The Indian economy today is reckoned among the fastest growing economies in the world. The 12th Five Year Plan of Indian Government has a vision to lift the nation's annual GDP growth to 8% and it also highlights the importance of internet connectivity or digitalisation and skill development of Indian MSMEs to achieve these goals.

1. Overview
Accelerating Digitisation
in Indian Economy
Rising internet penetration and greater uptake for digital by small business enterprises could help
increase their contribution to India’s GDP by 10% points, taking it up to 46 - 48% by 2020.
Digitally enabled small business enterprises grow profits up to twice as fast as
offline counterparts.
Nearly 51% of digitally enabled small businesses cater to customers beyond city
boundaries as compared to 29% of offline small business enterprises.
Digital SMEs employ up to 5 times more employees compared to those of do their business offline.
1
2
3
4
1
2
3
4
Opportunity
The government’s
12th five year plan
includes a vision to
lift annual GDP
growth to 8% and to
create additional 50
million job opportu-
nities in non profit
sector.
The importance of
Micro, Small and
Medium sized Enter-
prises (MSMEs) skill
development has
been repeatedly high-
lighted and the plan
of improvising the
internet connectivity
to achieve these
goals.
As per the annual
report published by
MSME in 2015-16,
India is home to 51
million MSMEs. It has
also been stated that
MSMEs contributed
37.5% to India’s GDP
& 37% of the manu-
facturing output un-
derlining their strate-
gic importance to the
Indian economy.
MSMEs employed
117 million people i.e.
14% of India’s work-
ing age population.
As per TRAI - BCG
Google Study, India
has 1.03 billion
mobile subscrip-
tions and 350 mil-
lion internet users.
Contribution of SMB’s in The Indian Economy
46%
37.5%
37%
117 Mn
Source MSMEs Annual Report, Ministry of Micro, Small and Medium Enterprises, Government of India, 2015-2016
Changing Landscape of Indian SMBs
Digital Adoption by Indian SMBs
SMBs’ growth is being driven by increasing consumer demand which is expected to rise by 55 per cent
by 2020.
This has also helped fuel greater investment by foreign players in the Indian market, and the emergence
of a start-up culture among the youth who account for 42 per cent of India’s population.
In addition, digital technologies are transforming the landscape in which Indian SMBs operate. This is
led by consumers moving online; especially on mobiles.
These users increasingly expect to discover and transact with businesses online. This represents a sig-
nificant opportunity for SMBs to engage with customers beyond local boundaries, and grow their busi-
ness online.
“A staggering 68 per cent of Indian SMBs are completely offline, with only 2 per cent actively selling or promoting
their business online.”
In 2007, the Indian Parliament passed the Payment and Settlement Systems Act, after which the central
bank released a series of vision documents for the periods of 2009–12, 2012–15, and 2015–18. These
papers were supplemented by initiatives to promote wider acceptance and deeper penetration of electronic
payments in India.
Figure 1: Digital engagement pyramid
SMBs with no internet connectivity, may or
may not have a personal computer, do not
use social media for business purpose.
Offline
SMBs that have their own website or use
social media for their business or maintain a
corporate email ID to engage and understand
their customer base.
Enabled
SMBs that use the internet for general infor-
mation gathering and communication but do
not use the internet for business purpose,
such as social media, online listening, com-
merce etc.
Connected
Exihibit 1: Increase the value of electronic payment provides numerous benefits to nations
Sources: Moody’s Analytics (2016); Bank of International Settlement and World Bank Group (2015); Denecker et al. (2013); At Kearney et al.
(2013); Brits at al. (2005); National Bank of Belgium (2006); Agbaje el al. (2013).
Drives Economic
Growth
Increases Financial
Inclusion
Reduces the Shadow
Economy
Enable Digital
Commerce
Increased card penetration can
increase GDP
Shift from cash payments reduces
social cost
Cumulative Contribution to GDP Growth from Greater
Card Penetration
2011 $ B, 2011-2015
United States
Russia
Brazil
China
United Kingdom
Germany
Mexico
Turkey
India
Saudi Arabia
South Africa
Chile
Indonesia
Kuwait
Philippines
Egypt
$81.6
$25.9
$18.0
$17.8
$12.4
$12.0
$7.8
$7.5
$6.1
$3.4
$3.1
$2.6
$2.2
$0.3
$0.1
$0.1
SMBs using digital technology actively to
enable business online by either selling on
ecommerce website or advertising or listen-
ing on 3rd party portals.
Engaged
1
The Government of India has encouraged the shift to a less–cash society with its push for digital payments
through the JAM Trinity: the Prime Minister’s Jan-Dhan Yojana, Aadhaar, and mobile connectivity including
the short and medium-term measures outlined in the Office Memorandum of February 29, 2016, to acceler-
ate the adoption of digital payments.
2
3 Prime Minister’s Jan Dhan Yojana programme (PMJDY) and the launch of the Payments and Small Finance
Banks had gradually addressed the issue of financial inclusion. So far, 242 million bank accounts have been
opened and over 180 million debit cards issued under PMJDY, according to the Ministry of Finance.
1. A high propensity to save in and use cash
2. A large shadow and remittance-based economy
3. Gender imbalance in the use of digital payments
4. High cost of acceptance infrastructure
5. Regulatory limitations
6. Insufficient focus on financial literacy
“India’s net cost of cash is 1.7% of GDP” To be highlighted by the side of the above mentioned content.
Exhibit3: Focusing on three pillars could help India accelerate its shifts to a less-cash society
Exhibit4: A country’s approach to expanding acceptance will depend its readiness for electronic payments
Perspectives on Accelerating Global Payment Acceptance, Visa, April 2016
Greater acceptance of e-payments
provides an on-ramp to financial
inclusion
Requires an enabling ragulatory
framework
Cash enables and perpetuates shadow
economies
Electronic payment penetration
correlates to size of shadow economy
Electronic payment facilitate trusted
transaction online
Reduction in cash payments enables
e-commerce growth, although in India
Cash on Delivery has played an
important role
Six factors perpetuate the use of cash in India
India needs to adopt a three–pronged strategy
to accelerate growth of digital payments
Accelerated
adoption of digital
payment
1
Establish Acceptance
Development Fund
Expand Acceptance
Provide fiscal incentives
to conusumers and
merchants
Introduce new regulations
3
Facilitate inter-ministerial
collaboration
Bolster Financial Participation
Tailor make programmes
for underserved segments,
e.g. farmers
Strengthen measures to
promote financial
participation at the last mile
Include financial literacy
programmes in schools
curriculum
Introduce certification
standards for business
correspondents
2
Adopt open-loop system for
mass transit
Energise Innovation
Digitise government
payments
Encourace adoption of new
technologies and form
factors
Enabling policy environment and supporting infrastructure
Market readiness can be
classified according to levels of
Acceptance Penetration
- Number of accepting merchants
- Number of acceptance points
(per population)
Consumer Adoption
- Access to electronic payment
method
- Frequeny of usage
Transition
(Limited Acceptance)
Progression along Accep-
tance Development Lifecyle
Electronic Payments not yet
used for everyday spend
Electronic
Electronic payments are “top
of wallet”
Specific niches of cash
payments remains
Cash-centric
Heavy depandent upon cash
payments
Early stage of electronic
payment ecosystem
Transition
Consumer resistant to
electronic payments
(Limited Consumer Adoption)
Need to demonstrate utility of
electronic payments
Acceptance PenetrationLOW HIGH
ConsumerAdoptionLOWHIGH
Establish an acceptance development fund:
The fund could increase the use of digital payments in underpenetrated categories. A fund with a corpus of
about INR 1,000 crores (USD 153 million), with contributions from all stakeholders in the payments industry,
could add about 2.7 million acceptance points. The Reserve Bank of India has been working expeditiously on
such an industry-led fund over the past several months.
Fiscal incentives:
The government could consider incentivising, for a specific period, small and medium-sized enterprises
(SMEs) and individuals to promote a shift in behavior. It could provide -
Introduce new regulations:
Active dialogue to introduce several new regulations is underway. For example, the Ministry of Finance, in its
memorandum on accelerating growth of card and digital payments, suggested mandating thresholds for cash
payments. In its report on black money, the special investigation team appointed by the Supreme Court of
India recommended capping cash transactions above INR 3 lakhs (USD 4,450) and restricting cash holding by
individuals and industry to INR 15 lakhs (USD 22,288). In addition, the government could consider a few other
measures, including:
Additional measures to spur acceptance could include:
Developing specific criteria to allow large global companies to participate independently in the acquiring
business. Such a move would increase the number of players, leading to higher competition and bringing
best practices to the market.
Mass transit
We recommend adopting open loop systems for person-to-government transactions that enable the use
of bank issued contactless chip cards for payments for public transport services. To begin with, adopting
such a system for mass-transit payments would ensure citizens could use mass-transit systems across
the country without purchasing additional tickets or banks reissuing new cards or separate ones for tran-
sit systems. Eventually various contact less enabled devices could be used as payment instruments.
Government payments
The adoption of digital procurement cards by the Government of India’s nearly 70 departments could
yield additional savings. Governments worldwide have benefitted significantly by adopting this approach.
New technologies, new form factors India needs innovation that would help overcome challenges associated
with financial inclusion – last mile connectivity, infrastructure, and the high cost of doing business in remote
areas. Promotion of mobile-based payment solutions, focus on interoperability, and measures to increase
penetration of near field communication technology (NFC) will prove beneficial. Innovations that enhances
customer security, ease-of-use, and are widely available are also important. Adapting such innovations to
meet the differing needs of urban and rural citizens would significantly enhance the growth of digital pay-
ments.
Facilitating inter–ministerial collaboration at the centre and engagement with states to leverage existing pro-
grammes and platforms, for example, mKisan
Designing programmes tailored to meet the needs of various types of underserved segments such as
women and farmers
Strengthening efforts to promote financial participation at the last mile, working in collaboration with existing
microfinance institutions in different states
Crafting approaches to inculcate financial literacy programmes at the school level and in higher education,
and as part of public service education
Introducing certification standards and constructing innovative models for business correspondents
Developing a central repository to track the payment history of consumers. Doing this would enable insti-
tutions to understand better the expenditure patterns and needs of consumers. In turn, it would provide
valuable insights to various stakeholders, including banks, and could help them expand the acquiring
business.
SMEs a 50 percent reduction in income-tax liability on 50 percent of their revenue.
Lowering import duties on point-of-sale terminals to 5 percent, and promoting domestic manufactur-
ing of acceptance devices under the country’s Make in India programme.
Introducing regulations that promote digital payment of salaries by all enterprises, including micro,
small, and medium enterprises, as Uruguay has done. Even households could be encouraged to do the
same. This could significantly reduce the flow of cash in the economy. A survey from the “Beyond
Cash” report of USAID shows that those earning and saving digitally have 2.5 times higher propensity
to spend digitally.
Individuals with a 5 percent income tax break on 20 percent of their electronic spending, with a cap of
INR 2,000 (USD 29.7) per individual per year.
Another way to disburse incentives could be to offset them by providing rebates on payments made
through Bharat Bill Payment System. In this approach, the Government of India could compensate the
revenue shortfall to entities receiving payments through this platform.
Drawing from experiences of other countries
and adapting them to the Indian context, we
propose that the Government of India consider
the following measures:
A
B
C
D
E
F
G
H
I
J
K
L
i.
ii.
iii.
i.
ii.
i.
ii.
*Disclaimer: All the information and stats mentioned abover are taken from KPMG and MSME research.
Helping Small Businesses Grow
www.biz2credit.in
1800-3002-0653
/@Biz2CreditIndia /+Biz2creditIn /Biz2Credit India /@Biz2CreditIn /Biz2Credit India