As the noise around the Union Budget 2017 has considerably reduced and state elections in India have occupied our minds, its time to do a policy changes in the budget that impact Digital Payments in India and conclude on the analysis of Decoding Union Budget 2017's Impact on Digital Payments in India

Previously, I had segregated the analysis into two distinct segments

1.   Part 1 focused on Non-Policy Aspects

2.   Part 2 now focuses on only on Policy and this will conclude the analysis of budget 2017

Let’s jump right in for a careful examination of each budgetary mention.

(a)  Disincentivizing Cash

Budget Announcement:

• I propose to limit the cash expenditure allowable as deduction, both for revenue as well as capital expenditure, to ` 10,000. Similarly, the limit of cash donation which can be received by a charitable trust is being reduced from ` 10,000/- to ` 2000/-         
• The Special Investigation Team (SIT) set up by the Government for black money has suggested that no transaction above ` 3 lakh should be permitted in cash. The Government has decided to accept this proposal. Suitable amendment to the Income-tax Act is proposed in the Finance Bill for enforcing this decision.

Analysis:

All across the world, the only sustainable and successful way to reduce dependency on cash is first and foremost disincentivizing its rampant use especially for high value transactions. Reasons are way too many and have been done to death when Demonetisation was being discussed in the recent path.

This measure will go a long way in consumer behavior shifting from cash to electronic resulting in large scale adoption of electronic methods for payments which is much needed.

(b)   Transparency in Electoral Funding

Budget Announcement:

• In accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive will be `2000/- from one person.
• Political parties will be entitled to receive donations by cheque or digital mode from their donors.
• As an additional step, an amendment is being proposed to the Reserve Bank of India Act to enable the issuance of electoral bonds in accordance with a scheme that the Government of India would frame in this regard. Under this scheme, a donor could purchase bonds from authorised banks against cheque and digital payments only. They shall be redeemable only in the designated account of a registered political party. These bonds will be redeemable within the prescribed time limit from issuance of bond.
• Every political party would have to file its return within the time prescribed in accordance with the provision of the Income-tax Act. 

Analysis:

The push to Digital India is strengthened with electronic payments being the only method to accept political funding beyond 2000 INR. Cash donations are the reason for black money circulating in the system to fund political parties for business benefit. By tightening the noose around this activity, the ruling government has sought to create transparency and accountability in the political system

Impact:

The budgetary recommendations put the BJP on high moral ground for being ethical in inviting reforms, the need for which has been long standing but no political party has had the will and leaning to go forward with these. Removing corruption and ensuring transparency will further the Ease of doing business as well - where dalals (middle men) use good offices (read offering money) to secure contracts from high ranking functionaries in government and administration sighting political patronage.

(c) A new cyber-security entityBudget Announcement:Cyber security is critical for safeguarding the integrity and stability of our financial sector. A Computer Emergency Response Team for our Financial Sector (CERT-Fin) will be established. This entity will work in close coordination with all financial sector regulators and other stakeholders.

Analysis:

A much needed step in securing India's security infrastructure which is critical for Digital India and indeed a lesscash society. Cyber security has never been a focus even though IT is the fifth largest industry in India contributing in excess of a 120 billion dollars in 2014-2015.

Impact:

Last year, there were plenty of high profile hacking incidents which out the focus on a woefully inadequate and incompetent existing infrastructure to deal with these. By instituting a task force, regular tracking and security drills will ensure we are adequately armed to safeguard personal and national digital security

(d)  Develop a grievance handling system

 Budget Announcement:The digital payment infrastructure and grievance handling mechanisms shall be strengthened. The focus would be on rural and semi urban areas through Post Offices, Fair Price Shops and Banking Correspondents. 

Analysis:

With the proliferation of digital methods of payment stimulated by DeMo, managing consumer grievances in a fastidious manner is an imperative without which large scale adoption is impossible

Impact:

Focusing on the customer experience not just for successful happy paths like payments being made successfully but on erroneous cases and for when failure occurs, making all payment participants (merchant, consumer) whole is a must-have if cash has to be replaced

(e)  Financial Inclusion Fund

Budget Announcement:

Government will strengthen the Financial Inclusion Fund to augment resources for taking up these initiatives

Analysis:

The Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) was constituted in the year 2007-08 for a period of five years with a corpus of Rs. 500 crore each to be contributed by Government of India (GOI), RBI and NABARD in the ratio of 40:40:20. Both these have since merged. The objectives of the FIF is to support “developmental and promotional activities” including creating of FI infrastructure across the country, capacity building of stakeholders, creation of awareness to address demand side issues, enhanced investment in Green Information and Communication Technology (ICT) solution, research and transfer of technology, increased technological absorption capacity of financial service providers/users with a view to securing greater financial inclusion. The fund is not to be utilized for normal business/banking activities.

Impact:

Augmenting the success of PMJDY with continued support of the FIF ensures banking reaches every Indian and serves the underserved. Governments continue to push and support financial inclusion which is an imperative given

(f)    Implementation of Interim Recommendations of Committee of Chief Ministers on Digital Transactions

Budget Announcement:

Government will consider and work with various stakeholders for early implementation of the interim recommendations of the Committee of Chief Ministers on digital transactions. 

Analysis:

A Committee of Chief Ministers was constituted during demonetisation, headed by Andhra Pradesh's N Chandrababu Naidu, entrusted with the responsibility to prepare a roadmap for transition to digital economy. The interim report was submitted on Jan 24th, complete details here.

Major highlights are:

• Formulate Incentive Structure & Remove disincentives to make digital payments more attractive than cash
• Expand & Strengthen Origination, Acceptance, Connectivity and Hardware Infrastructure
• Create Authority & Formulate policy, Regulatory changes that promote adoption of digital payments

Impact:

By clearly calling out that the committee recommendations will be considered, one should expect many of these to be implemented in 2017 which have been ascertained to have desirable and favorable impact on Digital Payments in India.

(g)  Structural reforms to Payment and Settlement Systems Act, 2007 & Creation of a new Payments regulatory Board

Budget Announcement:

The Committee on Digital Payments constituted by Department of Economic Affairs has recommended structural reforms in the payment eco system, including amendments to the Payment and Settlement Systems Act, 2007. Government will undertake a comprehensive review of this Act and bring about appropriate amendments. To begin with, it is proposed to create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems. Necessary amendments are proposed to this effect in the Finance Bill 2017. 

Analysis:

The Ratan Watal Committee was instituted on 23rd August, 2016 to review the framework related to digital payments. This was lead by Principle Advisor, NITI Aayog and Former Finance Secretary, Shri Ratan Watal. The report was submitted was submitted to the Ministry of Finance late last year. Full report can be found here.

The committee had also recommended setting up an independent payments regulator for supervision of Payments and Settlements Systems, currently under the RBI. Announcing the structural reforms in the budget incorporates recommendations made by the committee which is a healthy and prompt measure by the government

Impact:

Independence from the RBI will allow dedicated focus on the ever increasing landscape of electronic payments in India thereby reducing dependence on the main body for decisions and being able to be much more nimble in reacting and being a step ahead

(h)  Amending the Negotiable Instruments Act

Budget Announcement:

As we move faster on the path of digital transactions and cheque payments, we need to ensure that the payees of dishonoured cheques are able to realise the payments. Government is therefore considering the option of amending the Negotiable Instruments Act suitably.

Analysis:

The negotiable instruments act dates back to almost a century and has never really been changed. By reforming an outdated law, the government is moving ahead with the times, which should have happened decades back

Impact:

Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of the volume of total non-cash transactions in the country. This should have a positive impact on making payment failures less painful for recipients of dishonored cheques.

This wraps up the Union Budget 2017 Analysis. 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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