“India is now on the cusp of a massive digital revolution,” claimed Finance Minister Arun Jaitley emphatically during his Budget speech on February 1, 2017. The Finance Minister did not pull any punches while claiming that the digital economy was an integral part of the “government’s strategy to clean the system and weed out corruption and black money.” The general expectation, before the Budget presentation, was for the government to push digital payments systems and disincentivise the use of cash for payments. And right on track, the Budget presentation has an entire section dedicated to the digital economy.
It pushed for higher usage of the BHIM app, which is essentially an app for Unified Payment Interface (UPI) transaction built by the National Payments Corporation of India (NPCI), an organisation formed by a consortium of Indian banks. The budget proposed two schemes for the promotion of BHIM – a referral bonus scheme and a cashback scheme for merchants. Let us examine this in some detail.
Preferential treatment for a certain system
It is indeed strange for the union government to push for a product developed by a private organisation, thereby flouting many competition standards. Other players in the payments industry who rely on alternative payment systems would be justified in feeling aggrieved about this. Even within the UPI universe, many banks and even non-financial entities have built apps using the API for UPI. The government has selectively advocated one app built by the NPCI over all others. If the government wanted to push digital payments, it should have created universal incentives for all forms of digital payments instead of a selected app and for a selected payments system.
The government has selectively advocated one app built by the NPCI over all others. If the government wanted to push digital payments, it should have created universal incentives for all forms of digital payment
Further, Arun Jaitley encouraged the use of Aadhar Enabled Payment System and its merchant version, Aadhar Pay – both products from NPCI. It seems that the NPCI has been handed a virtual monopoly in the digital payments area by the government itself.
Forcing citizens to go cashless?
While it is understandable for the government to encourage digital payments due to its various perceived benefits, it has to understand that there is a thin line between encouragement and forcefully pushing it on citizens. It cannot mandate the use of digital payments if the citizens wish to use cash for whatever purpose.
Consider this move: in an earlier part of the budget speech, the Finance Minister disallowed any transaction above Rs 3 lakh to be made using cash. This was based on a proposal by a Special Investigation Team, set up by the government, to counter black money. There are issues regarding the enforceability of this move: how does the government propose to catch those who make cash payments above Rs 3 lakh? Beyond these implementational problems, the citizens should have the choice of using any payment system that they prefer. Is it impossible for the government to imagine a perfectly legal economic transaction done using cash? Take the case of a woman who may want to buy gold as a form of savings and insurance against her husband without leaving a digital trail.
Is it impossible for the government to imagine a perfectly legal economic transaction done using cash? Take the case of a woman who may want to buy gold as a form of savings and insurance against her husband without leaving a digital trail.
The Finance Minister proposed other moves that would force digital payments on the population. He promised that “steps would be taken to promote and possibly mandate petrol pumps, fertilizer depots, municipalities, Block offices, road transport offices, universities, colleges, hospitals and other institutions to have facilities for digital payments, including BHIM App”. It was also considering a move to mandate digital payments for all government receipts above a certain prescribed limit.
Yes, there are problems with cash being the predominant form of payment in an economy and there are dividends to be reaped by increasing digital payments. However, the government must be mindful of the pitfalls of blindly encouraging digital payments, without understanding its limitations and caveats. There are issues with anonymity, privacy, and security, which have to be addressed before a blanket enforcement of digital payments. (Read this article for more on this topic). The government needs to ensure that there are enough safeguards built in that protect the consumers’ privacy.
Is citizens’ data secure? And what about transaction charges?
Security implications of the digital revolution were conspicuous by their absence. Apart from a stray mention of cyber-security issues, there was no mention of building a safe eco-system for digital payments. Currently, the digital payments infrastructure, in its infancy, is still vulnerable to threats and attacks.
Another practical reason why the government should allow for cash to be a real and accessible choice for citizens is the issue of transaction fees. Remember that, for the consumer, cash is a zero-transaction-fee option of making payments, while almost all other payment options have transaction fees. The fees might be levied on the merchant, but there is considerable pass-through to the consumer — either in terms of outright additional charges or through minimum ticket size transactions. Debit and credit cards have transaction fees ranging from 1% to 4%. Wallets charge a transaction fee on the merchant transferring money from their wallet to their bank account. UPI and other NPCI products have no transaction charge at the moment, but it is widely expected kick in in the coming year. The zero transaction fee at the moment is to lure consumers and get them acclimatised and habituated to the products, just like many apps did in the beginning (Bookmyshow, Swiggy etc).
Remember that, for the consumer, cash is a zero-transaction-fee option of making payments, while almost all other payment options have transaction fees.
The Finance Minister could have used this opportunity to assure the public about reducing transaction fees for many of the digital payment systems. If digital payments are forcefully replacing a zero transaction fee alternative (cash), then the government should absorb either all or part of the transaction fees.
While digital payments can be encouraged, it should not aim to make cash redundant. There is huge merit in having cash as a viable option for payments. Perhaps, the Finance Minister should take a leaf out of the Economic Survey, which asked for a more gradual approach to digitisation. “Digitalisation is not a panacea, nor is cash all bad. Public policy must balance benefits and costs of both forms of payments. Second, the transition to digitalisation must be gradual; take full account of the digitally deprived; respect rather than dictate choice, and be inclusive rather than controlled.”
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Update on Feb 3, 2017 at 12 pm: One of the links to this author's earlier article was missing earlier. This has now been rectified. Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.