Coercion doesn't pay

Govt must learn from the dip in digital transactions

The announcement that curbs on cash withdrawals from savings accounts will be lifted on March 13 implies that the remonetisation of the economy will be nearing completion by then. The common citizen will certainly heave a sigh of relief after enduring 18 weeks of cash crunch. In this course of time, the government presented various reasons for initiating demonetisation but finally settled on transforming India into a cashless economy. The government has backed it up in every possible way — from banning cash transactions above Rs 3 lakh to incentivising digital modes of payment. One of the key assumptions of the policymakers was that this period of coercion would lead to a long-term change in behaviour. Individuals were compelled to join the formal banking system and use cheques, mobile wallets and cards for daily transactions. Indeed, in the immediate aftermath of the decision, that is November and December, there was a sharp spurt in digital transactions. The government had also hoped that since digital transactions were easy to track, they would boost tax collection as well. The Budget projects a 25 per cent rise in personal income tax collection in 2017-18. This presumes a continuation of this “cashless” behaviour. The income tax department is also hoping for punitive tax collections derived from an algorithmic analysis of the data on the deposits made during demonetisation.

 
However, the Reserve Bank of India (RBI) has released data for January which indicates the move towards digital payments should not be taken for granted. As the cash crunch eased in January, the number of cashless transactions fell considerably in terms of both volumes and value. The RBI data captures the full spectrum of digital transactions, from credit and debit cards to electronic fund transfers and from digital wallets to mobile banking transactions. However, it is not definitive since it collates card transactions of four banks, prepaid instruments from eight non-banks and mobile banking figures from five banks. But the trend is clear. The number of digital transactions fell from 1.02 billion in December to 922.9 million in January. In value terms, digital transactions generated Rs 105.4 lakh crore in December compared to Rs 98 lakh crore in January.

 
Certain instruments are clearly useful and becoming popular. The Immediate Payment Service (IMPS) saw an 18 per cent increase in volumes in January and the nascent Unified Payments Interface (UPI), which is built on top of the IMPS, saw the number of transactions rising from only 0.3 million in November to over 4.2 million in January with 3 million transactions in December. UPI values rose from Rs 91 crore in November to Rs 1,666 crore in January. It is quite likely that the uptake of digital transactions will see a secular long-term increase, as indeed was the case prior to demonetisation. To that extent, the drive towards digital payments must be backed by better physical infrastructure and more reliable data-security systems. But the larger point that this deceleration in digital transactions indicates is that relying on coercion to change long-term behaviour is not an optimal policy. Behavioural economics is inexact at the best of times and it is likely that users will revert to cash as soon as they can since there is nervousness about bank accounts being hacked and also about being targeted by intrusive tax raids and investigations. These doubts and insecurities must also be addressed before the digital drive gains serious momentum.