Decoding Union Budget 2017's Impact on Digital Payments in India - Part 1

As Finance Minister Shri Arun Jaitley stepped into Parliament on February 1st 2017, the weight of an entire nation and the world rested on his able shoulders as he unveiled India’s first budget post Demonetisation. Demonetisation, as a measure in itself has received worldwide coverage owing to the enormity of the move and the ramifications. Everyone (including me) has asked the question: Is India’s Demonetisation Decision The Biggest Disruption for Electronic Payments in 2016? Remonetisation has made a difference to the situation on the ground in the recent months with cash being inducted back into the system easing the pain and discomfort associated with missing cash for large segments of a cash dependent population.

Among the many firsts that the Union Budget 2017 has been associated with, policy and budget measures to construct a Digital Economy stand out as original and groundbreaking, especially for a growing economy with tremendous competition for financial resource allocations in the sectors of poverty alleviation, education , infrastructure development, health, etc.

Some interesting and notable firsts in Union Budget 2017

1. It’s the first time in 92 years that the general budget and the rail budget were presented together
2. Advancement of the budget presentation date
3. First budget after disbanding the planning commission
4. First budget post demonetization and the shock to GDP growth estimates

The overwhelming headline after the budget presentation was: There is something in the budget for everyone #BudgetForAll which aligns with the development theme that won Narendra Modi an unprecedented majority in the 2014 general election

Unlike a 10 point agenda (more common with predecessors of current FM), Mr. Jaitley declared the three-point agenda for 2017 was:

Transform | Energize | Clean India

Basis this, the 10 main tenets of the budget were the following (Also, full text of the budget speech is available here)

1. Agriculture
2. Financial Sector
3. Rural India
4. Digital Economy
5. Youth
6. Public Service
7. Poor
8. Prudent fiscal management
9. Infrastructure
10. Tax administration

Focusing on “Digital Economy: for speed, accountability and transparency” , FM started this section by speaking about the need and benefits from transparency of a digital economy.

I have segregated the considerations into two segments

1. Part 1 focuses specifically on Non-Policy Aspects
2. This will be succeeded by a concluding segment focusing only on Policy (post to follow soon)

Now for a careful examination of each budgetary mention.

(a)  Referral Bonus Scheme for individuals and a Cashback Scheme for merchants using BHIM (Bharat Interface for Money ) app

 Budget Announcement:

 Already there is evidence of increased digital transactions. The BHIM app has been launched. It will unleash the power of mobile phones for digital payments and financial inclusion. 125 lakh people have adopted the BHIM app so far. The Government will launch two new schemes to promote the usage of BHIM; these are, Referral Bonus Scheme for individuals and a Cashback Scheme for merchants. 

Analysis:

Changing consumer behavior is tough and a small incentive goes a big way as is evident from the massive growth of e-wallets that are synonymous for cashbacks for everything from utility bill payments to movie ticketing. To promote the activation and usage of transactions with BHIM (riding on NPCI’s UPI infrastructure for peer-to-peer payments), the cashback promotion and referral bonus scheme backed by a comparable user experience with popular wallets in the market, BHIM can finally realize the tremendous potential of digitizing everyday cash purchases

Impact:

This move should have a positive impact resulting in both uptake as well as adoption of the payment method by merchants and consumers alike.

(b)  Aadhaar Pay & Nation Wide rollout of Aadhaar-based Point of Sale (PoS) terminals

 Budget Announcement:

 Aadhar Pay, a merchant version of Aadhar Enabled Payment System, will be launched shortly. This will be specifically beneficial for those who do not have debit cards, mobile wallets and mobile phones.  A Mission will be set up with a target of 2,500 crore digital transactions for 2017-18 through UPI, USSD, Aadhar Pay, IMPS and debit cards. They will be encouraged to introduce 20 lakh Aadhar based PoS by September 2017.  Analysis:

Over 1110 Million of the 1250 Million population of the country has Aadhaar Cards. Out of this, 490 Million have bank accounts linked to their Aadhaar. From being a digital identity (as was envisaged by the creators) , with payments riding on top of the rails, an alternative payment system (will enable payments to be sent and received on successful biometric authentication of the user ) dependent solely on the coupling of an: identityand a financial instrument (in this case Aadhaar seeded with a bank account) is expected to further financial inclusion objectives of the present government which has succeeded to enable more than 22 crore Indians to have bank accounts.

Impact:

Aadhaar is currently being used for Direct Benefit Transfers (DBT) resulting in an annual savings of Rs. 36144 crores for the government. Measures are being taken to improve biometric authentication responses – Apart from fingerprint identification, IRIS will be used to validate the identity of a customer and cheap handsets are touted for market entry soon. Barriers to access such as smartphones, internet and even literacy to use and transaction on mobile results in a rather significant part of the population to be totally excluded from the push to less cash by the government. This measure is aimed at addressing this widening gap between the digital haves and have-nots. Further, the plans to integrate Aadhaar Pay with BHIM, will drive this adoption further.

(c)   Rollout of 10 lakh new PoS terminals by March 2017

 Budget Announcement:

 Banks have targeted to introduce additional 10 lakh new PoS terminals by March 2017

Analysis:

In the demonetization period, the government had set a target for acquirers in the country to bolster the card acceptance infrastructure with an additional 1 Million units by March 2017. To this measure, the excise and custom duties on import/manufacturing of these machines was lowered significantly.

Impact:

While this is a continuum of the DeMo announcements, the inclusion in the budget shows focus and commitment to eradicate the (dis)honour of having the lowest POS terminal penetration in the world at a paltry 693 machines per million users. This move warrants affordability for the terminals and helps foster better penetration for card based payments.

(d)  Encouragement to SIDBI (Small Industries Development Bank of India ) to provide loans basis digital transaction history

 Budget Announcement:

 Increased digital transactions will enable small and micro enterprises to access formal credit. Government will encourage SIDBI to refinance credit institutions which provide unsecured loans, at reasonable interest rates, to borrowers based on their transaction history.

Analysis:

The increase in adoption of digital payments by merchants will result in a larger footprint digitally for these entities, resulting in higher eligibility for credit. With these merchants being largely underserved by traditional credit rating agencies facilitating loan disbursements by lenders, smaller merchants are deprived of capital to build their businesses. With improved dependable history of digital transactions their credibility will drive opportunities for them to further their business. To this effect, the FM has made provisions for SIDBI to facilitate the availability of unsecured loans, encouraging higher financial inclusion and creating opportunities for this segment

Impact:

A country’s path to a less cash economy is largely dependent on mass adoption and focus on the base of the pyramid. This move enables opportunity to be created for this segment as well as the adoption for cashless methods of payments providing security and safety over cash usage in business.

(e)  Promoting Digital

 Budget Announcement:

 Steps would be taken to promote and possibly mandate petrol pumps, fertilizer depots, municipalities, Block offices, road transport offices, universities, colleges, hospitals and other institutions to have facilities for digital payments, including BHIM App. A proposal to mandate all Government receipts through digital means, beyond a prescribed limit, is under consideration. 

Analysis:

The government came in for a huge amount of criticism for government entities not accepting cashless means and/or passing on convenience fee charges to helpless consumers who in the wake of DeMo had access to little or no cash. Possibly a lesson learnt, thereby, resulting in a declaration of adopting digital in government thereby reiterating the government’s commitment to digital

Impact:

Walking the talk and putting money where their mouth is – best describes this affirmative action. Always better to be the change to promote the move to cashless for one of the largest cash dependent economies in the world.

This wraps up Part 1 of the Union Budget Analysis. As promised, a Part 2 with Policy impact analysis will follow soon.

What are your views on the budget? What did the FM get right or wrong specifically with regards to Digital? Would love to hear your feedback.

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