What hides beneath UPI transaction data

Market


In October, the number of economic transactions through the unified payments interface (UPI) touched 7.3 trillion, a record high. This is an increase of nearly a three-fourth from last October.

The fantastic growth in the total number of UPI transactions indicates that the convenience of carrying out an economic transaction in India has risen dramatically. One doesn’t need to carry cash or, for that matter, the small change in the wallet anymore. Further, the merchants being paid through UPI carry a lesser risk of being robbed, given that money is being paid digitally.

A contrast

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A contrast

Some analysts have used the UPI data to conclude that an increase in transactions shows that the economy is doing much better than in the past. While the economy is recovering from the negative economic impact of the covid pandemic, that conclusion can’t be drawn from the UPI data.

The reason is straightforward. UPI is used to carry out very small transactions. As the National Payments Corp. of India pointed out earlier this year: “Various studies on payment systems have observed that about 75% of the total volume of retail transactions (including cash) in India are below 100 transaction value. Further, 50% of the total UPI transactions have a transaction value of up to 200.” Essentially, people use UPI to carry out small everyday transactions, like buying vegetables and fruits from roadside vendors or groceries from mom-and-pop shops.

The increase in UPI transactions cannot be compared to anything. Earlier many of these transactions were happening in cash, and there is absolutely no way of knowing how many cash transactions were happening. Given this, there is no way of concluding whether, currently, the overall number of economic transactions (cash plus UPI) has gone up.

The other conclusion drawn from the massive increase in UPI penetration is that cash in the system has come down. Or that there is lesser black money going around. That conclusion is also incorrect. The currency in circulation has been going up and stood at 32.2 trillion as of October.

In fact, the currency in circulation to the gross domestic product (GDP) ratio as of 30 June stood at 12.9%. (The latest GDP data available is as of 30 June). This is higher than the level of around 12% of the GDP that prevailed before demonetization happened in November 2016 and at the start of UPI in April 2016. So, if more UPI transactions are happening, why has cash in the system not declined?

More UPI transactions are happening means that the number of the small cash transactions happening has possibly fallen or not grown at the same speed as UPI transactions. This can be gauged from the value of the average UPI transaction in October 2021 was 1,829. It has since fallen by over 9% to 1,658. This implies the size of the median UPI transaction size is now smaller than before. Hence, smaller economic transactions that used to happen in cash are possibly happening through UPI.

But given that the currency in circulation is close to 13% of GDP, the total cash in the system as a proportion of the size of the Indian economy hasn’t come down. This means that the larger transactions (real estate, wholesale to retail distribution etc.) are still happening in cash, implying that the black wealth in the system hasn’t really reduced.

To conclude, the number of UPI transactions rising has made carrying out any small economic transaction in India easier than ever before. Also, an income trail is developing for many merchants who carry out small economic transactions through UPI. This might prove to be beneficial as and when they make enough money to start paying income tax.

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