Why a subsidy to encourage digital payments is not a good idea

  • The Indian government is planning to create a subsidy package to encourage consumers to switch from cash payments to digital payments. The details have not yet been finalized but the aim is encourage small ticket transactions, ones up to Rs 2000 in value, to switch to digital payments.
  • At this point in time, using a subsidy to encourage digital payments is not a good idea. A new subsidy would require diverting some of the revenue that government gets to subsidizing digital payments over many other competing demands. For instance, strengthening public health systems to check vector borne disease such as Japanese enephalitis is a competing demand.
  • Therefore, if a subsidy for digital payments is worth it, there has to be a convincing case.

Is there a convincing case?

  • No, because the digital payments ecosystem has been growing fast and will perhaps grow even faster in the near future on account of technological developments in the sector.
  • A digital ecosystem for payments has three main stakeholders: buyers who make the payments, sellers or merchants who are willing to accept digital payments, and financial intermediaries who make it possible.
  • For buyers, a switch to digital payments is attractive if it is convenient and secure. For the seller, the cost of allowing digital payments must be financially viable or far more attractive than accepting just cash. Similarly, for a financial intermediary, the effort to connect buyers and sellers through digital infrastructure needs to be commercially viable.
  • We need to keep in mind that a non-cash option such as credit card has been available in India for over three decades. If it has not caught on adequately, it is because it hasn’t met the needs of all three main stakeholders.
  • This situation is in the midst of significant changes on account of technological developments. In much the same manner that mobile telephony allowed India’s communication system to leapfrog stages in a short period, it is poised to change India’s payments system.
  • Recent developments such as quick response (QR) code allows main stakeholders in payments system to bypass the high costs and other problems associated with setting up point of sale machines in merchant establishments.
  • The scale and speed of change in payments infrastructure is almost bewildering.

What is the best course of action at this stage for a government aiming to encourage a switch to digital payments?

  • It is to get the regulatory architecture right because the changes are being led by innovation. And oftentimes incumbents hamper the pace with which innovations show up in the marketplace as it may threaten their dominance.
  • Another problem brought out during a “Digital Payments Roundtable” organized by IFMR Trust is that subsidies, price caps and government sponsored payments products introduce uncertainty for commercial service providers.
  • Therefore, the best way for government to encourage digital payments is to remove obstacles in the introduction of new technology, and strengthen the legal and regulatory architecture to ensure integrity of digital transactions.

Source:Times of India

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