian Parliament passed the Payment and Settlement Systems Act, after which the central bank released a series of vision documents for the periods of 2009–12, 2012–15, and 2015–18. These papers were supplemented by initiatives to promote wider acceptance and deeper penetration of electronic payments in India. Figure 1: Digital engagement pyramid SMBs with no internet connectivity, may or may not have a personal computer, do not use social media for business purpose. Offline SMBs that have their own website or use social media for their business or maintain a corporate email ID to engage and understand their customer base. Enabled SMBs that use the internet for general infor- mation gathering and communication but do not use the internet for business purpose, such as social media, online listening, com- merce etc. Connected Exihibit 1: Increase the value of electronic payment provides numerous benefits to nations Sources: Moody’s Analytics (2016); Bank of International Settlement and World Bank Group (2015); Denecker et al. (2013); At Kearney et al. (2013); Brits at al. (2005); National Bank of Belgium (2006); Agbaje el al. (2013). Drives Economic Growth Increases Financial Inclusion Reduces the Shadow Economy Enable Digital Commerce Increased card penetration can increase GDP Shift from cash payments reduces social cost Cumulative Contribution to GDP Growth from Greater Card Penetration 2011 $ B, 2011-2015 United States Russia Brazil China United Kingdom Germany Mexico Turkey India Saudi Arabia South Africa Chile Indonesia Kuwait Philippines Egypt $81.6 $25.9 $18.0 $17.8 $12.4 $12.0 $7.8 $7.5 $6.1 $3.4 $3.1 $2.6 $2.2 $0.3 $0.1 $0.1 SMBs using digital technology actively to enable business online by either selling on ecommerce website or advertising or listen- ing on 3rd party portals. Engaged 1 The Government of India has encouraged the shift to a less–cash society with its push for digital payments through the JAM Trinity: the Prime Minister’s Jan-Dhan Yojana, Aadhaar, and mobile connectivity including the short and medium-term measures outlined in the Office Memorandum of February 29, 2016, to acceler- ate the adoption of digital payments. 2 3 Prime Minister’s Jan Dhan Yojana programme (PMJDY) and the launch of the Payments and Small Finance Banks had gradually addressed the issue of financial inclusion. So far, 242 million bank accounts have been opened and over 180 million debit cards issued under PMJDY, according to the Ministry of Finance. 1. A high propensity to save in and use cash 2. A large shadow and remittance-based economy 3. Gender imbalance in the use of digital payments 4. High cost of acceptance infrastructure 5. Regulatory limitations 6. Insufficient focus on financial literacy “India’s net cost of cash is 1.7% of GDP” To be highlighted by the side of the above mentioned content. Exhibit3: Focusing on three pillars could help India accelerate its shifts to a less-cash society Exhibit4: A country’s approach to expanding acceptance will depend its readiness for electronic payments Perspectives on Accelerating Global Payment Acceptance, Visa, April 2016 Greater acceptance of e-payments provides an on-ramp to financial inclusion Requires an enabling ragulatory framework Cash enables and perpetuates shadow economies Electronic payment penetration correlates to size of shadow economy Electronic payment facilitate trusted transaction online Reduction in cash payments enables e-commerce growth, although in India Cash on Delivery has played an important role Six factors perpetuate the use of cash in India India needs to adopt a three–pronged strategy to accelerate growth of digital payments Accelerated adoption of digital payment 1 Establish Acceptance Development Fund Expand Acceptance Provide fiscal incentives to conusumers and merchants Introduce new regulations 3 Facilitate inter-ministerial collaboration Bolster Financial Participation Tailor make programmes for underserved segments, e.g. farmers Strengthen measures to promote financial participation at the last mile Include financial literacy programmes in schools curriculum Introduce certification standards for business correspondents 2 Adopt open-loop system for mass transit Energise Innovation Digitise government payments Encourace adoption of new technologies and form factors Enabling policy environment and supporting infrastructure Market readiness can be classified according to levels of Acceptance Penetration - Number of accepting merchants - Number of acceptance points (per population) Consumer Adoption - Access to electronic payment method - Frequeny of usage Transition (Limited Acceptance) Progression along Accep- tance Development Lifecyle Electronic Payments not yet used for everyday spend Electronic Electronic payments are “top of wallet” Specific niches of cash payments remains Cash-centric Heavy depandent upon cash payments Early stage of electronic payment ecosystem Transition Consumer resistant to electronic payments (Limited Consumer Adoption) Need to demonstrate utility of electronic payments Acceptance PenetrationLOW HIGH ConsumerAdoptionLOWHIGH Establish an acceptance development fund: The fund could increase the use of digital payments in underpenetrated categories. A fund with a corpus of about INR 1,000 crores (USD 153 million), with contributions from all stakeholders in the payments industry, could add about 2.7 million acceptance points. The Reserve Bank of India has been working expeditiously on such an industry-led fund over the past several months. Fiscal incentives: The government could consider incentivising, for a specific period, small and medium-sized enterprises (SMEs) and individuals to promote a shift in behavior. It could provide - Introduce new regulations: Active dialogue to introduce several new regulations is underway. For example, the Ministry of Finance, in its memorandum on accelerating growth of card and digital payments, suggested mandating thresholds for cash payments. In its report on black money, the special investigation team appointed by the Supreme Court of India recommended capping cash transactions above INR 3 lakhs (USD 4,450) and restricting cash holding by individuals and industry to INR 15 lakhs (USD 22,288). In addition, the government could consider a few other measures, including: Additional measures to spur acceptance could include: Developing specific criteria to allow large global companies to participate independently in the acquiring business. Such a move would increase the number of players, leading to higher competition and bringing best practices to the market. Mass transit We recommend adopting open loop systems for person-to-government transactions that enable the use of bank issued contactless chip cards for payments for public transport services. To begin with, adopting such a system for mass-transit payments would ensure citizens could use mass-transit systems across the country without purchasing additional tickets or banks reissuing new cards or separate ones for tran- sit systems. Eventually various contact less enabled devices could be used as payment instruments. Government payments The adoption of digital procurement cards by the Government of India’s nearly 70 departments could yield additional savings. Governments worldwide have benefitted significantly by adopting this approach. New technologies, new form factors India needs innovation that would help overcome challenges associated with financial inclusion – last mile connectivity, infrastructure, and the high cost of doing business in remote areas. Promotion of mobile-based payment solutions, focus on interoperability, and measures to increase penetration of near field communication technology (NFC) will prove beneficial. Innovations that enhances customer security, ease-of-use, and are widely available are also important. Adapting such innovations to meet the differing needs of urban and rural citizens would significantly enhance the growth of digital pay- ments. Facilitating inter–ministerial collaboration at the centre and engagement with states to leverage existing pro- grammes and platforms, for example, mKisan Designing programmes tailored to meet the needs of various types of underserved segments such as women and farmers Strengthening efforts to promote financial participation at the last mile, working in collaboration with existing microfinance institutions in different states Crafting approaches to inculcate financial literacy programmes at the school level and in higher education, and as part of public service education Introducing certification standards and constructing innovative models for business correspondents Developing a central repository to track the payment history of consumers. Doing this would enable insti- tutions to understand better the expenditure patterns and needs of consumers. In turn, it would provide valuable insights to various stakeholders, including banks, and could help them expand the acquiring business. SMEs a 50 percent reduction in income-tax liability on 50 percent of their revenue. Lowering import duties on point-of-sale terminals to 5 percent, and promoting domestic manufactur- ing of acceptance devices under the country’s Make in India programme. Introducing regulations that promote digital payment of salaries by all enterprises, including micro, small, and medium enterprises, as Uruguay has done. Even households could be encouraged to do the same. This could significantly reduce the flow of cash in the economy. A survey from the “Beyond Cash” report of USAID shows that those earning and saving digitally have 2.5 times higher propensity to spend digitally. Individuals with a 5 percent income tax break on 20 percent of their electronic spending, with a cap of INR 2,000 (USD 29.7) per individual per year. Another way to disburse incentives could be to offset them by providing rebates on payments made through Bharat Bill Payment System. In this approach, the Government of India could compensate the revenue shortfall to entities receiving payments through this platform. Drawing from experiences of other countries and adapting them to the Indian context, we propose that the Government of India consider the following measures: A B C D E F G H I J K L i. ii. iii. i. ii. i. ii. *Disclaimer: All the information and stats mentioned abover are taken from KPMG and MSME research. Helping Small Businesses Grow www.biz2credit.in 1800-3002-0653 /@Biz2CreditIndia /+Biz2creditIn /Biz2Credit India /@Biz2CreditIn /Biz2Credit India