Digital Finance Could Boost India’s GDP By Almost 12%: McKinsey Report
Financial services delivered over a digital infrastructure could increase India’s gross domestic product by 11.8 percent, adding $700 billion to the economy by 2025.
Rapidly spreading digital technologies provide an opportunity for emerging economies like India to provide cheaper financial services, hence, increasing profitability, financial inclusions and enabling large productivity gains, a McKinsey Global Insights report said.
The report suggests that digital financial services in India could positively impact productivity by 4.8 percent and push investments up by 6.8 percent. It will also help increase labour availability by 0.2 percent driven by time savings for individuals.
It could create 21 million new jobs compared to the 2014 levels across sectors, the report added.
According to the report, India hasn’t tapped the potential of digital finance as more than 99 percent of transactions by volume are still cash payments.
A large part of the population in emerging economies is not part of the country’s financial system and remains unbanked.
In India, only 53 percent of adult individuals own a formal financial account. To put that in perspective, the emerging economy average for inclusion in the financial system is 55 percent.
In the absence of access to financial institutions, people have to resort to informal financial instruments. India is a fine example as there is a significant informal savings stock in the country, the report said.
The report estimates that India has the potential for 344 million new inclusions.
Digital payments would reduce the size of informal economies where unregistered businesses do not pay taxes, or comply with product and labour market regulations. In the case of informal lending, usually high unreasonable interest rates are charged.
The poor households, which cope with irregular income in India, would benefit most, as annual financial flows through informal instruments ranged between 75 percent and 330 percent of the average household income.
Financial services could improve the consumers ability to save, invest and hence smooth out consumption patterns through periods of irregular income, the report said.
Not just that, digital financial services eliminate the limitation of physical access to banks. In India, it may take several hours to reach a rural bank branch, forcing people to lose time and money on travel.
The report estimates that Indians lose more than $2 billion a year in forgone income in travelling to and from a bank.
Scope For New Credit
In India, 23 million small and medium enterprises (MSMEs) have a credit gap of $140 billion.
Credit gap is the difference between the amount of credit small business can obtain and the amount they need. Lack of credit hinders growth for these small businesses.
According to the report, there is scope for Indians for obtaining $689 billion (34% of 2014 GDP) in new loans due to digital financial services.
The upside is not restricted just to consumers. McKinsey research noted that digital finance could attract new deposits in the country worth $799 billion (39% of 2014 GDP). This would result in $48 billion worth cost savings per annum for financial institutions.
Benefit To Government
Digital transactions hold the potential to improve the efficiency of government finances, the report said.
Governments across the world face reduced efficiency in the complex and expensive cash-based revenue collection process due to leakages like tax evasions.
According to McKinsey research, revenue collection in India by the postal system had an estimated leakage of $700 million in 2008.
By reducing the size of the informal economy, the digital finance space can reduce leakages according to the report.
India, the report said, could reduce government leakage by $24 billion per annum. Of this, $3 billion will be saved from leakage in revenue collection and $20 billion will be saved by leakages in subsidy payments.
This is a notable amount for the country which has seen numerous cases of corruption in payment of subsidies.
With the government’s push for a ‘less cash, more digital’ financial system, through payments bank and the launch of the unified payments interface, India’s digital finance growth story seems to be on track, the report concluded.
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