Explained: How digital payments are fuelling India's economic growth

Govt plans to introduce biometric authentication for UPI payments, but what exactly is a digital payment system and why is it important for the Indian economy?

In today’s India, if one does not carry cash, they will do fine because digital payment systems have seeped into the nerves of the Indian economy. One can pay digitally even in remote areas of the country by simply opening an app on their phone and entering a PIN.

 

Soon, there will not even be a need to enter a PIN — biometric authentication will enable payments. According to media reports, the government is planning to introduce a biometric authentication interface for making payments through the Unified Payments Interface (UPI) using data stored by the unique identification system, Aadhaar. The method is likely to be revealed at the Global Fintech Festival 2025 in Mumbai. The addition of this feature will further boost the ongoing digital payments revolution.

 

 

In August, UPI transactions crossed the 20-billion mark for the first time. The digital payments system is slowly becoming the backbone of the country’s financial infrastructure. But have you ever wondered what a digital payments system is, how it works, and why it is important for the Indian economy? Let’s explore.

 

What is a digital payments system?

 

The transaction of money through technologies such as debit cards and smartphones, without involving physical currency, constitutes digital payments. Digital payments are fast, secure, and make transactions more transparent.

 

The digital payments system makes it easier for businesses and customers to track transactions.

 

For example, if a customer uses their credit card to make a payment at a restaurant or a person uses UPI to send money to their family or friends, it qualifies as a digital payment. 

 

How many types of digital payments are there in India?

  The digital payment infrastructure has been evolving rapidly in India, especially since internet access has become widespread. There are various methods of digital payment; some of the prevalent ones in India are:

 

• UPI (Unified Payments Interface): UPI is a real-time payment system developed by an RBI-regulated entity, the National Payments Corporation of India (NPCI). It is built over the IMPS infrastructure and allows people to transfer money promptly between any two bank accounts.

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• Credit card/debit card: These are unique cards provided by banks to enable payments without visiting a branch. A debit card uses funds deposited in the payer’s bank account, while a credit card uses the credit limit granted by the bank.  These cards can be used for various purposes such as paying for groceries or food through a mobile application. Some popular card issuers include Visa, Mastercard, and Amex.

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• Internet banking: One of the earliest digital payment methods, it is facilitated through a bank’s website and allows users to make payments and manage other banking activities digitally. The bank provides a unique ID for customers to access their accounts.

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• Mobile wallets: Mobile wallets are digital wallets that allow users to add money directly from their bank accounts or cards to make payments. Some popular digital wallets are Paytm, PhonePe, and MobiKwik.

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• AEPS (Aadhaar-enabled payment system): This system is commonly used in rural areas to make payments through local business correspondents. It is enabled using the Aadhaar number and biometric verification.

 

How does the digital payments system work?

 

The digital payments system generally involves three parties in a transaction. For example, when a person visits a restaurant and wishes to pay the bill using a credit card, the staff provides a POS machine. The customer either enters the required details or taps their card to initiate the transaction.

 

Next, the transaction details are verified by the digital payments facilitator. Once verified, the facilitator sends the payment request to the receiver — in this case, the restaurant — to accept or decline.

 

If the receiver accepts the payment, the facilitator processes it and confirms completion to both parties, thus finalising the transaction. 

 

How do digital payments help the Indian economy?

  India is the fastest-growing economy in the world, and digital payments help the government maintain records of transactions that would otherwise be difficult to track in cash-based systems.

 

The government is constantly working towards creating a cashless economy by promoting digital payment methods such as UPI and internet banking.

 

Recently, dispelling rumours about charges on UPI transactions, Reserve Bank of India (RBI) Governor Sanjay Malhotra clarified that there is no such proposal and that UPI transactions remain free for all users.

 

In August, UPI transactions surpassed the 20-billion mark, worth ₹24.85 trillion in value.

 

According to ACI Worldwide Report 2024, around 49 per cent of global real-time payment transactions in 2023 occurred in India. As of 2023, more than 40 per cent of all payments made in India are digital, with UPI leading the charts.

 

The digital payments system is part of the government’s broader ambition to digitise the economy. In 2022–23, the digital economy contributed 11.74 per cent to the Gross Domestic Product (GDP), amounting to ₹31.64 trillion, and employed 14.67 million workers.

 

What is GDP?

 

GDP, or Gross Domestic Product, is the total value of all goods and services produced in a country within a specific period.

 

 

How is GDP calculated?

 

There are three main methods of measuring GDP — the income approach, the expenditure approach, and the production approach. The National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI), uses the income approach to calculate India’s GDP.

 

In this approach, the sum of all incomes of households, businesses, and the government is used to determine GDP.

 

What is GDP growth or the GDP growth rate?

 

The GDP growth rate measures the percentage change in a country’s economic activity over a specific period, usually year-on-year or quarter-on-quarter.

 

The Indian government releases quarterly data on the economy’s growth rate. The latest data showed that in the first quarter of FY2025–26, the economy grew 7.8 per cent year-on-year, indicating an upward trend. 

 

What is the GDP growth forecast for India?

 

GDP growth forecasts are projections made by various research organisations. As of October 7, GDP growth estimates for Q2FY26 are as follows:

 

Reserve Bank of India: 7 per cent

 

IDFC First: Above 7 per cent

 

India Ratings*: 6.5–7 per cent

 

Bank of Baroda: 6.8 per cent

 

Larsen & Toubro: 6.8 per cent

 

Icra Ratings: Below 6.5 per cent

 

Emkay Global*: 7 per cent

 

*Unofficial estimates

 

What is the future of digital payments in India?

  India’s digital payments landscape is projected to surpass the $10-billion mark by 2026, according to a 2022 report by Boston Consulting Group and PhonePe.

 

The report added that digital payments will account for two out of every three payment transactions by 2026. 

  Kearney Amazon Pay's ‘How Urban India Pays 2025’ report says that retail digital payments in India will surpass $7 trillion by 2030, helped by “deeply aspirational” consumers.  According to PwC’s 'The Indian Payments Handbook 2025-2030', between FY25 and FY30, digital payment volumes are likely to touch 617.3 billion worth ₹907.3 trillion in value.