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Cash is expensive, argues the Committee set up on September 1, 2016

By Parsa Venkateshwar Rao Jr

The Modi government was giving serious thought to move to a digital economy much before the November 8 announcement by Prime Minister making the
Rs 1000 and Rs 500 notes cease to be legal tender.  

A committee was set up on September 1, 2016 under Ratan P Watal, former finance secretary and senior advisor to NITI Aayog for the purpose. It had submitted its report to Finance Minister, Arun Jaitley on December 9, 2016.

The report has laid down a three-year roadmap to increase and diversify digital payments systems. The plan is to reduce cash to GDP ratio of 12.5 per cent at the moment to six per cent in three years.

The Watal committee has been called on Committee on Digital Payments, and its report is called Medium Term Recommendations To Strengthen Digital Payments Ecosystem.

In its executive summary, the committee notes: “The recent initiative to demonetize high denomination currency has highlighted the gaps in our digital payments ecosystem.”

A major suggestion of the Watal Committee is: to “upgrade” the Payment and Settlement Act, 2007 and to make the regulation of payments independent from the regulation of banking. As such payments will become a sector of its own, and it will have its mechanism and institutions. Regular banks will do other things than being engaged in the payments process.

It says that five per cent of personal consumption and 20 per cent of all transactions is through digital payments. The committee says, “India’s cash to Gross Domestic Product (GDP) ration is among the highest in the world. Over the next three years, it is the vision of the Committee to reduce the ratio from about twelve per cent to six per cent.”

Why does the Committee think it will be able to increase the digital payments to nearly half of the present payments system? The argument offered is that 65 per cent are active mobile telephone users, 99 per cent have “electronic identity” through Aadhaar.

The role of state in this transition should be minimal, and that it should only intervene to address and rectify market failures. It is recognized that the possibility of market failures is real.

Interesting Anecdote

The most interesting part of the Watal Committee Report is the fifth section called Vision. In a box, the committee adopts a modest tone compared to its earlier statements comparing to digital payments to the emergence of fire and wheel.

The Committee’s sentiment deserves to be quoted:

“Cash has been in use for over 2600 years and is the dominant form of transaction globally. Challenging this would be as revolutionary as attempting to replace fire or the wheel. Many developed countries continue to have a significant proportion of transactions in cash. We do not know the future but it is not the intent of the Committee to replace all cash transactions with digital ones.

It is for the people to have the incentives to decide whether it makes sense for them to transact in cash or in digital form.

It is important for them to have this choice. This choice must be a real choice.”

There is need for Prime Minister Narendra Modi to pay heed to the last two sentences.

It is also see that banks which held the monopoly over payments, apart from collecting deposits and disbursing credit, will now have to hand over the function of payments to financial technology companies.

The Committee suggests that there is need for a payments regulator, and that this should now be moved away from the Reserve Bank of India (RBI).

The committee notes that it was in his November 27 Mann Ki Baat speech that Prime Minister Narendra Modi has asked small traders to adopt technology and take to digital payments. And following this, the NITI Aayog had appointed a Committee of Officers under CEO of NITI Aayog “to identify immediate steps to promote understanding and adoption of available digital payment options”. And that Committee of Chief Minister under Andhra Pradesh Chief Minister N Chandrababu Naidu has been constituted on November 30 “to accelerate digital payments”.

A major suggestion of the Committee is: to “upgrade” the Payment and Settlement Act, 2007 and to make the regulation of payments independent from the regulation of banking. As such payments will become a sector of its own, and it will have its mechanism and institutions. Regular banks will do other things than being engaged in the payments process.

So, the Committee suggests to either to set up an independent payments regulator, or make the existing Board for regulation and supervision of payment and settlement systems (BPSS) in the RBI more independent of the central bank.

The committee bases its argument in favour of digital payments on the premise that ‘cash is expensive’. Observing that 78 per cent of “all consumers’ payments” are made in cash, it points out that the dependency on cash costs Rs 21,000 crore in terms printing the currency, maintaining the cash chests and the ATMs. It amounted to 1.7 per cent of the GDP in 2014-15, says the Committee. According to estimates, digitizing government payments itself would save Rs 100,000 crore annually. So, by spending Rs 60,000 crore over five years, the government would be able to reduce cost of cash from 1.7 per cent of the GDP to 1.3 per cent.

Lead: Union Minister for Electronics & IT and Law & Justice, Ravi Shankar Prasad and Harsh Vardhan, Minister for Science & Technology and Earth Sciences visiting the ‘Digi Dhan Mela – an awareness camp’ in New Delhi. Photo: UNI

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