A shift towards a digital economy is natural — that’s the word coming from railway minister Piyush Goyal. In an exclusive conversation with CNBC-TV18’s Shereen Bhan the minister also added that the government will not forcefully lead people to go digital. He also talked about the key lessons from the demonetisation exercise. Shereen also spoke to Ajay Banga CEO of Mastercard.
Below is the transcript of the interview.
Q: If I could ask you to elaborate for us what the lessons have been from the experience post November 8?
Goyal: One very clear learning has been that over the last few years and I have been looking at the numbers, this happened particularly after 2005 or 2006, the country just kept printing more and more currency and we almost encouraged cash transactions rather than banking transactions or digital transactions.
So, you saw huge amount of increase in the percentage of cash to the GDP in the 10 years before 2016. That is not good for any economy for two or three reasons. One is, it adds to cost, it is an unnecessary cost. Second, the traceability of funds becomes very opaque and most importantly the safety and security of money. A poor person in a village doesn’t have very great security in his home. Should he keep his savings in a safe or in a cupboard in his home, it is very possible that he may lose that or it may get stolen. So, the country over a period of time had become too used to cash. The good big thing that happened was that the country is now seriously moving gradually towards digital economy.
In terms of other learnings, I think traceability of cash, just allowing banks to give any amount of cash to any and everybody who wants to withdraw it may not always necessarily be good. It also causes economy moving from a formal economy to an informal economy. So, some amount of check and balance on where the money is going, what is happening with large amounts of currency is good.
Prime Minister yesterday spoke about how the cash to GDP ratio has improved from 12 to 9 in a growing economy, which means the currency has significantly reduced in the system.
To my mind digitalisation is inevitable, it is happening the world over. India has the opportunity to take a lead in that. We are now leading in many areas be it climate change, be it renewable energy, be it telecom, I think we have an opportunity to lead the world in digitisation and that is one big outcome that I expect happening out of demonetisation.
Q: When you talk about India leading the way so to speak when it comes to digitalisation, if I could only ask you about this specific parameter – cash in circulation, do you believe that this is the zone that you find comfort in or do you believe that we need to do much more to bring down further the cash in circulation?
Goyal: It will be a natural phenomenon. Even after the demonetisation initial rush, government per se hasn’t done anything to make people move towards digital transactions. It has happened naturally as more and more people are recognising that it pays to be honest, it pays to move into the formal economy and not be a part of the informal economy as transactions are becoming cheaper on the digital medium, as smartphones are increasing. We already have 300 million odd smartphones in India and which are slated to double by 2020. Smartphones have become your bank, your wallet, all of that in one.
Post November 8 2016, I don’t remember spending cash accept at the temple. Internationally I have paid by card at temples in London. So, it is not as if it is something very difficult to imagine. I actually don’t recall paying cash for anything other than my temple donations in the last almost a year now.
Q: We have seen an uptick in digital transactions, in fact UPI transaction volumes are up 10 fold since December. 30.8 million in September, up 8.5 percent from the previous month. If I could ask you about one particular aspect which often doesn’t get talked about and SBI has done some analysis on that, that banks today suffer about Rs 3800 crore of losses to run the current payment infrastructure system. So, what are the lessons as we move forward to ensure that we have the infrastructure system in place and also that banks don’t actually have to bear the burden of this, what is it that we need to do?
Banga: I am not familiar with that number, so it is a little bit of a surprise to me. The cash to GDP angle – in the world 85 percent of retail transactions, people buying merchandise are still in cash. In India that number is 90 plus percent, it has reduced because of some of the activity of the last 4-6 months but it is still a very high percentage. Having said that, in the US it is 50 percent, in Germany it is 80 percent, in Japan it is 80 percent, so this is not an emerging market or developed country thing, it is something to do with infrastructure, culture, history, a lot of the things that Piyush Goyal touched on when he started off. That is a guiding post for us to think about.
The only countries in the world where cash is smaller than digital are South Korea and the Scandinavian countries. The reason those two countries are in that situation is because of very enlightened government policies with a lot of education of consumers. A lot of the things that I think this government is beginning to do are all in the same direction.
Q: What is it that you would like to see from a policy perspective to encourage the creation of the ecosystem?
Banga: I believe a lot of things are happening. I think GST will make a huge impact because of the fact that there is no longer an incentive for a merchant to take cash payment from a customer and cannot provide a discount because of tax avoidance. So, the whole system changes when you introduce this and when it goes through the supply chain – all the way from the manufacturer to the end point where the consumer buys.
Second thing is it is really important to provide the right incentives in the system for merchants to accept electronic payments. What Korea did as an example, is they said if you take electronic payments at a greater percentage than X in your number our tax guys will come and audit you once in two years, if you don’t we will be there every three months.
Q: Is that something that you might want to consider?
Goyal: I am happy that this got raised. Post demonetisation we were looking at all the digital modes of payment and thinking how we can encourage, that is when Ajay and his team I had a lot of interactions. We studied the South Korea model and learnt a lot from it, that is the advantage of having a government which has an open mind. We are not necessarily saying that we have to reinvent the wheel on everything. For example in our tax policies, finance minister Arun Jaitley brought in this clause that when you have a turnover up to I think Rs 2 crore, the amount you transact digitally, the presumptive taxation rates are much lower, significantly lower. Instead of 8 percent, they take only 6 percent.
We are in our own way trying to encourage digital payments. My sense is that all of these various initiatives will help us move the needle very rapidly.
Railways used to charge a service charge. Post demonetisation they removed that service charge and we saw digital transactions really shoot up. Now the only charge that is charges is the merchant discount rate (MDR). I am now engaged with bankers to see what we can do about that MDR also.
Q: Let me ask you about the issue of regulation and I remember when Kenneth Rogoff was here in July and we spoke with him about demonetisation and the lessons from demonetisation, he was very clear that he does not believe in going cashless, but what he did seem to suggest is that you should have regulation to bring down the use of cash. Now we have seen several recommendations, whether it is the SIT saying that there should be a cap on withdrawals and so on and so forth, from an idea or a vision as far as regulating the use of cash is concerned, what further can we see?
Goyal: We have no plans to really focus on regulation as much as on persuasion. My own sense is that is what works well with people and will give us faster and better results. I don’t think we need to regulate that, I think what we need to do is only incentivise like we did with the income tax, for digital transactions B2B. Going forward the government is looking at different ways to encourage to people to transact digitally.
Q: You said that more regulation is clearly not on the governments’ agenda at this point in time. You would like to use persuasion to get people to move to digital transactions, let me also then ask you about what the future is as far as high denomination notes are concerned. There was confusion post demonetisation that we brought in actually Rs 2,000 note but the government explained it saying that this is what was needed to tide over the demonetization. We understood the logic of that then, but now what is the thinking as far as high denomination notes are concerned?
Goyal: I don’t know if that is something which is well beyond my paygrade.
Q: Let me ask you for your point of view personally.
Goyal: I don’t think many people here are carrying too many high denomination notes these days; that is passé. We all use digital means to transact, more and more of the country is using digital means. Tell me one thing, the story about high denomination notes, how many occasions are there in any of our lives where we need to pay Rs 5,000, Rs 10,000, or Rs 20,000 to somebody? It is a very rare thing. It is maybe in a five star hotel like where we are, that we may need to settle a bill, if Rahul has a had a big Marwadi Thali which is too expensive for somebody else that you may need to pay a large amount of money, or Godrej has had some nice delicious prawns maybe, but otherwise where do we spend large amounts of money in any case. So there is no need to really have very large amounts of cash in our pockets.
Banga: I guess both Adi and Rahul would favour the Mastercard, I can assure you that.
Goyal: I can promise you if we look into their wallets, they will also have Visa and an American Express.
Banga: My competitors have words that are four letter words; Visa and AMEX are both four letter words. You got to remember that they can have a brand with more than four letter word.
Q: Let me talk to you about collaboration and you have just signed an MoU with state government of Andhra Pradesh today, the chief minister was here. Give me a sense of when we talk about collaboration, realistically on the ground what is your ask, what is your expectation whether it is the center or state.
Banga: What you have done is specific with Chandrababu Naidu is that he has signed a collaboration on four areas. One of it somebody was referring to in our opening panel, on farmer tools. So with the Gate Foundation in our lab in Kenya, we had developed a very simple tool which allows farmers to engage with a marketplace without going through middleman. They therefore get paid directly without the middleman. They can also get access to fertiliser, seed, and cropping patterns and so on. We are going to adapt that to Indian users, built it in a lab in India and roll it out in Chandrababu Naidu’s state as a starting point. However, my ambition is through people like Goyal to reach the central government and look at similar ways of being constructively helpful.
Goyal: This sounds very interesting. I would love to know more about it.
Q: Since we are talking about digitisation, let me also bring in the aspect of inclusion now and whether it is through Aadhaar, it is through the JAM Trinity, the effort on the part of the government is to try and get more of the unbanked within the banking system or at least access to some kind of finance and credit. What next now in that endeavour, what next in that effort?
Goyal: First all I must acknowledge the contribution of all the bankers of India. I remember it was at Davos in 2015 when the World Bank President actually asked me to convey to Prime Minister Modi his compliments that in a short span of four months, India was able to do something which the World Bank has targeted 2030 as the terminal date. Read more