India’s Financial Revolution | Case Study On The Digital Payment Revolution Of India

According to reports by “The Hindu”, published on Jan 9, India is unstoppable in the journey to become a $5 Trillion economy by 2025.

India has witnessed a financial revolution in the last three decades. India’s digital payment sector has revolutionized, thrived, and blossomed with the advancement of technology.

India has one of the largest payment ecosystems and a flourishing economy led by the largest youth population in the world, in the current decade.

There are a series of events in the past couple of decades which has contributed to and accelerated India’s financial revolution. The revolution in the finance sector has increased the financial system’s efficiency and facilitated economic growth and development.

Let’s dive into the contributing factors that have catalyzed the financial revolution of India.

1. Liberalization:

The liberalization of the Indian economy in 1991 was a turning point for the finance sector. The government allowed foreign direct investment (FDI) in the financial sector, which opened up new avenues for investment and growth. The Reserve Bank of India (RBI) also introduced several reforms to liberalize the financial system. One of the most significant reforms was the introduction of the new monetary policy framework, which aimed to achieve price stability and promote economic growth.

The RBI also deregulated interest rates and allowed banks to determine their own lending and deposit rates. This move increased competition in the banking sector and forced banks to improve their efficiency and service quality. The RBI also allowed the entry of new private-sector banks, which brought in new ideas, technology, and expertise.

Today, India has a well-diversified banking sector with public sector banks, private sector banks, and foreign banks competing with each other.

2. Privatization

The privatization of the Indian financial system was another important aspect of the financial revolution. The government allowed the privatization of many public sector banks, which helped to improve their efficiency and profitability. Privatizing the insurance sector was another major reform, which opened the sector to private players.

Today, India has a vibrant insurance sector with both life and non-life insurance companies operating in the market.

The privatization of the stock exchanges was also a significant step towards a competitive financial system. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) were established as private limited companies, which helped to improve their transparency and efficiency. The introduction of electronic and online trading platforms has made stock trading more accessible to retail investors, and citizens like us.

3. Globalization

The globalization of the Indian financial system was another important aspect of the financial revolution. The government allowed the entry of foreign banks, insurance companies, and mutual fund companies, which brought in new technology, expertise, and products.

The global financial crisis of 2008 highlighted the importance of global integration and the need for stronger regulation.

The RBI introduced several reforms to align the Indian financial system with global standards. The Basel III framework was adopted to improve banks’ capital adequacy, liquidity, and risk management. The RBI also signed several bilateral and multilateral agreements with other countries to strengthen financial cooperation and regulatory coordination.

4. Demonetization

India was a robust cash-led economy until the 2016 Demonetization. Although this is a highly debatable topic, overnight demonetization definitely has a role to play in the digital payment revolution of India.

The sudden implementation of demonetization led to the swarming of people outside every ATM and bank, the financial institutes limiting and freezing cash withdrawals due to cash crunch, hence people were forced to adopt digital payment, which went on to stay and contribute to the success story of Digitalization of the Indian Financial system.

Demonetization was something which has happened first time in India where the cash money was reduced to no less than a thrash of paper. The experience was bitter enough for the citizen to realize that digital payment should be the next move because any denomination of currency can become a thrash of paper within a matter of seconds.

5. UPI (Unified Payment Interface)

Technology has been the catalyst to drive this revolution. With the advancement of technology and the growth of start-ups in India, the digital payments revolution was inevitable.

The early birds of Fin-tech like Paytm, Tez (later acquired by Google and renamed as G-Pay), and Phonepe built a robust and secure payment infrastructure that flourished the growth of digital payment in India.

UPI, being an instant, real-time payment method, is the flag-bearer of the Financial Revolution. The impact of UPI on the Indian economy has been crucial by reducing the friction and time of transfer. UPI has undoubtedly fast-tracked the growth of the digital economy of India. The success of UPI has accelerated the financial revolution of India.

According to the data released by the National Payment Corporation of India (NPCI), UPI recorded 2.8 million transactions in 2021.

6. Jio Revolution

While Demonetization and UPI were the seeds that gave birth to the financial revolution, it was still prominent only for the urban population who had access to the internet and smartphones. Jio revolution served as the root which strengthened the digital payment system in India, by enabling the rural population to internet access.

Smartphones had already started percolating the rural ecosystem, however, people were reluctant to get one because of the soaring internet surcharges.

Just then Jio launched, introducing the rural population into the world of digitalization, who were earlier aloof in all the earlier stages of the global revolution.

India still has a majority of 64% rural population and the inclusion of this vast majority of the country has been pivotal in the success of the Digital Payment Revolution of India.

7. Covid-19 Lockdown

Covid-19 pandemic was the last nail in the coffin of the cash-based Indian economy. The sudden attack of Covid, followed by a never-ending lockdown in the country, forced digitalization on the remaining population who were still resistant to digital payment.

The small businesses and shopkeepers who were still anti-digital had to adopt cashless overnight because E-commerce was the only business that was running and digital payment was the only mode of transaction.

These series of events, synchronized together, led to the Financial Revolution of India, which has become the hottest case study in the country and across the globe.

The success of UPI itself has served as a role model for many developed nations where the dependency is still on physical credit and debit cards.

The boom of start-ups, e-commerce, and the launch of Jio to connect the dots between the internet and telecom industry, all of these have together led to India’s Financial Revolution.

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Signing off,

Noor