Paper: GS – III, Subject: Economy, Topic: Broad/Overlap, Issue: Significance of UPI.
Context:
India is witnessing a biggest leapin formalisation, driven by the adoption of digital payment systems, particularly UPI (Unified Payments Interface). UPI is increasingly replacing ATMs and cash usage, becoming central to household and business transactions.
Key Highlights:
Rise of UPI Transactions:
- April–June 2025: 34.9 billion person-to-merchant transactions worth ₹20.4 lakh crore which is equal to 40% of private final consumption expenditure, up from 24% two years ago.
- It indicates a massive scaling-up of digital payments across goods and service segments.
Comparison with ATM Transactions:
ATM withdrawals are declining steeply from 78 crore transactions in July 2018 to 44 crore transactions in July 2025. It indicates a clear preference for digital payments over cash withdrawals.
Impact on Household Consumption:
| Food & Beverages | Non-Food Items | Other Household Payments |
| April–June 2025 – ₹3.84 lakh crore spent digitally (17% of all UPI transactions).Accounts for 21% of household consumption expenditure in the quarter. | Digital payments widely used for clothing, medicines, electronic goods, utilities, personal services.Accounts for two-thirds of person-to-merchant transfers. | Debt repayments, building assets, and security deposits increasingly done through UPI. |
Significance for Formalisation:
- Shift from Cash to Digital: UPI payments are replacing cash in small transactions and reduces informality and improves tax compliance.
- Broader Coverage: Transactions include not only consumption but also financial liabilities, asset building, and services.
- Inclusivity: Small vendors, service providers, and households increasingly use UPI which reduces entry barriers into the formal economy.
Macroeconomic Implications:
- Boost to GDP: Share of digital transactions aids financial transparency and tax revenues. It helped raise India’s GDP ratio from 10.1% (2022) to 10.9% (2025).
- Consumer Behaviour Change: Households increasingly prefer digital transactions, impacting consumption patterns facilitating faster credit access and formal financial inclusion.
Challenges:
- Exclusion of some segments such as person-to-person transfers, wholesalers, and informal sector not fully captured.
- Persisting cash reliance in certain rural/low-income pockets.
- Need for robust digital infrastructure to handle rising transaction volumes.
Way Forward:
- Expand Digital Infrastructure: Strengthen internet connectivity and payment security.
- Financial Literacy: Train rural populations and small businesses to use digital modes effectively.
- Policy Push: Continue incentives for digital adoption, integrate UPI with GST/taxation databases.
- Global Expansion: Export UPI as part of India’s fintech diplomacy.
Conclusion:
By reducing cash dependence, enhancing transparency, and including small transactions in the formal economy, UPI is redefining India’s financial ecosystem. Sustaining momentum will require policy support, infrastructure upgrades, and continued consumer trust.
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