Is India's economy prepared to shift from cash to a `less-cash' model that the government has been talking about since demonetisation?
Yes, says Nandan Nilekani, a name synonymous with Aadhaar, and now part of the Niti Aayog panel on e-payments that is working with chief ministers to promote the use of digital payments systems across the country .
Nilekani said that the infrastructure needed to enable more than a billion people to transact digitally is already in place, but unlike the West, where card-based payments are more common, the Indian economy will digitalise through mobile-based payments that are faster and cheaper to roll out. Now, it is a matter of increasing awareness and keeping transaction charges low, he added.
At present, only 5% of personal consumption expenditure in India happens digitally . The 600 million debit cards are used mostly for ATM withdrawals while credit cards number merely 20 million. Nilekani said cards and point of sale (PoS) machines have increased slowly because of high maintenance costs.
However, National Payments Corporation of India's (NPCI) new payment applications are designed to work on all phones--with or without internet--and even without phones. The Aadhaar-enabled payment system for those who don't have phones is likely to enable digital payments by about 350 million people.
For digital payments to catch on, sellers will need to come on board on a large scale. Nilekani said a combination of low transaction charges and formal sector credit will help. Transaction charges are likely to be low because, unlike the card systems that requires significant investment in PoS machines and other infrastructure, the mobile-based system has no such requirements.
Merchants currently prefer cash deals to hide their income because their profit margins are inadequate to pay both taxes and the high rates on informal sector credit. But when they accept digital payments, the income trail will make them eligible for credit from the formal sector at much lower interest rates, besides other products like insurance policies. “Credit is the killer app of digitalisation,“ Nilekani said.