A push too hard

Digital payment mandates should be avoided

Budget 2019-20 continued the government’s push towards digitising the Indian economy, particularly digital payments. To further corral the remaining cash-based sections of the economy, Finance Minister Nirmala Sitharaman said withdrawals from a particular bank account totalling more than Rs 1 crore in a year would require tax to be deducted at source. There can be few objections to this notion — certainly, it is far less draconian than other measures that were being proposed at the time of demonetisation.

However, other aspects of the Budget’s policy outline for digital payments should be re-examined. The finance minister pointed out that “low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit cards, NEFT, RTGS” could be used to “promote a less-cash economy” and, therefore, proposed that “business establishments with [an] annual turnover [of] more than Rs 50 crore shall offer such low-cost digital modes of payment to their customers and no charges or Merchant Discount Rate (MDR) shall be imposed on customers as well as merchants”.

This essentially forces medium-sized shops to offer this set of digital payment mechanisms to their customers. First of all, the lobbying potential under such mandates is enormous and should as a matter of principle be avoided. But more importantly, it should be left to the shopkeepers, the payment companies, and the financial structure — particularly banks — to make decisions based on their commercial interest. Only then will a sustainable digital payments architecture evolve in India. A payments architecture that is based on government mandates and regulations will be inefficient and unremunerative. The only sustainable digital financial architecture will be one in which each step of the chain — from customers and merchants to banks and companies — will share in monetary gains from greater efficiency. This requires voluntary rather than forced switching to digital modes at every step.

It could be argued that there are significant external benefits to the government stepping in to speed up the transition to a less-cash economy, and that once such a transition is completed, it will pay for itself. Such arguments, particularly after the demonetisation experiment, should be viewed with caution. At the very least, the costs of any such mandates should also be scrutinised.

Essentially, if the government perceives that there are broader benefits to a move towards a less-cash economy, then economic logic dictates that it should bear the costs itself. The elimination of the MDR, a major source of revenue from some digital payments, flies in the face of this logic. In this case, the finance minister said that the Reserve Bank of India and the banks would “absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment”. If those savings existed, then banks could surely come to their own decisions on the move and should be allowed to do so. Therefore, the chances are that the savings are, in fact, too far in the future or accrue to the economy more generally. In that case, it is the government that should find some way of bearing the cost of its policy priorities, rather than pushing them on to banks or merchants.