A Guide to Formalisation of Economy since FY18 - SBI Research

A Guide to Formalisation of Economy since FY18 - SBI Research

Summary of the report:

· India’s Economy has undergone significant formalisation in last 5 years

· Latest currency in circulation data reveals that it has remained constant over the previous year even as record purchases happened during Diwali at Rs. 1.25 lakh crores

• This happened for the first time since 2014

· Indian consumers have now migrated big time to better technology platform like UPI that does not require the intervention of a POS machine and factor authentications: UPI transactions have jumped 70 times in last 4 years

· Indian consumers now prefer convenience in payments through the click of a button. The vast quantity of information that is produced as a passive by-product of the use of such UPI transactions holds a great promise as a transformative resource for real time policy and evidence based policy making

· As convenience in payments takes centre stage, the future will evolve increasingly towards use of huge swaths of data through use of Artificial Intelligence and Machine Learning by Banks to redefine financial intermediation and this will imply further scaling up of large investment in Cloud Platforms

· This might also necessitate regulatory interventions of both Central Banks and Government so that database can be harnessed and stored and also used for real time policy making

• The UK Government has the power for requisition of telecommunication and related data for public policy purposes. A recent example being the power of the UK Government to request for data to fight the public health emergency under the Corona Virus Act 2020

· • The Monetary Authority of Singapore enables setting up of public cloud services for harnessing and analyzing data by financial institutions

· The formalization efforts are bearing major fruit in terms of currency /GDP ratio. We estimate that without pandemic GDP collapse, CIC/GDP ratio would have been 12.7% in FY21, as against 12.4% in FY11. Tax/GDP ratio did jump between FY16 and FY19 but has declined since then reflecting direct tax changes in FY19 budget :Tax/GDP has risen in the pandemic years

· Our estimate also shows that because of the pandemic people may have been holding as much as Rs. 3.3 lakh crores in cash for precautionary motive beginning FY21. If we adjust for such currency transactions, the currency to GDP ratio for pure payment purposes may have actually declined in FY21 compared to earlier years.

CIC remained almost stable during Diwali week even though there was record Rs 1.25 lakh crore transactions as

per CAIT in the Diwali week



• Currency in circulation has remained constant during the Diwali week during 2021 even as there was record purchases

• Previously it was only in 2014 that CIC remained same as previous year

The almost steady growth in currency is juxtaposed with a significant increase in digital payments

❑ Digital payments have been growing exponentially

❑ As many as 3.5 billion transactions worth Rs 6.3 trillion were recorded through UPI in the month of October 2021 making a jump of 100% while transaction value jumped of nearly 103% compared to October 2020

❑ Indian consumers have now migrated big time to better technology platform like UPI that does not require the intervention of a POS machine

❑ Data shows that UPI transactions have jumped 69 times since 2017, while debit card transactions have commensurately stagnated indicating people preference and shift to UPI mode

The formalisation efforts are bearing fruit in cash /GDP ratio that has stayed nearly constant over the decade….

❑ After dipping to 8.7% of GDP post demonetisation, CIC as % of GDP has climbed again. However, FY21 GDP collapsed

owing to pandemic and the effect is also evident in FY22 GDP

❑ If the circumstances were normal, nominal GDP growth in FY21 and FY22 would have been much higher and as a result the

CICI as % of GDP would have followed the trend as witnessed pre-demonetisation

• We estimate that without pandemic GDP collapse, CIC/GDP ratio would have been at 12.7% as against 12.4% in FY11

❑ Our estimate also shows that because of the pandemic people may have been holding as much as Rs 3.3 lakh crores in

cash for precautionary motive implying currency /GDP may have actually declined in recent times

Tax as % of GDP has also jumped post FY16 but declined post FY19, reflecting the changes in the budget of

2019:Remarkably Tax/GDP ratio has jumped in pandemic year again reflecting formalization efforts

❑ Tax/GDP ratio jumped from 10.5% in FY16 to 11% in FY19 and retreated since then as the exemption limit was raised to

Rs 5 lakh in FY20 budget

❑ But critics miss such tax changes and ascribe a declining tax/GDP ratio beyond FY19 as an example of less formalization