Policy Wrap: Digital economy to account for over 20% of India's GDP by 2026, Over 3000 fintech startups operational in the country, RBI could extend incremental CRR, and more
Share your feedback and comments with us at firstname.lastname@example.org
Digital economy likely to account for over 20% of India's GDP by 2026
Rajeev Chandrasekhar, the Union Minister of State for Electronics and Information Technology, forecasted on Thursday that by 2026, the digital economy will account for more than 20% of the nation's GDP. Speaking at the "G20 Digital Innovation Alliance Summit" in Bengaluru, he claimed that India is a leading country that quickly embraced technology and has begun providing solutions to the rest of the globe.
From 4-4.5% of the entire GDP in 2014 to 11% of the total GDP now, the digital economy has grown significantly.
He claimed that India utilised technology to give practical answers that, in recent years, have not only led to widespread innovation, but has revolutionised people's lives, governance, and democracy.
Due to the speed of digitalization, both the upstream and downstream effects of every citizen and consumer using the cloud or consuming digital goods or services, that connect them to the government and governance, must be recognized.
The "centre of gravity of tech," which was formerly concentrated in a small number of nations and revolved around a small number of organisations and businesses, is shifting to open source platforms, and more and more younger startups are disrupting the status quo.
Fintech startups on the rise as over 3,000 recognised startups in the domain currently operating in India
The Department for Promotion of Industry and Internal Trade (DPIIT)'s Startup India initiative has 3,085 recognised startups active in India's financial technology domain as of 30th April 2023.
The government has started a number of programmes to support entrepreneurs in a variety of industries, with an emphasis on encouraging expansion in the financial technology (fintech) sector. Since the inception of Startup India in 2016, a total of 98,119 companies have received recognition from DPIIT as startups.
For the startups to be recognised by the DPIIT, the government has announced a list of requirements, including the date of registration, revenue and profit benchmarks, and the number of employees. The government occasionally announces various fiscal and non-fiscal incentives for recognised startups.
The International Financial Services Centres Authority (IFSCA) has implemented a number of initiatives to support the startup ecosystem, particularly in the fintech domain.
The creation of a unique "Fin-Tech Entity Framework" to serve the demands of fintechs and techfins is one of these steps.
IFSCA has established an incentive programme specifically for startups and fintechs. This extensive programme includes a variety of incentives, such as startup grants, sandbox grants, proof-of-concept (PoC) grants, green fintech grants, listing funds, and accelerator grants.
The government has implemented the Pradhan Mantri Jan Dhan Yojana (PMJDY) among other strategic measures to increase investment inflows into the fintech sector.
By expediting the enrolment of beneficiaries in new bank accounts, enabling direct benefit payments, and enabling access to a wide range of financial services applications, these efforts seek to increase financial inclusion in India. As a result, fintech firms have been able to find technical solutions that successfully serve India's sizable user base.
The Unified Payments Interface (UPI) and the synergy of the Jan Dhan Yojana, Aadhar, and Mobile (together referred to as the JAM trinity) have also been essential in advancing technical inclusion, transparency, integrity, and the prompt delivery of financial benefits and services to the general population.
RBI could extend incremental CRR and focus on reining in liquidity
In order to combat inflation, the Reserve Bank of India (RBI) may decide to extend the temporary incremental cash reserve ratio (CRR) it imposed on banks last week. This is because the RBI appears to be focusing more on liquidity management than raising benchmark policy rates to control excessive increases in food prices. Inflation measured by the Consumer Price Index (CPI) increased significantly in July from 4.87% to 7.44% year-on-year, mostly due to high vegetable costs. The objective for CPI inflation set by the RBI is 4%, with a tolerance range of 2-6%.
The RBI may decide not to raise the repo rate as it assesses the sustainability of rising food prices and monitors how recent rate hikes have affected the economy, which is threatened by a fragile external environment.
However, by keeping a tight rein on the banking system's liquidity, the central bank can improve the dissemination of its policy initiatives and stop borrowing costs from becoming cheaper.
The RBI may continue to prioritise liquidity management in the near future to make sure that liquidity stays close to neutral and that the interbank weighted average call rate stays at or slightly above the repo rate. The increased CRR published by RBI on August 10 may still be used after being evaluated on September 8.
The repatriation of Rs 2,000 notes to banks, a higher-than-expected surplus transfer from the RBI to the government, and foreign inflows have all contributed to a substantial increase in excess liquidity in the banking system over the past few months. The average daily amount of bank surplus funds held by the RBI reached a 14-month high of Rs 2.5 lakh crore in August.
Excessive banking system money market rates and, thus, the cost of funds in the economy are often dragged down by liquidity. Both price stability and financial stability are at risk from liquidity. The 10% additional CRR on deposits made between May 19 and July 28 is seen as impounding funds worth roughly Rs. 1.1 lakh crore.
OCEN 4.0 with updated API specifications, registry and product network launched to facilitate short-tenor loans to MSMEs
To facilitate cash flow-based MSME (micro, small, and medium businesses) lending, the Indian software products industry think-tank ISPIRT (Indian Software Products Industry Round Table) announced the Open Credit Enablement Network (OCEN) 4.0 protocol.
OCEN is a system of APIs enabling communication between lenders, loan agents, partners in collection and disbursement, providers of derived data, and account aggregators. Up until this point, just a few pilots across the nation and the government's e-marketplace GeM SAHAY were using OCEN.
Along with new API specifications, OCEN has incorporated a registry and a product network in this iteration. These characteristics enable scalability, complexity, and need-based cash-flow-based financing.
Currently, the credit gap for MSMEs is $17 trillion to $24 trillion and that less than 11% of MSMEs have access to formal credit. By developing a framework for short-term and small-ticket loans, enabling remote lenders to operate in other countries, and providing consented access to alternative data sources, OCEN is attempting to resolve these issues.
OCEN is working with stakeholders from multiple domains. Loan brokers Spice Money, Indifi, and Finagg are among of OCEN 4.0's wave one partners. Banks like ICICI, Kotak, Union Bank, and Axis Bank are just a few examples of lenders. Among others, Disseminare and Finarkein Analytics are its technology service providers.
The main barrier to bankers adding short-term lending to their portfolios has been the cost per loan. OCEN 4.0 enables lenders to decrease loan processing and collection expenses, enabling them to disburse small-dollar, brief-term loans at scale. This will make it possible for many new borrowers' sectors to access short-term cash-flow credit.
OCEN has so far been utilised to provide short-term loans with amounts ranging from 168 to 8 lakhs of rupees. Ongoing efforts are being made to find solutions for small firms who have been unable to get one-year working capital loans due to inconsistent business performance over the previous three years.
The typical financing needs of nanobusiness owners range from Rs. 5,000 to Rs. 100,000. The most common uses of credit in company are to buy new equipment, expand the business, manage cash flow that is stalled in receivables, and refill inventories.
Credit needs are frequently unanticipated, urgent, and need for funds can be within a day or two. Due to the challenges in approving such loans and the disproportionately high costs of acquisition and servicing of these tiny loans, this audience has few options for formal sources of credit.
OCEN 4.0 uses the digital public infrastructure to address this issue for all ecosystem actors, including end borrowers as well as borrower agents, lenders, and loan agents.
Thanks for reading ADIF! Subscribe for free to receive new posts and support our work.