This Article is From Dec 01, 2016

Modi Has Just Bet He Can Change India's Social Behaviour

There is no doubt that the hacking of Congress vice-president Rahul Gandhi's Twitter account was an unfortunate and criminal act. Yet, it would be churlish on part of the party to use this to attack the push for digital payments and a "less-cash economy" (not "cashless economy", for that is impossible).

What is the Narendra Modi government's motivation for a less-cash economy and what explains the Prime Minister's urging that people consider payments by cards and e-wallets accessible using mobile phones? Is this an afterthought to the primary target of demonetisation: black money kept in cash? Actually, it is complementary.

The government has calculated that a less inefficient and more transparent financial system has to have a bigger quantum of digital payments. Currently, just about one per cent of payments in India use this route. The digital nudge is also part of the war against future black money generation, tax avoidance, and costs - to individuals, financial institutions and government - that cash transactions entail.

This programme is not new. It was being spoken about even in the UPA years and some of the work for it - such as the Aadhar platform - was built by Manmohan Singh's government. Even so, as is so often the case in India, political parties in opposition are happy to junk positions and policies they have espoused in government. Something similar is happening in case of the Congress and digital payments.

Having said that, the trajectory is clear and unavoidable. It is worth recalling the early 1990s  and the political discourse during the negotiations that led to the creation of the World Trade Organisation (WTO). The scaremongering then including painting the Dunkel Draft - the Swiss trade official Arthur Dunkel's document that became the basis of WTO - as the equivalent of the East India Company's charter. The left parties and sections of the BJP raised unfounded fears to attack the PV Narasimha Rao government.

In the end, WTO was formed and India became a founder member. The liberal trading order transformed India, making this country a beneficiary of globalisation. In fact, the BJP government that came to office at the end of the 1990s took even stronger steps to make India WTO-compliant. 
While no two situations are exactly alike, it is instructive to compare the drive towards digital payments with India's entry into WTO. In both cases, there were (or will be) winners and losers. Both suggest overwhelming logic for overall benefit to the economy. Like India's entry into the international trading order, the acceptance of digital payments will also be gradual. The cash shortage following the demonetisation exercise will offer an initial impetus but this is only the start of a process.

The absolute abolition of cash is not feasible. No country has achieved this, though Sweden has come close. In India, the dependence on cash is not going to go away. The point is that in areas and among groups and individuals that can transact as easily using a digital platform, can behaviour change be inculcated?

This is a question for both the rich, who can flash multiple credits, and for bottom-of-the-pyramid transactions. After all, if the Ola or Uber driver has quickly become comfortable with receiving digital payments, will he now be comfortable buying his groceries and spending his money in the same manner? How easily can Indians adapt to such technologies? History would recommend optimism, but this is still a substantial bet. Along with it comes political risk. Modi has staked a lot.

The opportunities offered by digital payments are immense. In September 2016, the McKinsey Global Institute (MGI) released a report titled Digital Finance for All: Powering Inclusive Growth in Emerging Economies. It made some telling assessments about India: "In India it may take several hours to visit a rural bank branch that is open only on weekdays, forcing people not only to lose time and money on travel but also often requiring them to take a day off of work...to make a simple deposit or withdrawal. We estimate that Indians lose more than $2 billion a year in forgone income simply because of the time it takes travelling to and from a bank."

This example is relevant because of lines outside banks currently as people seek to deposit demonetised notes or withdraw their legal money. This is unacceptable, notwithstanding the "50 days of inconvenience" that the Prime Minister has sought. The fact is, however, for many of those who have bank accounts in India, this is the predicament for the other 315 days of the year as well. Can digital payments address this? The scope is huge. As the MGI report found, digital payments services in India could add "US$ 700 billion to GDP" by 2025 and create "21 million new jobs".

The challenge lies in infrastructure. Before the post-demonetisation surge, only 10 per cent of merchant outlets in India had point of sale (PoS) devices that read debit cards and so on. To push use of these, the government has just cut taxes on PoS devices. Frankly, behaviour change will need more incentives. Income tax rebates for individuals and businesses who move increasingly to digital payments could also be considered. South Korea began a similar programme in 1999. Today, it is a digital payments trendsetter in Asia.

Consumer behaviour tends to be tax sensitive. Incentives will be needed to push industries - trucking, agricultural purchases, construction - where wages are still distributed in cash towards digital payments. The payer will need to perceive immediate tax or other benefit in forcing his recipients to open bank accounts and getting direct payments, and in digitising payments along his supply or distribution chain.

Such a process could be revolutionary but will not be achieved in a few short weeks. It will need to be sustained and built into the architecture of the budget of 2017 and the roll-out of GST. For Modi, this is not just a political or economic imperative; it is a colossal task of social engineering.

(The author is distinguished fellow, Observer Research Foundation. He can be reached at malikashok@gmail.com)

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