Robust architecture

Earlier this week, the Chief Ministers' committee on digital payments, led by Andhra Pradesh Chief Minister Chandrababu Naidu, submitted its interim report to Prime Minister Narendra Modi, recommending a slew of tax incentives and subsidies. Soon after the Centre introduced its move to withdraw the inactive Rs 500 and Rs 1000 currency notes on November 8, which resulted in a severe cash crunch in the economy, a committee of Chief Ministers was constituted for devising ways to reduce the use of cash. Among critical suggestions made to expand the scope of digital transactions, the panel said that the government should levy a cash transaction tax on withdrawals above Rs 50,000 and above. There were media reports that this recommendation could be taken up in the upcoming Union Budget. In response to these reports, the Ministry of Finance clarified that it had made no final decision. Many have implored the government not to consider a cash transaction tax seriously and argued that such decisions will have negative implications for the economy's health in the long term. Of course, the move towards a less cash-dependent economy has its distinct advantages. The use of digital payment platforms will, for example, reduce the scope for tax evasion, as these transactions will leave behind a trail. Critical developments like the greater penetration of smartphones and the introduction of payments applications like the United Payments Interface are already aiding the transition to digital payments with or without demonetisation. Any further fiscal intervention to compel consumers into making that transition seems wholly unnecessary and disruptive. The committees' proposal to levy a tax on cash transactions above Rs 50,000 is an idea that the government should not entertain at this moment.

India is still home to a significant informal sector, which predominantly conducts its business in cash. It's estimated that between 90 and 98 per cent of all transactions in India involve cash. Approximately 92 per cent of the country's workforce is in the unorganised sector and earn their wages in cash. A mere 6 per cent of retailers accept debit cards or mobile payments. Despite the government's initiative to bring vast swathes of the rural populace into the formal banking system through schemes like the Pradhan Mantri Jan Dhan Yojana scheme, the proportion of those who remain unbanked is still substantial. In other words, the lack of infrastructure to expand the digital payments ecosystem remains a serious obstacle. The informal sector will take some time to make a complete transition. If the government indeed introduces such a measure, a lot of money will leave the banking system just to avoid that transaction tax. The deleterious consequences of a bank run to an economy are well known, resulting in outcomes that would leave the government in a real spot of bother. Under the current rules, any transaction above Rs 50,000 requires a customer to furnish his/her Permanent Account Number (PAN). Asking the customer to furnish his/her PAN card is enough to track these transactions. If the government were serious about discouraging the use of cash in the long term, it would do well to gradually phase out all or a significant portion of high-value notes from circulation, including the useless Rs 2000 currency note. Developing robust digital payments architecture and issuing currency notes in smaller denominations through gradual phases, are better means of discouraging the use of cash than levying a tax.

The panel also recommended a whole host of other measures like tax refunds for consumers using digital payments, a subsidy to small merchants for buying smartphones and special tax incentives to manufacture micro ATMs. The merits of these measures are not very clear. In fact, some experts have even gone to the extent of arguing against implementing them. The development of a strong digital payments architecture is the need of the hour. The Reserve Bank of India and the Centre must work together to devise legal and robust means of plugging the regulatory gaps that currently exists and help the banking system handle enormous volumes of digital transactions. Yes, the panel did make recommendations to this effect, and the government would do well to follow up on them. At the heart of any secure digital network are current technology, proper regulation and consumer protection. Critical issues regarding privacy, data security and the rights of customers have to be addressed. With some of the NDA government's biggest reform initiatives, including the banking-for-all Jan Dhan Yojana, Aadhaar and Digital India, implemented on a 'grand scale', the government can no longer brush aside these issues. Along with China, Russia, Saudi Arabia and South Korea, India is ranked among the top five nations most vulnerable to damaging cyber attacks, according to a recent book co-authored by data-mining experts from the University of Maryland (UMD) and Virginia Tech in the United States. Earlier this year, the Indian banking system suffered possibly its biggest data security breach in its history, leaving customers and their money at significant risk. Information related to 3.2 million debit cards from at least 19 commercial banks was leaked due to malware in ATM security systems. What's worse, it reportedly took three months for the banks to discover the security breach. With the move to digital payments, these fears take greater precedence with citizens vulnerable to data misuse and without any rights to protect that information and data. Of course, no system is 100 per cent secure, but India must do a lot better in ensuring safe access for its consumers. In the past, the government has indeed ridden roughshod over privacy concerns in allowing the wider use of a citizen's personal Aadhar data by private bodies under clause 57 of the Aadhar Bill.