A month after Rs 500 and Rs 1,000 notes were demonetised, the government on Thursday announced a slew of measures to promote the use of digital payments and said dealing with cash had economic as well as in-built costs in a democratic set-up. The announcements reflected the complete transformation of the narrative surrounding demonetisation; the core reasoning for the move has shifted from curbing black money and fake currency (that often funds terrorism) to the first step towards creating a cashless economy. Be that as it may, the focused attention to making it easy for people to transact without cash could not have come a day sooner. However, these steps are independent of demonetisation, whose merits are yet to be established while the disruption it has caused is quite clear.
To help people make the shift to the digital world, the government’s plans include providing two point-of-sale (PoS) machines to 100,000 villages with a population of at least 10,000 and making it cheaper to buy petrol and diesel through a digital device. There are many more such measures. The upshot is, irrespective of the fact that demonetisation will not be able to stop the generation of black money or that it has failed to unearth large sums of existing black money, the economy will receive a big push towards being far less dependent on cash. Finance Minister Arun Jaitley noted the emerging evidence: Digital payments by people buying fuel had doubled to 40 per cent. At one level, it was natural that those with digital and plastic money would have switched from cash. The challenge, from the beginning, has been to help those without the understanding and access to digital methods.
These ad hoc measures try to reduce the transaction costs and, to that extent, they will help. But, the truth is that India has several regulatory hurdles that impede the switch to the digital world. The Reserve Bank of India (RBI) this week finally waived its requirement for “two-factor authentication” for small online payments, which had allowed inefficient mobile wallets to grow at the expense of card payments. Payments up to Rs 2,000 can now take place without entering an additional password; however, this limit should have been left to individual card issuers, and not mandated. Another recent reform is the introduction of the Unified Payment Interface for mobile payments. But, mobile transfers are still too dependent on one party having a bank account. In countries where mobile transfers have spread rapidly, such regulations are far less stringent.
There are other challenges, too. Latest RBI data show in July this year, 881 million transactions were made using debit cards at ATMs and PoS terminals. Out of these, 92 per cent were cash withdrawals from ATMs. The principal purpose for cards in India is thus a means to withdraw cash. Also, 75 per cent of transactions in India last year were cash-based while in developed countries such as the US, Japan, France and Germany, these were around 20-25 per cent. It may be time for the government and RBI to look at building in a disincentive for cash transactions beyond a certain ceiling. Finally, If India has to go cashless, it must think harder about privacy and security. Forcing the adoption of electronic payments without spreading financial literacy is equivalent to asking for large-scale fraud to occur. Several online payment gateways have admitted to being vulnerable to hacking, and redressal systems are minimal or non-existent. A dedicated data privacy and security law is urgently needed. Unless cashless transactions are made cheaper, easier and more secure, even this objective of demonetisation will be left unrealised.
