After a successful run at home, India’s Unified Payments Interface (UPI) made its first cross-border foray in February. The real-time mobile transaction system was linked to Singapore’s PayNow.
UPI contributes more than half of the real-time transactions in India and has been instrumental in catapulting the country to the top of the global order for digital transactions, within five years of its arrival in 2016.
Over the last one-and-a-half years, Reserve Bank of India (RBI)-promoted the National Payments Corporation of India (NPCI) — the developer and operator of UPI — entered pacts with counterparts in nine countries for cross-border adoption of the platform.
Singapore — a leading financial hub in the Asia-Pacific, an invitee in G20 summits and a top source of remittance to India — became the first country to implement it for person-to-person remittance. The success of the deal will have a serious impact on UPI’s global ambitions.
And, that marks a new era in the history of the Indian monetary system that has potentially found an alternative to the Western Block-controlled SWIFT (Society for Worldwide Interbank Financial Telecommunications) for cross-border payments.
Benefits Of Disruption The real-time mobile transaction is a disruptive technology. It may accrue multiple benefits depending on the popularity and, levels of adoption for cross-border payments.
First, SWIFT is stable but takes a longer time to settle transactions compared to UPI, which is developed on the back of India’s Immediate Payment Service (IMPS) infrastructure. Also, SWIFT charges participating banks 2-5 per cent annual fee.
At the user level, this translates into a $13 transaction cost for remitting $200. UPI, on the other hand, is free of cost.
India earned 60 per cent of $100 billion in remittances in 2022 from five countries — the US (23.4 per cent), United Arab Emirates (18 per cent), the UK (6.8 per cent), Singapore (5.7 per cent) and Saudi Arabia (5.1 per cent).
Adoption of UPI for person-to-person transactions in key markets may, therefore, attract decent traffic.
UPI is an emerging story.
The biggest test lies in establishing its stability and security vis-a-vis SWIFT for cross-border payments. The Indian authorities are aware of the challenge.
In an unusually strong pitch for UPI, the RBI governor, Shaktikanta Das, recently said that the mobile transaction platform is capable to handle four times more daily transactions.
“NPCI is operating the UPI in three parallel systems — they not only act as disaster recovery facilities for each other but are running parallel. In the unlikely event of some problems in one system, the other systems are very much in operation,” Das said, underscoring the stability of the platform.
There is a distinct possibility that disruptive technology may also force SWIFT to reduce transaction costs, which will be a big plus for global trade and commerce.
However, that would require UPI to build sufficient momentum.
Meanwhile, coupled with RBI’s recently launched rupee trade mechanism; the UPI may help India to de-risk from the disruptive impacts of the US sanctions and over-dependence on the dollar as an international currency.
When compared to China or even Thailand — which conducts land border trade in local currencies — Indian trade has been almost fully dependent on SWIFT and US dollar.
The latter made India overtly vulnerable to the US monetary policy changes.
Both factors proved a major hurdle for India to step up trade with Myanmar, during the decade of democracy before the February 2021 military coup.
The US sanction that was imposed during military rule in the past was never completely withdrawn. This made trade costlier.
Moreover, Myanmar barely had the banking infrastructure to support dollar-based trade. China made merry by offering easy convertibility of Kyat at the border.
The context took a more serious turn with the return of multipolarity following the Ukraine crisis, the rise of the China-Russia axis and the sanction by the Western Block on Russia.
China switched to its Cross-border Interbank Payment System (CIPS) to trade with Russia. India went back to the rupee-ruble trade mechanism.
To safeguard the economy from the US rate hikes and the resultant strengthening of the dollar; India widened the rupee trade options.
This is a modified version of the rupee-ruble mechanism and, is beneficial only in cases where India has a high negative trade balance.
Fintech Revolution The dollar dominates 60 per cent of global trade.
SWIFT offered a stable transaction system.
Neither is easily replaceable nor is India having any misplaced ambition in that direction. As the world’s fastest-growing economy, India wants to de-couple its monetary and trade policies from external risks.
The fintech revolution and global appreciation for UPI have created a case for improved acceptability of the rupee.
It is no joke that India now tops the world with 260-280 million digital transactions a day and, accounts for 40 per cent of real-time payments across the world.
China is a distant second with roughly one-third of the Indian total.
It came on the back of an all-around initiative undertaken by the Narendra Modi government to revolutionise India’s digital payment infrastructure.
From ensuring universal coverage of banking, seeding biometric identity with bank accounts and Indian payment gateways to the digitisation of toll collection on the highways etc — India has built its digital infrastructure with care.
The job at hand is to make full use of the infra and create a bait for the outside world to adopt UPI for their own benefit.
The rise in digital payments will benefit India as well.
According to the Centre for Economics and Business Research (CEBR), real-time payments increased the country’s GDP by 0.56 per cent in 2021.
The GDP contribution of UPI will reach 1.12 per cent in 2026.
With an 89 per cent mobile wallet adoption rate in the country as against 94 per cent in Thailand and 93 per cent in Vietnam; India has substantial headroom to improve its performance.
Read More at https://swarajyamag.com/tech/how-upi-opened-an-opportunity-for-india-to-decouple-its-monetary-and-trade-policies-from-external-risks