Watal Panel Wants Budget 2017-18 To Fuel Drive To A Less-Cash Economy

The Watal Committee setup by the Modi government to review the framework related to Digital Payments presented its report yesterday (27 December). The recommendations given by the committee are intended to strengthen the ecosystem to promote digital payments “with a focus on reaching financially and socially excluded groups.”

Why Digital? India’s cash to GDP ratio (12 percent) is one of the highest in the world and in the next three years, through these recommendations, the committee believes that it can be brought down to six percent. Cash is expensive too. It costs the treasury Rs 21,000 crore to print and mint currency annually. This includes the cost of printing new currency, costs of maintaining currency chests, costs of maintaining supplies to ATM networks, and interest accrued. Then, the influx of counterfeit currency and black money has its own costs. According to some estimates, the committee notes, the net cost of cash may be around 1.7 per cent of India's real GDP in 2014-15. This can be brought down to 1.3 per cent of GDP if we invest Rs 60,000 crore over the next five years to push digital payments.

But how can this be done? There are two broad areas the committee has focused its attention on while recommending some steps towards a less-cash economy. These include legislative changes and executive decisions. It has further specified the role institutions like the Reserve Bank of India (RBI) and the government can play to strengthening the ecosystem.

Legislative changes

The committee has recommended a payments regulator independent of the central bank. This is perhaps the most important recommendation. A stodgy regulator like the RBI is simply not geared for the fast-paced world of digital transactions . It already has too much on its plate. As this Swarajya column argues, we need a nimble payments regulator, which can ensure that money is safely transacted, and also that the charges are not extortionate. Without a regulator looking over their shoulders, payments service providers would have a tendency to fleece users. So, a regulator is important.

The committee has also recommended the updation of the current Payment and Settlement Act to foster competition and innovation, increase consumer protection and access, and improve regulatory governance with focus on data protection and security.

Executive decisions

The committee believes that the government should play a lead role in adapting to digital transactions. It recommends that the government should, in its next budget, specify that it will make and receive only digital payments. For this, the required infrastructure should be installed. The committee notes that by doing so, the government could save approximately Rs 1,00,000 crore annually by investing around Rs 60-70,000 crore.

Other suggestions include waiving off convenience fee/service charge/surcharge levied by some departments for customer to government payments, bearing the cost of electronic transactions instead of passing them on to consumers, allowing citizens to pay their taxes and other government payments through e-wallets or other digital media apart from internet banking. The committee also want government to enable low value digital transactions (parking charges, tolls etc), reduce customs and excise duties on equipment used in payment systems infrastructure (PoS machines, fingerprint readers, etc), facilitate service tax input credits and require utility bills and payments to government above a certain threshold to be in digital mode only.

The committee also recommends creating a Digital Payments Incentive Fund (DIPAYAN) from the savings generated by moving to a less-cash economy and investing that fund in promoting public education regarding digital payments and incentivising extension and greater usage of Jan Dhan accounts for such payments.

The committee also suggests levying a cash handling charge over a certain threshold and bats for gradually reducing the compulsory PAN quoting limit of Rs 50,000 and Rs 2 lakh for banking transactions and merchant transactions respectively.

For the central bank, the committee suggests outsourcing the function of operating payment systems like RTGS and NEFT, making them operational 24x7.

Another significant recommendation by the committee calls for interoperability between banks and non-banks as well as within non-banks to facilitate payments. This would mean that a customer would be able to transfer money not only from his bank to his wallet, but also from one wallet to another. If you have a PayTM app and the merchant accepts freecharge, then you can transact without having to worry about downloading one more app on your phone.

Many of the suggestions given by the Watal committee may be implemented in the upcoming budget. This would be a good place to start with and would go a long way in transitioning India to a less cash economy.