What lessons have emerged from India’s digital wage payments ecosystem?

NEW DELHI (ILO News): India’s adoption of digital wage payments has accelerated in the past decade, with the wages received in cash standing at 43 per cent in 2021, a substantive drop from 79 per cent in 2014. The government's drive toward a digital economy, along with financial inclusion initiatives and the rapid expansion of digital infrastructure, has been a key catalyst for this transformation. The ILO’s new brief “Scaling up digital wages: Lessons and challenges from India’s enabling environment” has identified several measures that have been critical drivers for the scaling up of digital wage payments. The report provides insightful lessons on policies that can inspire other countries in their journeys towards wage digitization.

Integrated digital public infrastructure, universal biometric digital ID, universal access to bank accounts, direct benefit transfers, cost-effective digital connectivity are among some of the measures introduced by India that had a positive impact on the transition to digital wages. Literacy, both financial and digital, and the updating of the labour and financial regulatory framework also played a foundational role for higher adoption of digital wages, and to ensure a responsible transition.

In 2019, India approved the Code on Wages, which consolidated and simplified the country’s labour laws related to wages. According to a senior high court lawyer interviewed for the study, the new Code on Wages recognizes that “electronic payment methods facilitate the generation of digital records, enabling employers to track and document wage payments more effectively. It also reduces cash transactions in wage payments, which can be prone to pilferage, leakage, and corruption.”

© ILO

© ILO

The increasing digitization of financial transactions and the proliferation of digital payment systems makes it imperative to establish frameworks to regulate cybersecurity, data privacy, and consumer protection. These are key criteria to ensure that digital wage payments are conducted responsibly and have a substantial impact on fostering the usage of digital financial services and building trust between workers, employers, and financial service providers.

India’s digital public infrastructure is spread across a range of sectors, centred around India Stack, a set of Application Programming Interfaces (APIs) that allows governments, businesses, start-ups, and developers to utilise unique digital infrastructure. It consists of three layers of APIs: identity, payments, and data. Together, they enable online, paperless, cashless, and privacy-respecting digital access to public and private services. Aadhaar, India’s biometric identity system is the first layer of India Stack, has played a foundational role in facilitating digital wage payments, enhancing security, and promoting financial inclusion. Aadhaar has made a transformative impact on the adoption of digital wage payments, by providing secure biometric authentication, getting linked with bank accounts and getting incorporated into payment systems.

In 2014, India launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), a scheme that aimed to provide universal access to banking facilities, with basic savings accounts offered free of charge with no minimum balance requirements. These accounts enable beneficiaries to receive digital wage payments directly into their accounts, reducing the need for physical cash transactions. These accounts have expanded the banking infrastructure and encouraged digital transactions through increased financial and digital literacy. The expansion of banking networks has also allowed individuals in remote areas to access basic banking services, including digital payments, through authorised banking agents.

© ILO

© ILO

The Indian government launched the National Digital Literacy Mission (NDLM) Scheme in 2017 under the Digital India campaign, with an aim of providing access to digital devices, internet connectivity, and digital literacy training to 60 million rural households. This has also entailed increasing mobile network coverage and internet connectivity across the country while providing budget-friendly smart and feature phones to enable people from diverse socioeconomic backgrounds in accessing digital wage payments.

Finally, digital wage payments have had a profound impact on bridging the gender gap in India. A 2019 report found that greater control over earned income can increase women’s household bargaining power. The study found that women who received wages directly into their own accounts (and not through the account of a male household member) were more likely to find employment than those paid in cash; they also stayed longer in the labour force. This also helps address social norms around financial decision making, which leads to increased economic empowerment and financial resilience for women.

Yet, the journey towards comprehensive digital wage payment adoption is not without its challenges. The digital divide remains a significant barrier, particularly in remote and mountainous areas with sparse internet connectivity and low digital literacy. Micro and small businesses, which form the backbone of India’s economy, have also been slower in adopting digital wage payments.

Bridging these gaps will require sustained effort, collaboration between public and private sectors, and tailored solutions to meet the diverse needs of India’s population. As these challenges are progressively addressed, India can look forward to a more inclusive and efficient digital payment ecosystem, benefiting women and men workers and businesses alike.