- India has been suffering a cash shortage after demonetisation.
- Only 20 percent of the total transactions and 5 percent of personal consumption expenditures are happening digitally.
- Committee recommends cash transactions be disincentivised by imposing nominal tax.
- Committee acknowledges it is absolutely necessary to develop consumer confidence in digital payments.
- Panel says ensuring safety and security of electronic transactions is indeed a formidable challenge.
At a time when most Indians are undergoing extreme suffering due to the cash shortage wrought by Prime Minister Narendra Modi’s demonetisation move, a committee on digital payments has recommended that “cash transactions should be disincentivised by imposing nominal charges after a certain limit.”
The committee, constituted in August this year under the chairmanship of Niti Aayog Principal Advisor and former finance secretary RP Wattal, submitted its report to the government today. It appears to have gone along with suggestions by the government that “high-value transactions should be charged with a nominal tax”, which would “act as a disincentive for use of cash and push people towards a cashless medium.”
The government has also submitted to the committee that “there should be a monthly or quarterly or yearly cash limit on cash transactions and nominal charge should be levied if cash transactions go beyond the limit.” The committee was, however, silent on the amount of such a “nominal charge”.
Establishing Consumer Confidence
But the panel acknowledged that “it is absolutely necessary to develop consumer confidence on digital payments.” Admitting that India’s rickety digital payments sector can only improve with “essential legislative safeguards” to replace the “legislative distortion” that has “restricted fast-paced expansion of digital payments in India by hindering competition from technology firms.”
A crucial word of caution by the 11-member panel, however, is that the “disruption” of the systemically important payment systems, at a time when the current law – the Payment and Settlement Systems Act, 2007 – does not provide a framework to deal with them, “could lead to financial instability”.
In fact, while warning that the 2007 Act “is silent on data protection issues”, the committee has sought the promulgation of a vastly upgraded law to “address drawbacks” in the event of India taking to digital and cashless payments.
Challenges to Consumer Protection
The committee notes that:
Payment services have been going through a phase of innovation, but at the same time, has increased the scope for deception and misunderstanding in the payment services. Some of the challenges to consumer protection which inhibit greater consumer adoption are personal data protection, digital identity theft and fraud. India has recently witnessed incidents of data theft which have raised concerns about data protection and security of digital payments.
It adds, ominously, that “the present framework does not mandate consumer protection as statutory objectives.”
Formidable Challenge
While the committee has presented a scenario in which Indians could potentially step towards a cashless system of payments, it has recognised that “given the low literacy levels in India, ensuring safety and security of electronic transactions is indeed a formidable challenge. The absence of strong laws protecting consumers is a fundamental issue.”
By indirectly admitting that the 2007 law has plenty of large holes, “with respect to data protection” the Act “does not contain any provision related to protection of personal information”, which is one of the main reasons why Indians have desisted from embracing digital payments.
Weak Consumer Protection Laws
While expending greater focus on consumer protection laws, the panel has recognised that “the present privacy regulations do not clearly enable the payment service providers to process information to monitor fraud.” In this context, the committee “is of the opinion that if privacy laws limit the use of that data, then fraud and money laundering rates may well rise.” The panel recommended that “payment service providers should be allowed to process data to improve fraud monitoring and anti-money laundering services.”
Reliance on Cash
Admitting that it is “difficult to envisage a transition from cash-based society to a less-cash society without streamlining the interaction and relationship between the payment service providers and users”:
The committee observed that “current statistics suggest that Indian economy by and large operates on cash today” with only “20 percent of the total transactions and 5 percent of personal consumption expenditure happening digitally.” Besides, “cheques continue to be preferred.”
The committee’s findings suggest that “in terms of usage, currently debit cards are mostly used at ATMs for cash withdrawal (85 percent of total volume) while a very few transactions are happening at PoS (point of sale)… Usage of debit cards at PoS machines accounts for only around 14 percent.” As for credit cards, their usage is way lower than debit cards: usage at ATMs is 0.75 percent of volume and 1.18 percent of value of total transactions.
Too Few ATMs
India has only 165 ATMs per million of population and 1,080 PoS terminals per million of population, as against the corresponding figures for Mexico at 385 and 7,189, respectively. In India, “access to and usage of digital payments have been growing steadily but at a very slow pace.”
“There are various elements which are acting as barriers to the adoption and usage of digital payments. Some of those are inadequate infrastructure, regulatory impediments and inadequate value proposition for merchants and users,” the committee notes.
Here’s the link to the full report of the Committee on Digital Payments.
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