Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
From UPSC perspective, the following things are important:
Prelims level: UPI 2.0
Mains level: Measures for facilitating cashless transactions.
Unified Payments Interface (UPI) 2.0
National Payments Corporation of India (NPCI) has upgraded unified payments interface (UPI) with enhanced security features and overdraft facilities.
In addition to current and savings accounts, customers can link their overdraft account to UPI.
The UPI mandate could be used in a scenario where money is to be transferred later by providing commitment at present.
National Payments Corporation of India (NPCI)
NPCI is the umbrella organisation for all retail payment systems in India which aims to allow all Indian citizens to have unrestricted access to e-payment services.
Founded in 2008, NPCI is a not-for-profit organisation registered under section 8 of the Companies Act 2013.
The organisation is owned by a consortium of major banks, and has been promoted by the country’s central bank, the Reserve Bank of India.
Its recent work of developing Unified Payments Interface aims to move India to a cashless society with only digital transactions.
It has successfully completed the development of a domestic card payment network called RuPay, reducing the dependency on international card schemes.
The RuPay card is now accepted at all the ATMs, Point-of-Sale terminals and most of the online merchants in the country.
UPI is a path breaking innovation that is unprecedented globally. Its high volume, low cost and highly scalable architecture built on an open source platform is key to India’s transformation to a digital payment economy.
The first version of UPI was launched on April 11, 2016 and in the last two years the platform has emerged as a popular choice among users for sending and receiving money.
On 8 November 2016, PM announced the “demonetization” of high-value currency notes.
Now that sufficient time has elapsed since demonetisation, it is possible to bring data to bear on the specific question: Has demonetisation succeeded in making India a “less cash” society?
Numerous commentators argued that one such goal would be to push the economy towards greater formalisation, and, relatedly, to push the financial sector towards greater digitisation and a reduced reliance on cash.
But Demonetisation did not trigger any long-lasting behavioural change in the preference for currency, thus striking off one possible long-run gain induced by the short-run pain of the cash crunch.
Look at the chart
The Chart plots currency in circulation (CIC) as a share of broad money (M3) —henceforth, CIC/M3. All data are sourced from the Reserve Bank of India (RBI).
The demonetisation shock in November 2016 saw CIC/M3 plunge to as low as about 0.08 within a month, not surprising when fully 86% of the currency stock was invalidated.
It is not hard to see the trend: CIC/M3 is clearly converging back to its pre-demonetisation level—indeed, it is just about already back to that earlier level.
The Way Forward
It should be added that the failure of demonetisation to make India a less-cash society does not necessarily imply a complete failure of the larger digitization drive.
Data suggest that some components of digital payments are up after November 2016, although it is not clear if this is merely a continuation of pre-demonetisation trends or an effect wrought by demonetisation.
Nor can one conclude, on the basis of the analysis, that demonetisation has failed, although such data as shown have question remain open to contestation and interpretation.
Measures of Money Supply
As we move from M1 to M4, Liquidity of the money goes on decreasing
Reserve Money (M0): Currency in Circulation + Bankers deposit with RBI + Other deposits with RBI
Narrow Money (M1): Currency with Public + Demand Deposits with banking System + Other deposits with RBI
M2: M1 + Savings Deposit with Post Office
Broad Money (M3): M1 + Time Deposits with Banking System
M4 : M3 + total post office deposits* (Excluding National Savings Certificate)
From UPSC perspective, the following things are important:
Prelims level: Features of the App
Mains level: Measure towards cashless and paper-less ticketing
A wallet for daily commuters
Centre for Railway Information System (CRIS) has developed a mobile application for Unreserved Ticketing.
This app will help daily commuters by reducing time spent in queues.
Features of “UTS on Mobile App”
The ‘utsonmobile’ application enables booking and cancellation of unreserved tickets, issue and renewal of season and platform tickets, check and load R-wallet balance and helps maintain user profile management and booking history.
The app is very handy, free and is available for both Android and Windows smart phone. Users can download this app from Google Play Store or Windows store free of cost.
Upon successful registration, Railway Wallet (R-Wallet) will be created automatically with zero balance to the passenger. There will be no extra cost for creating R-Wallet.
The R-Wallet can be recharged either at any of the UTS counter or through recharge option available in the website.
No advance ticket booking is allowed. (i.e.) the journey date will always be current date.
Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth.
Prelims: RBI, Demonetization.
Mains level: The news card discusses RBI’s study titled ‘The impact of demonetization on financial sector’ which further highlights that MFIs, NBFCs are yet to recover from the impact of demonetization.
The RBI’s study on ‘The impact of demonetisation on financial sector’.
Disbursals by micro-finance institutions (MFIs), which plunged by over 71 per cent after demonetisation of Rs 500 and Rs 1000 notes, are yet to bounce back into the positive territory, a Reserve Bank of India study has said.
However, the study attributed the decline to farm loan waivers by various state governments.
In the case of MFIs, however, disbursals continued to contract in comparison with the monthly average of disbursals during April-October 2016 in view of the uncertainty surrounding loan waivers by state governments.
While the average monthly disbursals by MFIs declined by 71.4 per cent in December.
Disbursals gradually improved but stayed down in June 2017, the study said.
However, collections by MFIs fell during November 2016-February 2017 vis-a-vis April-October 2016, but witnessed an improvement in March, May and June 2017.
Growth in collections (i.e., repayments of loans) of asset finance firms and loan firms during November 2016-June 2017 increased over the monthly average collections during April-October 2016.
Trend of Bank Credit to NBFCs
Bank credit to NBFCs decelerated from 5.1 per cent (y-o-y) in October 2016 to 1.3 per cent in November 2016.
However, it improved to 10.9 per cent in March 2017.
In terms of the returns submitted by the reporting NBFCs, loans and advances by NBFCs rose broadly at the same rate in the year ending March 2017 (16.4 per cent) against FY16 (16.6 per cent), the RBI study said.
During demonetisation and the subsequent period, there has been a distinct rise in saving flows into equity/debt oriented mutual funds and life insurance policies.
Apart from this, NBFCs seem to have recorded improvement in collections and disbursals.
Demonetisation-led increase in CASA deposits also led to significant improvement in transmission to bank lending rates during the post-demonetisation period.
The challenge, going forward, would be to channel these funds into productive segments of the economy and expand the footprints of the digital economy, which has undergone a sharp increase, another important consequence of demonetisation.
Fake notes detected per million pieces of notes processed at the currency chest level was 7 pieces for Rs 500 denomination and 19 pieces for Rs 1000 denomination.
At the RBI’s currency verification and processing system, there were 2 fake Rs 500 notes and 6 fake Rs 1000 notes for every million pieces processed during 2015-16. These rose to 6 pieces and 12 pieces, respectively, during the post-demonetisation period.
As compared to 2015- 16, 12 clusters for Rs 500 denomination and 14 clusters for Rs 1000 denomination showed a statistically significant higher rate of fake note detection during the post-demonetisation period.
These findings imply a significant pick-up in the rate of fake notes detection at the Reserve Bank level in the post-demonetisation period as compared to a year ago.
Mains Paper 3: Indian Economy: Indian Economy and issues relating to planning,mobilization of resources, growth, development and employment
From UPSC perspective, the following things are important:
Prelims level: The trends in labour participation rate and unemployment rate
Mains level: Challenges of Development and Employment
1. The article talks about the fall in labour participation rate post-demonetisation as per the Centre for Monitoring Indian Economy(CMIE)
2. The central idea of the article is follows: A comparitive approach of the labour participation rate, unemployment rate and volatility of unemployment in the 10 months preceding and post demonetization.
Key trends in labour market post demonetization-
1. About 2 million jobs were lost between January and August 2017
2. The average labour participation rate during the 10 months preceding demonetisation was 47% which decreased to 44% during the 10 months following demonetisation
3. The immediate impact of GST has been less severe compared to demonetisation.
4. Labour participation was at its lowest in July 2017 but increased in the following months.
5. Demonetisation had a wealth distribution element which cushioned the impact of demonetisation on job losses
6. Monthly overall unemployment rate has been increasing steadily since August 2017 from 4.11% to 5.68% in October 2017
7. Overall employment rate showed a decline from September 2016 to April 2017. However it picked up from May 2017
8. Urban unemployment rate was 8.2% which was the highest recorded employment rate in the past 11 months
9. The rise in labour participation and unemployment rates indicate that although labour is entering the market, they are unable to find jobs.
10. The volatility of unemployment rate measured through the coefficient of variation increased from 8.8% in Jan-Oct 2016 to 23.5% in Nov 2016-August 2017
11. The volatility of unemployment in India was 8.3 times higher than in OECD countries in the overall 20-month period
1. Organisation for Economic Cooperation and Development(OECD)
– It is an intergovernmental economic organisation to stimulate economic progress and world trade
– Its headquarters are located in Paris, France
– India is not a member
1. Demonetisation: It is the act of stripping a currency unit of its status as legal tender
2. Labour Participation Rate: It refers to the number of people who are either employed or actively looking for employment
3. Unemployment Rate: It is the number of unemployed people as a percentage of the labour force
To achieve the trinity of Jan Dhan, Aadhaar and a more or less cashless economy that the government promises, it is essential for the commercial banking system to fall in line Cutting down the extra charges.
Commercial banking system falling in line means abolishing or reducing many of the extra charges that banks impose on customers and merchants for transactions.
These charges are mostly arbitrary, opaque to even educated customers, and wholly incomprehensible to most consumers, small merchants and traders who are supposed to migrate to the new system
If cashless is the goal, then what sense does it make to charge customers to issue a debit card? Facilitate cashless transactions, instead
Yet, there is a cost to implementing all the infrastructure and connectivity, which has to be recovered
It cannot be done through taxes or high transaction fees
Either would hurt the government’s monetary trinity goals
The solution is to balance volume with immediate value
Instead, if their managements look further ahead, it is apparent that short-term losses might lead to big midterm gains
What: Andhra Pradesh Chief Minister N. Chandrababu Naidu announced free phones and an application called ‘AP Purse’ last week.
Context: This is aimed at promoting the use of digital wallets and thereby moving towards a cashless society following the cash crunch.
Challenges: Unavailability of user interface in regional languages across devices that support cashless payments.
International Experience: Chinese and people of many other technologically developed countries have mobile interfaces in their own languages and not English.
Related developments: Introduction of Hindi Voice Search on mobile OS, and Hindi and other regional language keyboards by Google last year.
Also, some Indian mobile phone brands like Micromax offer operating systems in local languages.
ATMs offer Hindi and regional language user interface.
The way ahead: The government should ensure that the developers of e-wallets, bankers and others involved release versions of local languages to ensure that even a layman with little education background can use them.
In the context of the demonetisation drive and consequent push for a cashless society, make a note of these specific practical challenges. Language issue is a major obstacle as you can see.
Current cash flow deficit force people to make digital payments
Without proper precautions and security policies, the highly reactive nature of cyber security leaves us vulnerable to cyber attacks
Past records: Financial data breaches in India, exposed late October, had compromised the financial data of over three million users and victimised major banking companies
Breach occurred when a network of Hitachi ATMs infected with malware enabled hackers to steal users’ login credentials and make illegal transactions
Hackers breached a British mobile company, Three Mobile’s database
This put at risk the private information of six million users, which was later used to purchase mobile accessories at the users’ expense
Security of online transacting companies: PayTM, is certified under the Payment Card Industry Data Security Standard (PCI DSS) 2.0 certification
PCI DSS is current industry security standard set by American Express, Visa International, MasterCard Worldwide – an essential certification
These companies use 128-bit encryption technology to crypt any information transfer between two systems
It takes more than hundred trillion years to crack a password under 128-bit encryption!
Cyber threats: Other uses for stolen data include underground sales, identity theft, or targeted personal attacks such as extortion
Creating fake mobile applications and spyware that steal information, or social engineering tactics that make you reveal your login credentials
Forums on Internet are flush with step-by-step instructions on how to create fake websites that imitate digital payment platforms
Steps to control cyber theft: Companies that offer digital platforms should increase awareness among their customers of the risks, and educate them on ways to secure themselves
They must be proactive in looking out for any fake applications or websites that masquerade their service
Government should check if the current policies regulating these platforms are adequate and update them regularly
Customers must check the Website’s authenticity by searching for proper spelling of the Web address
Check if the Website is secure by looking out for a green padlock symbol on the left side of the Web address, and keep Web browsers updated so they can recognise illegitimate sites easily
We have summarised this op-ed in 4 major buckets – threat, new security measures, intro to cyber threat and steps to control. Most of this would now seem intuitive to you. Make note on the PCI DSS certification. What do you know about RUPAY’s security? What is NPCIL doing about Cyber threats?
Context: The data breach at 19 Indian banks that has led to more than 32 lakh debit cards being blocked or recalled is a wake-up call for the banking industry
For the government and the banking regulator, much is at stake as the two have sought to move in concert to harness the digital revolution to advance socio-economic policy objectives
Initiatives at stake: Better targeting of subsidies through the direct benefit payments model, improving economic efficiency by lowering transaction costs, and moving toward a cashless economy
Way forward: With banks in India having embraced technological change, the onus is on them to integrate inter-generational legacy systems across branches, ATMs and online banking networks into one seamless and secure whole
Earlier this month, the government released a draft proposal that, if accepted, will see income tax benefits for consumers, who predominantly use electronic transactions for payments.
What else? Key Issues to be addressed:
The advances-related frauds continue to be the major concern for banks, especially because of their size and far reaching implications to their financial soundness and integrity.
A special variety of frauds, which are increasing in number and in terms of speed, are the cyber frauds.
Banks should make an effort to really know their customers — their backgrounds, stated activities or profession, their signature style of operation and digital footprint in the case of online transactions, etc.
This would allow a bank to draw up a robust customer profile and put up a red flag if there is any exception to the norm.
In this article we will explain what Cashless economy is, what are the major advantages of cashless economy and what challenges India will face in moving towards a cashless economy.
What is a cashless economy?
Benefits of Cashless economy
Challenges in making India a cashless economy
Steps taken by RBI and Government to discourage use of cash
What else needs to be done?
India continues to be driven by the use of cash; less than 5% of all payments happen electronically however the finance minister, in 2016 budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money.
Even the RBI has also recently unveiled unveiled a document — “Payments and Settlement Systems in India: Vision 2018” — setting out a plan to encourage electronic payments and to enable India to move towards a cashless society or economy in the medium and long term.
What is a cashless economy and where does India stand?
A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.
India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil.
Less than 5% of all payments happen electronically
The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.
Reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left.
It will curb generation of black money
Will reduce real estate prices because of curbs on black money as most of black money is invested in Real estate prices which inflates the prices of Real estate markets
In Financial year 2015, RBI spent Rs 27 billion on just the activity of currency issuance and management. This could be avoided if we become cashless society.
It will pave way for universal availability of banking services to all as no physical infrastructure is needed other than digital.
There will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients. Thus once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs.
There will be efficiency gains as transaction costs across the economy should also come down.
1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided.
Hygiene – Soiled, tobacco stained notes full of germs are a norm in India. There are many such incidents in our life where we knowingly or unknowingly give and take germs in the form of rupee notes. This could be avoided if we move towards Cashless economy.
In a cashless economy there will be no problem of soiled notes or counterfeit currency
Reduced costs of operating ATMs.
Speed and satisfaction of operations for customers, no delays and queues, no interactions with bank staff required.
A Moody’s report pegged the impact of electronic transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because of increased velocity of money
An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers.
This will eventually have the following chain effect:
Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run.
Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.
Challenges in making India a cashless economy
Availability of internet connection and financial literacy.
Though bank accounts have been opened through Jan Dhan Yojana, most of them are lying un operational. Unless people start operating bank accounts cashless economy is not possible.
There is also vested interest in not moving towards cashless economy.
India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure.
The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. It could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulators will have to take a tough stand against such rent-seeking behaviour by the banks.
Steps taken by RBI and Government to discourage use of cash
Licensing of Payment banks
Government is also promoting mobile wallets.Mobile wallet allows users to instantly send money, pay bills, recharge mobiles, book movie tickets, send physical and e-gifts both online and offline. Recently, the RBI had issued certain guidelines that allow the users to increase their limit to Rs 1,00,000 based on a certain KYC verification
Promotion of e-commerce by liberalizing the FDI norms for this sector.
Government has also launched UPI which will make Electronic transaction much simpler and faster.
Government has also withdrawn surcharge, service charge on cards and digital payments
What else needs to be done?
Open Bank accounts and ensure they are operationalized.
Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
Tax rebates for consumers and for merchants who adopt electronic payments.
Making Electronic payment infrastructure completely safe and secure so that incidents of Cyber crimes could be minimized and people develop faith in electronic payment system.
Create a culture of saving and faith in financial system among the rural poor.
The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.
Though it will take time for moving towards a complete cashless economy, efforts should be made to convert urban areas as cashless areas. As 70% of India’s GDP comes from urban areas if government can convert that into cashless it will be a huge gain. Therefore different trajectories need to be planned for migration to cashless for those having bank account and for those not having.