India is aggressively promoting the digitalisation of its economy.
It has taken some drastic measures, like the demonetisation of two key high-value currency notes in November 2016, which resulted in an acute cash crunch that, along with other causes, has slammed the brakes on the economy itself. Economists now even question the move’s efficacy in reducing people’s reliance on cash.
Nevertheless, India can still digitalise massively, and potentially become the world’s third-largest economy in the coming decade, a report by brokerage house Morgan Stanley says. It expects digital payments in India to increase from 5% of gross domestic product in financial year 2017 to 20% by 2028.
“We estimate that digitisation will provide a boost of 50-75 basis points to GDP growth and forecast that India will grow to a $6-trillion economy and achieve upper-middle income status by 2026-2027,” Ridham Desai, Morgan Stanley’s head of India research and equity, said.
And for this, it can take inspiration from South Korea, the report says.
India can learn from the East Asian nation’s experience of turning into one of the world’s top 10 digital economies, ranking ahead of even the United States, the United Kingdom, and Japan in the digital economy index released earlier this year.
The digital Seoul curry
To boost digital payments, the South Korean government introduced tax incentive schemes in the 1990s, promoting credit card use. Tax rebates were offered if more than 25% of an individual or entity’s annual income was spent through credit or debit cards.
It introduced a weekly lottery scheme based on the invoice number of credit card transactions. The prize was won by both the customer and the merchant. This drew a lot of people towards plastic money.
Acceptance of credit cards was also made mandatory for businesses. Meanwhile, banks aggressively lent on credit cards.
As a result of these measures, credit card transactions grew nine times in absolute terms from 4.9% of the country’s gross domestic product in 1999 to to 34.3% in 2002.
South Korea’s path to digitalisation:
- Introduced tax incentives if over 25% of annual income was spent via credit and debit cards.
- A weekly lottery scheme based on credit card invoice numbers rewarded customers and merchants.
- It was made compulsory for businesses to accept card payments.
- Banks aggressively lent money on credit cards.
A word of caution
Aggressive credit card expansion and loan growth in South Korea also led to a crisis. South Koreans began spending more through their credit cards than what they could afford to repay. Debts ballooned, as well as as defaults, leading to a massive macro crisis in 2003 (paywall).
So, instead of recklessly expanding credit card usage, India can offer tax incentives for digital transactions, the Morgan Stanley report suggests.
Meanwhile, this is not the only area where South Korea appears as a model for India.
Its high spends on research and development, which fuelled a rise in the number of intellectual patents, is something India can emulate. There is also a lesson to be learnt in maintaining a steady 9% annual GDP growth for over four decades.
This article first appeared on Quartz.