Regulatory push key to digital ecosystem

Digital Drive

- UPI transactions jumped 70x in last 4 yrs

- Banks increasingly use huge swaths of data via AI and ML

- It's redefining financial intermediation - It'll imply further scaling up of large investment in cloud platforms

- However, currency in circulation remained constant over the previous year as record purchases happened during Diwali at Rs1.25 lakh crore

Mumbai: Cash is no more the king, but digital revolution needs to be supported by a regulatory infrastructure, says a study.

India economy has undergone significant formalisation in last 5 years. Latest currency in circulation data reveals that it has remained constant over the previous year even as record purchases happened during Diwali at Rs1.25 lakh crores, says an internal research report by SBI economists. This happened for the first time since 2014.

Indian consumers have now migrated big time to better technology platform like UPI that does not require the intervention of a POS machine and factor authentications: UPI transactions have jumped 70 times in last 4 years. Indian consumers now prefer convenience in payments through the click of a button. The vast quantity of information that is produced as a passive by-product of the use of such UPI transactions holds a great promise as a transformative resource for real time policy and evidence-based policy making. As convenience in payments takes centre stage, the future will evolve increasingly towards use of huge swaths of data through use of Artificial Intelligence (AI) and Machine Learning (ML) by banks to redefine financial intermediation and this will imply further scaling up of large investment in cloud platforms.

This might also necessitate regulatory interventions of both Central Banks and Government so that database can be harnessed and stored and also used for real time policy making.

The UK Government has the power for requisition of telecommunication and related data for public policy purposes. A recent example being the power of the UK Government to request for data to fight the public health emergency under the Corona Virus Act 2020.

The Monetary Authority of Singapore enables setting up of public cloud services for harnessing and analyzing data by financial institutions.

The formalization efforts are bearing major fruit in terms of currency /GDP ratio. The study estimates that without pandemic GDP collapse, CIC/GDP ratio would have been 12.7 per cent in FY21, as against 12.4 per cent in FY11. Tax/GDP ratio did jump between FY16 and FY19 but has declined since then reflecting direct tax changes in FY19 Budget:Tax/GDP has risen in the pandemic years.

"Our estimate also shows that because of the pandemic people may have been holding as much as Rs 3.3 lakh crores in cash for precautionary motive beginning FY21. If we adjust for such currency transactions, the currency to GDP ratio for pure payment purposes may have actually

declined in FY21 compared to earlier years," says Soumya Kanti Ghosh, SBI group's chief economic advisor.

Currency in circulation (CIC) has remained constant during the Diwali week during 2021 even as there was record purchases. Previously it was only in 2014 that CIC remained same as previous year.

As per the report, digital payments have been growing exponentially. As many as 3.5 billion transactions worth Rs 6.3 trillion were recorded through UPI in the month of October making a jump of 100 per cent while transaction value jumped of nearly 103 per cent compared to the year-ago period.

Indian consumers have now migrated big time to better technology platform like UPI that does not require the intervention of a PoS machine. Data shows that UPI transactions have jumped 69 times since 2017, while debit card transactions have commensurately stagnated indicating people preference and shift to UPI mode.

If the circumstances were normal, nominal GDP growth in FY21 and FY22 would have been much higher and as a result the CIC as per cent of GDP would have followed the trend as witnessed pre-demonetisation.