• India’s digital economy is poised to constitute one-fifth of the GDP by 2026 from one-tenth at present, according to a Reserve Bank’s ‘Report on Currency and Finance for the year 2023-24’.

• Digitalisation is driving innovation and efficiency, fostering a new model of economic growth, and facilitating quality improvements. Digital transformation is also evident in the financial sector, where adoption of technology solutions by financial institutions, coupled with the advent of new market players like financial technology firms (FinTechs) and large corporations (BigTechs), is reshaping the conventional notions of finance.

• India is leading the global digital revolution, emerging as a frontrunner on the back of its robust digital public infrastructure (DPI), rapidly evolving institutional arrangements, and a growing tech-savvy population. 

• Over the past decade, the global digital economy has grown 2.5 times faster than the physical world economy to account for more than 15 per cent of global GDP.

• In a formal sense, the term “digital economy” has been defined as the contribution of any economic transaction involving both digital products and digital industries to GDP — digital products being goods and services with the main function of generating, processing and/or storing digitised data.

Advantages of digital economy

• Digitalisation is set to break the ‘iron laws’ of cross-border trade and bring about a fundamental structural shift in global production processes, trade, and investment flows.

Digitalisation in the financial sector provides enormous benefits in terms of:

i) Fostering innovations

ii) Reducing financial intermediation costs.

iii) Improving customer experiences.

iv) Enhancing competition among the service providers, thereby boosting efficiency and inclusivity of the financial sector.

• Digitalisation offers a unique and dynamic opportunity to expand the reach of financial services to the entire population, especially disadvantaged and voiceless sections, thereby formalising the economy. Globally, there has been an increase in bank account ownership from 61 per cent of the adult population in 2014 to 74 per cent in 2021.

• Digitalisation can play a vital role in increasing the contribution of women to economic activity and effectively targeting delivery of the public schemes for intended beneficiaries.

• Digitalisation is transforming payments for internationally traded goods and services. Technologies like real-time payment systems and blockchain enable instant transfers, reduce delays and improve tracking of funds. Automated processes cut costs, offer better exchange rates and ensure regulatory compliance through data analytics.

• Digitalisation is also rapidly transforming cross-border migrant remittances and global capital flows by lowering costs, increasing transparency and efficiency.

• Digitalisation has diversified the range of players in the financial services industry, with a significant increase in the number of FinTechs across nations.

• The digital revolution is galvanising banking infrastructure and public finance management systems covering both direct benefit transfers and tax collections. Vibrant e-markets are springing up and expanding their reach. 

India at the forefront of the digital revolution

• India has one of the largest digitally connected populations worldwide. 

The two fundamental drivers of this wave of digitalisation are: 

a) Ubiquitous connectivity through mobile, internet-connected devices and communication networks.

b) Low-cost computing and data storage.

• India is home to the second largest telecom subscriber base and internet user base globally. The growth in digital enablers has been powered by competitive offerings by telecom operators, advent of global tech giants and among the cheapest data prices in the world.

• The average time Indian users spend online is 6.45 hours per day, which is close to the global average (6.4 hours). 

• Although internet penetration in India was at 55 per cent in 2023, the internet user base has grown by 199 million in the recent three years.

• India’s cost per gigabyte (GB) of data consumed is the lowest globally at an average of Rs 13.32 ($0.16) per GB. India also has one of the highest mobile data consumption in the world, with an average per-user per-month consumption of 24.1 GB in 2023.

• There are about 750 million smartphone users, which is expected to reach about one billion by 2026. India is expected to be the second largest smartphone manufacturer in the next five years. 

• India has the world’s third largest startup ecosystem with over 1.4 lakh startups and over 100 unicorns .

• India’s digital trade is projected to increase to $2.4 trillion in 2047, more than 13 times its level in 2020.

• In the digital currency arena, the Reserve Bank of India is at the forefront with pilot runs of the e-rupee, the Central Bank Digital Currency (CBDC).

• The digital lending ecosystem is becoming vibrant with initiatives such as Open Credit Enablement Network, Open Network for Digital Commerce and the Public Tech Platform for Frictionless Credit.

• Digitalisation is empowering India to bridge economic inequalities through a paradigm shift in social welfare schemes via Direct Benefit Transfers (DBTs). Over the last decade and especially since the pandemic, funds disbursed directly to beneficiary accounts through DBT have been ramped up, along with an increase in the number of beneficiaries.

• Digitalisation in finance is paving the way for next-generation banking, improving access to financial services at affordable costs, and enhancing the impact of direct benefit transfers by effective targeting of beneficiaries in a cost-efficient manner.

• Under the payments layer, the development of a real-time, round-the-clock, scalable and interoperable retail payment option is enabled by the Unified Payments Interface (UPI). It powers multiple bank accounts into a single mobile application, merging several banking features, seamless fund routing and merchant payments. 

• The payment platform has facilitated secure, convenient and low-cost transactions between individuals, businesses and governments on demand, with settlement in fiat money inside the formal financial system.

• Digital payments have recorded a compound annual growth rate (CAGR) of 50 per cent and 10 per cent in volume and value terms, respectively, in the last seven years involving 164 billion transactions worth Rs 2,428 lakh crore in 2023-24.

• The UPI has seen a ten-fold increase in volume over the past four years, increasing from 12.5 billion transactions in 2019-20 to 131 billion transactions in 2023-24 — 80 per cent of all digital payment volumes. Currently, the UPI is recording nearly 14 billion transactions a month, buoyed by 424 million unique users in June 2024.

Digitalisation’s Challenges

While digitalisation opens several opportunities across sectors, it also brings in new challenges while accentuating existing ones.

1) Cybersecurity

• Cybersecurity is an important challenge owing to the diverse nature of cyber threats targeting the digital financial infrastructure. In India, security incidents handled by the Indian Computer Emergency Response Team (CERT-In) have increased from 53,117 in 2017 to 13,20,106 during the period January-October 2023. Unauthorised network scanning/probing/vulnerable services account for more than 80 per cent of all security incidents in India.

• Globally, cybercrime costs are expected to reach $13.82 trillion by 2028, up from $8.15 trillion in 2023. The average cost of a data breach has also risen to $4.45 million in 2023, a 15 per cent increase over three years. Recognising the significant costs involved, most central banks have increased their cybersecurity investment budgets by 5 per cent since 2020. 

• In India, the average cost of data breaches stands at $2.18 million in 2023, a 28 per cent increase since 2020 albeit less than the global average cost of data breach. The most common attacks in India are phishing (22 per cent), followed by stolen or compromised credentials (16 per cent).

2) Consumer Protection 

• While digitalisation offers enhanced convenience and accessibility, the growing complexity of financial products also introduces new challenges in ensuring customer protection. With the increasing adoption of digital payments, the share of complaints related to mobile/electronic banking, ATM/debit cards and credit cards received in the offices of the RBI ombudsman accounted for 47 per cent of total complaints in 2022-23.

• India is one of the top ten countries in terms of embedded finance revenue and it is expected to expand at a compound annual growth rate (CAGR) of 30.4 per cent over 2022-29 to reach $21.1 billion in 2029. While cross-selling and embedded finance models enhance customer convenience, they may raise anti-competition concerns due to bundled services.

• While the digital lending platforms and buy-now-pay-later (BNPL) services bolster consumer convenience, they also entail various costs, including exorbitant charges, coercive recovery practices and hidden fees.

• Digitalisation is also giving rise to certain ‘invisible risks’ or ‘dark patterns’, whereby consumers are tricked into making decisions detrimental to their interests.

3) Reshaping of Labour Markets

• Digital technologies are impacting workforce composition, job quality, skill requirements, and labour and regulatory policies. Implementation of AI in financial services is shifting roles to higher-skilled tasks, automating routine functions and aiding decision-making.

• Digitalisation is decentralising financial labour through outsourcing and telework. Automation replacing labour can potentially widen the gap between capital and labour returns, creating a fragmented labour market with low-skill/low-pay and high-skill/high-pay jobs, while middle-tier jobs are displaced by technology.

• Between 2013 and 2019, employees in support roles in the financial sector decreased in many countries, while the number of professionals and technicians rose. This is evident in the Indian banking sector as well.

• Upskilling and reskilling the labour force pose significant challenges, given the growing shift towards digital-intensive roles. The rising importance of AI-related skills in the labour market in India is reflected in the growth in AI talent recruitment relative to overall recruitment in 2023.

• Pre-existing traditional methods of learning and development, however, are inadequate for this transformation, necessitating significant investments to build the required skills at scale, leverage AI in learning and keep pace with the swiftly evolving demands of digital skills.

4) Emerging Regulatory Challenges

• Digitalisation generates regulatory challenges, necessitating that regulators stay ahead of the financial innovation curve while balancing the complex trade-offs related to financial stability, competition and customer protection. This will require enhancing the capacity of regulated entities and oversight authorities, updating legal and regulatory frameworks, engaging stakeholders to identify risks and expanding consumer education.

• Regulations need to set boundaries to contain the irrational exuberance of participants and ensure a sound and robust set of institutions, thereby promoting financial stability. In the context of peer-to-peer lending applications in India, regulations have been found to have a positive impact in building trust, thereby enabling adoption of financial innovations.

• BigTechs, that can quickly become ‘too big to fail’ and dominate markets, may pose significant challenges in assessing risk profiles due to their unique characteristics, extensive group entities, interconnected activities and transnational presence.

• Collection of extensive data by BigTechs can be utilised to favour their own products, obtaining higher margins by making financial institutions’ access to prospective clients via their platforms, engaging in product bundling and cross-subsidising activities. This can give rise to adverse economic and welfare outcomes.

• Unregulated non-bank payment services could disadvantage traditional banks, leading to regulatory arbitrage and deposit disintermediation. Globally, countries have accordingly enacted regulations to strengthen enforcement in FinTech-related activities.

• On the regulatory front, the challenge is to balance financial security through data analytics with the need to protect individual privacy and customer rights.

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