India's digital economy to make up 1/5th of GDP by 2026: RBI  

India's digital economy is expected to make up a fifth of GDP by 2026, up from the current one-tenth, according to a Reserve Bank report released on Monday. In the foreword of the 'Report on Currency and Finance (RCF) for the year 2023-24', Reserve Bank Governor Shaktikanta Das highlighted that digitalisation in finance is paving the way for next-generation banking and improving access to financial services at an affordable cost. 

India is leading the digital revolution, the report stated. The country has not only adopted financial technology by accelerating digital payments but has also embraced India Stack, which includes biometric identification, the Unified Payments Interface (UPI), mobile connectivity, digital lockers, and consent-based data sharing. The digital revolution is enhancing banking infrastructure and public finance management systems, covering both direct benefit transfers and tax collections, the report said. Vibrant e-markets are emerging and expanding their reach. 

"It is estimated that the digital economy currently accounts for a tenth of India's GDP; going by growth rates observed over the past decade, it is poised to constitute a fifth of GDP by 2026," the report said. 

Several factors have come together to drive this revolution. Internet penetration in India reached 55 per cent in 2023, with the internet user base growing by 199 million over the past three years. India's cost per gigabyte of data is the lowest globally, averaging Rs 13.32 (USD 0.16) per GB. The country also has one of the highest mobile data consumption rates in the world, with an average per-user per-month consumption of 24.1 GB in 2023. 

RBI Governor stated that the flagship UPI has transformed the retail payment experience, making transactions faster and more convenient. In the digital currency sector, RBI is leading with pilot runs of the e-rupee, the central bank digital currency. The digital lending ecosystem is becoming vibrant with initiatives like the Open Credit Enablement Network, Open Network for Digital Commerce, and the Public Tech Platform for Frictionless Credit.

Fintechs are collaborating with banks and non-banking financial companies as lending service providers and operating platforms for digital credit. BigTechs are supporting payment apps and lending products as third-party service providers.  

"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," Das said. 

The RBI Governor highlighted that retail loans are being facilitated by online payments and innovative credit assessment models with instant disbursements. E-commerce is also benefiting from embedded finance. He stated that these innovations are making financial markets more efficient and integrated. 

However, Das warned that digitalisation poses challenges related to cybersecurity, data privacy, data bias, vendor and third-party risks, and customer protection. Increased interconnectedness may lead to systemic risks, and emerging technologies can introduce complex products and business models that users may not fully understand, including fraudulent apps and misselling through dark patterns. 

The report noted that digitalisation is transforming India's financial sector by changing how financial institutions operate and interact with customers. While digitalisation offers several benefits, it also brings challenges like complex financial products, greater interconnectedness, cybersecurity risks, financial frauds, and customer protection, which have implications for macro-financial stability. These issues need to be addressed to fully realise the potential of financial digitalisation.