Data. A photo itself has some value to it. But knowing the data that interconnects people and photos is pretty valuable to a lot of folks. This has Facebook written all over it :)

Ads.

Because it's a useful feature that makes sense in this context, is already offered by competitors, and can be implemented elegantly without radically changing the existing UI?

Maybe this will be used for data-mining, or to serve up targeted ads, but I really just think it's a neat addition to the app that will drive usage. The more meta-data you can assign to a photograph, the better the Instagram experience.