The 2017 budget, as expected, has been very bullish on the prospects of a digital economy. While “Digital Economy” was one of the 10 themes that finance minister Arun Jaitley stated the budget focused on, a quick glance reveals that only four points relate to it directly: the establishment of a computer emergency response team for India’s financial sector; promotion of Unified Payments Interface (UPI) system via the BHIM (Bharat Interface for Money) app; the establishment of a Payments Regulatory Board for digital payments, within the Reserve Bank of India (RBI); and the enabling of a merchant version of Aadhaar-enabled payments, primarily targeted towards those who do not have debit or credit cards. These four propositions taken together, however, go a long way in shoring up the basic structure of a digital economy.
First, a computer response team for the financial sector is the most immediate need, given the woefully inadequate cybersecurity infrastructure in India, explicitly brought to light by the mass data breaches of last year.
Second, the UPI system rolled out last year provides a potentially revolutionary step to make banking less cumbersome. While various banks have already brought out their individual UPI apps, the National Payments Corporation of India-backed BHIM app is best placed to popularize the daily use of UPI.
Third, an increase in the uptake of digital payments, especially since demonetization, and the consequent rise of related issues, has highlighted the need for a regulator with specific jurisdiction over such payments. While at one point it seemed like the government was planning on putting digital payments outside the purview of the RBI, the establishment of a regulatory board within the RBI is a wise move that should be welcomed by the e-payments sector.
Finally, prioritizing Aadhaar-enabled payment systems will provide a massive push towards a less-cash economy. The lack of access to smartphones, reliable Internet, debit cards and credit cards puts a very significant portion of India’s population outside the entire cashless drive. Enabling cashless payments on the back of a biometric-enabled Aadhaar system overcomes this hurdle to a great degree.
Individually, therefore, each of these four is not only welcome but also necessary. Put together, they signify a concerted effort to strengthen the structural underpinnings of the digital economy, in order to incentivize a bigger uptake of digital payments.
However, there still remain a number of issues with the push towards increasing digitization that Jaitley has not addressed. The lack of adequate data and privacy protection measures remains a major concern. This is especially true if the government introduces the Aadhaar-based payments system, where biometrics will be used for identification and authentication. Without a robust data protection and privacy regime, it will be difficult to build long-term trust in any digital system. The continued existence of loopholes in the Aadhaar Act regarding information sharing, and protection in case of a data breach, shows the continued lax attitude of the government towards privacy protection. Last year, an estimated 3.2 million debit cards were compromised due to a massive cyber attack. If a similar attack were to occur on the Aadhaar system, it is not simple card details that would be compromised, but the identities of over a billion people. As it stands, the current Aadhaar Act does not provide for any intimation of a potential data breach, nor does it provide for a mechanism to rectify the fallout of such a breach.
Another concern is the limited reliability of wireless Internet, which is essential for digital payments to become ubiquitous. While Jaitley did mention that 150,000 villages would be connected with high-speed optic fibre cables by the end of the year, it is the wireless component that holds the key to a cashless economy. Outside the major urban areas, availability of reliable high-speed Internet is extremely rare, which hinders any transition to either UPI or mobile wallets.
The lack of interoperability among the various mobile wallets is the third major concern. Mobile wallets provide both convenience of use and a certain degree of security to users. Given their status as third-party intermediaries and the limits imposed on the amount of money they may hold, any security breach of a mobile wallet would have a limited fallout. Currently, however, payments are possible only within the same mobile wallet network, imposing a problem akin to that of a barter system. Incentivizing interoperability would, therefore, go a long way in ensuring that mobile wallets become effective substitutes for petty cash.
Lastly, the high cost of cashless transactions, especially in the form of the high fees that merchants need to pay for using card systems, remains a major impediment to popularizing digital payments. Such fees are normally passed on to consumers, and when they are not, they eat into the profits of the merchants. This can be especially harmful for small establishments, which operate on razor-thin margins, and therefore have no incentive to switch to digital payments.
The steps outlined in the budget do provide a solid framework for a transition to a less-cash economy. It is, however, necessary for the government to build on this framework by addressing the aforementioned concerns in order to enable a truly digital economy.
R. Shashank Reddy is a researcher at Carnegie India.