Remonetisation is now over, and prime minister Narendra Modi needs to take stock of the potential and pitfalls. What is needed is a broader political vision to use the tax and dividend from unclaimed notes as part of infrastructure development to boost GDP, e-commerce and financial inclusion.

 

Those patiently waiting for the new notes were acutely aware of the extent of the black economy and corruption and are ready to bear the pain for new opportunities. The policy lesson is that the importance of rural subsidies has steadily diminished with increased connectivity. The rural poor are now seeking employment outside agriculture in the services sector in newly developing urban areas. There were no complaints about non-availability of cash to pay MNREGA daily wages. The BJP has won municipal elections in Maharashtra and Gujarat, and is likely to win in Uttar Pradesh.

 

Demonetisation is a bold move that many governments want to take but few dare to implement because the outcome is uncertain. The ‘system’ has not been able to fully meet the challenges of the initial panic, illicit conversion and shift to a digital economy because it did not anticipate the problems unique to the Indian situation. For example, policymakers had some idea about the scope of the ‘black economy’ but not about the nature of the transactions through which it thrived; for example, shell companies to whitewash black money. Now that they know how it is done, an SIT should concentrate on seeking convictions and not just seizures of funds – the rich fear jail terms not fines. It is best not to leave enforcement of the post-November 8 conversion to just the income tax officers, as that has the danger of bringing back the ‘inspector raj’.

 

 

Three choices have now to be made with political implications and need a wider political consensus. 

 

First, can a transformation be implemented without the full support of the state governments? The CMs of Bihar and Tripura, strong on development, declined to be members of the committee of CMs for pushing the cashless society citing the association of the programme with the central government. The NITI Aayog writing to district collectors for their support will not be enough to get the required commitment of the whole district administration. 

Converting this programme into Digital India and widening its scope will respond to the political problem and achieve better and quicker results. Most important will be building awareness of all CMs to the opportunities, approach and evaluation methods. The exercise can be a shining example of cooperative federalism around a single vision.

 

Second, should India go directly from cash transactions and limited debit card use to mobile payments? The current approach is to emphasise the potential of technology ignoring its spread, acceptability and ease of use. For example, large segments of the rural areas do not have a broadband footprint, and these areas are known to the telecom companies. Expediting the laying out of fibre optic cable, extending broadband coverage and ensuring connectivity should be a priority that is not being talked about. 

 

Similarly, segmenting the population in accordance with usage of cash, debit cards and mobile banking will establish the status quo whereas the way forward is to address the hesitations the poor and the middle class have in using digital means, that is, security against fraud. Up to a monetary limit fraud reported within a couple of months should be insured and this should be widely announced. Public sector banks should do away with transaction charges initially for a period of one year to provide a level field with cash payments for peer-to-peer transfers. As the less-cash economy grows banks and telecom companies will more than make up for the lost revenue from transactions by selling the data that they will have to e-commerce entities and that will in turn set up a virtual cycle for more digitisation. China achieved digital transformation on the back of strong e-commerce growth.

 

The government has now to identify the most technologically appropriate and user-friendly digital payments option. The Unified Payments Interface (UPI) interconnects banks, the Aadhaar Enabled Payment System (AEPS) uses biometric authentication, the Bharat Interface for Money (BHIM) is a UPI-based service using just a mobile number and the Unstructured Supplementary Service Data (USSD) is for feature phone users. BHIM has been released by the PM and could be the preferred medium to be pushed by government. The other digital payments options should not be supported and public sector banks should withdraw their individual applications, as they only create confusion in the minds of the less educated and poor. A single ‘app’ to complement the RuPay card is needed, and a government-supported task-force should constantly review glitches and complaints to provide user and merchant protection to ensure trust, as that will be the critical factor in widespread adoption of digital payments.

 

Bulk orders should be placed for the handheld terminals to secure best prices and contract with a service provider to provide them to all post offices as part of a crash programme and reach remote areas. In addition, panchayats, block development offices, tehsils, hospitals and ration shops can be provided terminals to receive payments by digital transfer. Retailers in tier-II towns will need adequate incentives to buy handheld terminals. A financial literacy and information campaign through television and radio networks in the regional languages should be initiated immediately. The entire operation could be overseen by the district collectors.

 

Third, can a new culture emerge without transforming governance, in cooperation with the states? Results must be visible early by focusing on a small number of high-volume activities and basic services. For example, a single website for all government services and Aadhaar-based IDs for mobile operations, and using digital processes it should be possible to register a company in a few days. Helplines and call centres will need to be set up in each district to respond to queries and complaints with digitisation. The organising principle should be inclusion as the hallmark of the digital welfare state. 

 

PM Modi must now focus on a strategic digital agenda. Investment should focus on giving an immediate boost to e-commerce, security and employment in call centres in tier-II towns, rather than be frittered away in old-style subsidies which will only generate more black money. 

 

Experience with the ongoing computerisation of government services shows that the entire chain of activities has not been digitised. For example, while applications and processing of passports is online the interface with police verification continues to be done manually. In the banks digitisation has yet to be fully implemented. There is no interface between the online registration of transactions and the digitised land records. The computerisation of courts has been done independently of the registration of cases in police stations, prisoners in jails and gun and transport licences and registration of vehicles; collaboration should be around strategic goals. End-user orientation should be triggered by an open competition for new apps; for example, tracking progress through school, college and employment and apps for retirees and health check-ups for the aged. The way the tax administration is seeking to use data in the Insight Project at a cost of Rs 1,000 crore needs to be replicated across other areas. 

 

The committee of CMs will need to set up procedures for standardised operations in a federal polity. Legacy IT system may need to be changed for fast front-end systems while back-end systems can be slower. Talent development will be important and should include Smart Fellowships (as in Singapore) and a Cyber Security University (as in the UK). A public security software, on the lines of China’s ‘360’, needs to be developed to give confidence to first time digital users for digital transactions. 

 

India is at a defining moment because of the paradox of reduced GDP and delay in remonetisation combined with money becoming available immediately into the banking system. China added as much cement capacity in three years as the US added over 100 years to become a $10 trillion economy and we need a similar push for financial inclusion, e-commerce and digitisation of governance over the next five years to become a services-based, middle-class, urbanised economy.