The Indian Express (Delhi Edition)
Slowdown, more pain ahead, warns Kaushik Basu
One of the underlying charges, the merchant discount rate, is decided by the banks themselves. While there is a cap prescribed by the RBI on the MDR applicable on debit cards, there is no limit on that for credit cards CASH CRUNCH
THE GOVERNMENT’S decisive push in favour of incentivising digital payments underscores the need to plug a number of regulatory gaps governing products such as credit and debit cards, internet banking and mobile wallets. Two of the elements that could come under scrutiny are the arbitrariness in levying merchant charges, which add to the cost of every digital transaction, and the need to enforce the interoperability of digital tools such as wallets.
One of the underlying charges in the digital transactions space, the merchant discount rate (MDR) — that is charged to a merchant accepting card payments and sometimes passed on to the consumers — is decided by the banks themselves. While there is a cap prescribed by the Reserve Bank of India on the MDR applicable on debit cards, there is no limit on that for credit cards. Government officials indicated that there could be a move towards removing the arbitrariness of the merchant rates and aligning their estimation on the “work done” principle, the principle followed for determining the interconnection charges in the telecom sector.
“The transaction involving the digital transfer of money occurs essentially entails the creation of a ledger entry by the entities such as banks, and for that charges should be close to zero. This charge should be only based on the work done. Once you do that, these transactions will become almost free,” a senior government official said. The RBI in 2012 had rationalised the MDR for debit cards, capping it at 0.75 per cent for transaction values up to Rs 2,000 and at 1 per cent for transaction values above Rs 2,000. This was done in order to encourage all categories of merchants to deploy card acceptance infrastructure and also to facilitate acceptance of small value transactions through card payments.
However, in its Concept Paper on Card Acceptance Infrastructure issued in March 2016, the RBI noted that the MDR continues to act as a clear disincentive. “Though the regulatory policy on MDR (issued in September 2012) had indicated a cap on MDR, it is generally treated as floor, with the benefit of lower MDR not really accruing to smaller merchants. In certain segments like mutual funds, insurance, etc. a flat fee structure of charges has also been established by the industry,” the RBI noted in March. Hence, cash continues to be the predominant mode of payment as it appears to be “costless” in comparison to the visible costs associated with card and electronic payments.
An industry representative said that the MDR for debit cards, despite being regulated, is fixed by banks and the payment network companies. The government official cited above said that: “These charges are being paid by a customer or a merchant to the system. It’s the banking system gain, and it is in their interest to charge the merchant or the customer. This is not financial inclusion. The Reserve Bank of India must issue a fiat to banks to end these charges. Digital transactions should be made cheap and convenient, and physical transactions should have a levy.”
The RBI has reportedly presented a number of options to regulate the merchant rates, including an option of levying uniform ad-valorem MDR across all merchant categories and locations and setting MDR for debit cards as a fixed or flat fee for transactions beyond a certain value. Another sector that has seen surge in its volumes post the Centre’s November 8 announcement is of the prepaid payment instruments,ormobilewallets.evenasthecompanies pay a 1-2 per cent fee to the banks when their users load money into the wallets, the bigger ones with a wider merchant network earn from the funds that stay in their own system. The National Payments Corporation of India had proposed to the RBI that interoperability between these wallets would be an added service from which customers would benefit and give boost to cashless transactions.
A government official also said that the integration must not happen only within various wallets but also with the unified payments interface (UPI). “The wallets have to be interoperable. They must get integrated with UPI. Otherwise they are just islands. Interoperability is such an essential stuff. Either you integrate them with UPI, or create their own switch, and let that switch talk to UPI. There is a need to completely integrate every payment method and architecture,” the official said. He said that interoperability between wallets must be made compulsory failing which the bigger wallets, which can sustain themselves on their own, would not opt for money transfer to and from their wallets to those run by other companies.
“If you don’t mandate payment wallets to be interoperable, the bigger ones won’t come on board. They’ll say they are big enough to sustain their network on their own. The tendency of the bigger wallets will be to not become interoperable. Similarly, the bigger banks will have a tendency to not come on board UPI. The problem is that when transactions become commoditised, big players don’t like it because they get subsumed, and they wouldn’t want to participate in the network,” the official said. INDIA’S FORMER Chief Economic Advisor and former chief economist of the World Bank, Kaushik Basu has warned the government that the economy would take a turn for the worse next year besides greater suffering for people in the days ahead and of a new form of corruption building up in the wake of the withdrawal of Rs 500 and Rs 1,000 notes.
Basu has been quite critical of the government’s move after it was first announced on November 8, having tweeted that the economics of demonetisation was complex and that the collateral damage was likely to far outstrip its benefits, joining a growing number of those who have slammed the government’s decision, including former Prime Minister Manmohan Singh.
According to him, the currency shortage in the country is unlikely to ease any time in the near future. He said that close to Rs 12 lakh crore has already come into the banking system of the total high value notes in circulation of around Rs 15 lakh crore. However, the RBI has supplied only Rs 4 lakh crore notes. Around Rs 6 lakh crore will be supplied by the end of December 30, leaving a big shortage, he said at the third N R Kamath Colloquium at the Indian Institute of Technology, Bombay. on Friday.
Basu, who was the Chief Economic Advisor of the UPA government during 200912 and is currently the C Marks Professor of Inetrnational Studies and Professor of Economics at Cornell University, hit out at the demonetisation drive, saying “it’s a wrong step with design flaws … that needs to be corrected. It’s hurting people which are not the intended target.”
Basu said that there will be deeper second and third round effects of the demonetisation move including an imminent slump in growth of economy. “The RBI said GDP growth will come down from 7.6 percent to 7.1 per cent this year. I think it will be 7 per cent or 6.9 per cent. The next year will be worse as productivity will suffer and agriculture sector will be hit,” he said.
Basu cited the example of the only other precedence of demonetisation in the country in 1978. While it was a ‘small demonetisation’ as only the Rs 1000 notes were demonetised, the following year was when independent India had the worst growth. “In 1979-80, India grew by -5.2 percent… Maybe there was some role to be played by the demonetisation,” said Basu adding that interfering with the law of the market was not good for the economy.
Basu said the support for demonetisation is unlikely to last for a long time once the people undergo sustained hardship over currency shortage and the economy and agriculture faces slowdown. Productivity will suffer and demand for certain things will rise and others will fall, he said. Cautioning the government overthe‘moneymules’whowillconvertblack money into white money for others, Basu said, “a new form of corruption is already building up in the country. People can easily create black money using Rs 2,000 notes. Besides, demonetisation has already spawned a new black market to service people wishing to offload old notes. Large amounts of cash are broken into smaller blocks and deposited by teams of illegal couriers.”
Quoting World Bank and Mckinsey reports, Basu said black money is around 2025 per cent of the country’s GDP and tackling corruption and black money would require changing institutions and mind-sets and formulating suitable policies considering the complexities of the economy and society. Close to 98 per cent of the transactions in the country are by cash, he said, adding, “it could make the old Rs 500 notes legal tender again. The government can use ‘helicopter’ money to inject more funds into the system. It will take some time for the country to get into the digital mode”
Basu said Rs 500 and Rs 1,000 notes form 86.4 per cent of the value of currency in circulation.“tosuddenlyjamonthebrakesonthese has to have huge effects on the economy. The first effect observed is people queuing up to exchange money,” Basu said and added that these effects will appear smaller compared to the future effects that the move is bound to have. “Because of this huge jamming [of currency] that has taken place due the demonetisation, the government has to step in everywhere. They are trying to bring new rules, regulations, trying to get into the market. This is interfering with the invisible hand which is the law of the market,” Basu said.
In another example, Basu said that Brazil’s measures to fight corruption following major scandals had side-effects, too and the country was grappling with a current growth rate of -3.2 per cent.
Basu challenged the reasons cited by the government for the demonetisation move. “That the demonetisation will counter India’s problem of fake Indian currency notes was a non-argument,” he said. He said the move will not catch the menace at its root — the source where the counterfeit currency is printed — as the fake currency was already in circulation among people who had nothing to do with the source. Moreover, the problem will not be wiped out as soon new counterfeit notes of the denomination of Rs 2,000 and Rs 500 will be printed. “For this what you need to do is keep improving the quality of currency notes gradually,” he said.
He thrashed the government’s claim that taking black money out of the system would dampen inflation.