Digital payments grow fast but GDP impact remains unclear

Source: The post Digital payments grow fast but GDP impact remains unclear has been created, based on the article “Do e-payments spur growth?” published in “Businessline” on 11th July 2025

UPSC Syllabus Topic: GS Paper3- growth and development

Context: India’s digital payments, led by UPI, have crossed 20 billion transactions annually. While convenience has improved, the article examines whether these payments actually contribute to GDP growth and real economic activity.

For detailed information on UPI and Digital Payments in India read this article here

The Rise of UPI and its Growth Trends

1. Exponential Increase in Usage: Launched in 2016, UPI now handles around 600 million transactions daily, worth over ₹7,800 billion. The Finance Minister expects this could touch one billion transactions per day soon.
2. Mismatch with GDP Growth: Despite this surge, GDP growth does not reflect similar acceleration. Data show exponential UPI growth but only modest GDP increase, indicating a disconnect.
3. Friedman’s Quantity Theory Analysis: Milton Friedman’s theory suggests that increased money velocity should raise GDP. But from 2018 to 2024, velocity remained stable (RBI Annual Report 2024–25, p.48), indicating digital payments alone may not boost output or prices significantly.

Nature and Impact of UPI Transactions

1. Main Uses of UPI: UPI transactions mostly cover transfers, utility bills, merchant payments, and e-commerce. Transfers add convenience but don’t create new goods or services.

1. Utility and Merchant Payments: While utility payments count in GDP, UPI only changes the
   payment mode, not the payment volume. Merchant transactions, like paying a street vendor, are easier, but not necessarily more frequent.
2. E-commerce Substitution Effect: UPI facilitates round-the-clock buying on platforms, but it is unclear if this leads to more consumption. E-commerce may simply shift demand from local shops to online platforms.

UPI’s Influence on Consumption and Intermediation

1. Uncertain Consumption Impact: There is no clear economic framework yet (BIS Paper No. 1196; Dubey & Purnanandam, 2023) explaining how UPI drives consumption or growth.
2. Displacement of Local Sellers: When users buy from ‘Blinkit,’ it may reflect a loss for nearby grocers. The net growth effect of such substitution is unclear.
3. Credit Enablement Still Emerging: Credit lines via UPI are new. Their impact on lending and financial deepening is still limited and under-studied.

Reduced Transaction Costs and Labour Market Link

1. Time Saving Benefits: Digital payments reduce transaction time and effort. This could enhance productivity if it leads to more goods and services.
2. Labour Market Constraints: Without job creation or wage rise, time saved doesn’t translate into economic growth, especially in a market with wage rigidity and underemployment.

Digital vs Cash Economy Dynamics

1. Cash Use Remains Steady: Despite UPI growth, cash-to-GDP has stayed constant (Chart 3). Digital payments are not replacing cash significantly.
2. Preference Factors Beyond Access: According to an ECB study (2024), cash preference is shaped by age, habit, and needs—not merely education or access—making digital transitions complex.

Conclusion

While UPI has made payments easier and faster, its effect on economic growth remains inconclusive. More research is needed to understand its real impact on consumption, production, and GDP.

Question for practice:

Examine whether the rapid growth of UPI transactions in India has contributed meaningfully to real GDP growth.