Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

A digital device for every Indian

It is my view that if India wants to replace cash with digital payments, it must be prepared to issue a digital device to every Indian and simply absorb the fiscal cost of doing so. The alternative is a tiered payment system with high quality payments for those with smartphones, a second tier solution for those with feature phones and a broken model for those with neither. Such a tiered payment system that makes some Indians second class citizens in their own country is fundamentally irreconcilable with our democratic values and with the constitutional guarantee of legal treatment.

Cash gives the poorest of the poor access to a retail payment system that meets the gold standard for payment systems: real time gross settlement in central bank money. It is unacceptable to give them anything less than this in a digital solution. Settlement in commercial bank money or other inferior forms of money can be a choice, it can never be a compulsion. I might voluntarily choose to adopt a paytm wallet or a bank wallet and take the credit risk that the wallet provider might fail; but I should not be forced to do so as the price for participating in digital payments. This means two things:

  1. The Reserve Bank of India should introduce electronic money on its own in the form of an official e-wallet because only an e-wallet filled with central bank money can replace cash. This would also solve the problem of interoperability between different wallets. A core function of the central bank is to be the “tender of the tender” – the issuer and maintainer of legal tender of the country. A central bank that abdicates this responsibility forfeits its raison d’être.

  2. Every Indian must be issued a digital device that allows first class access to the digital payment system. There is room for bringing the cost of this device down by careful design that pares it down to just its core functionality. I would think that a starting point for this might be something like the Raspberry Pi which is enough of a general purpose computer to run at least a bitcoin SPV client. The Raspberry Pi costs about $35, but a suitably pruned down device manufactured in truly large scale might cost only $20. Giving one such device to every Aadhar holder might cost about 1.5 trillion rupees.

In my view, this cost is affordable for a country at our stage of economic size and development, and is also quite reasonable in comparison to other big ticket fiscal expenditure (for example, large defence contracts, infrastructure projects or subsidy schemes). It is perfectly fine for you to take the opposite view that this cost is unacceptable. What you cannot do is to use that view as the justification for building a great payment system for the elite at the cost of taking away from the poor what they have today – a payment system (cash) that allows them to settle in real time in central bank money.


6 responses to “A digital device for every Indian

  1. Karthik December 9, 2016 at 3:59 pm

    we can discount a lot of users – close to 300 million, who probably have their own smart phone which can satisfy the requirements for accessing this digital payment system

  2. Sitaraman Iyer December 9, 2016 at 4:12 pm

    Both your solutions promote socialism. A system that has always failed

    Starting with point no 2
    Distributing digital devices.
    Classic socialistic approach.
    A Why should tax payers pay the price. We jeer when AmMa and karunadhi distribute TVs mixer grinder . Why should one suddenly cheer if we distribute digital devices.
    B who will pay the price to upgrade these devices as currently most digital devices get obsolete in 2-3 years.
    C Very recently IIT tried to promote a low cost tablet(Aakash) along with datawind. End result- Classic fail

    Time and again private sector has proved that they can out compete public sector/government on cost, technology and service yet we want the government in unnecessary fields

    Now to point no 1
    Centralised wallet governed by RBI
    Novel idea, sounds good on paper but the problem is that it’s another socialistic solution.

    Did any one stop RBI from starting it’s own wallet. Obviously it’s not in their mandate to be a B2C player but even if they had that mandate would they have started it.

    If RBI was that smart they would have beaten Paytm to the the market.

    Fact is Paytm got there first and is a leader because they identified the problem and decided to provide a solution. That’s the power of private enteprise.

    Let private/public wallets and banks compete to serve the poor middle class and rich. Differentiated solutions would emerge

    • Jayanth Varma December 10, 2016 at 2:12 pm

      I would happily agree with you if you are also willing to allow the same private sector competition in paper currency: let a hundred banks and non banks print 100 rupee currency notes and let these currencies compete freely with each other. I would agree with you even more if you say that we should abolish state created money altogether and adopt something like Bitcoin which is pure private money. What I cannot accept is that paper money must be nationalized but digital money must not be.

      What I also cannot accept is that paper currency can be abolished without giving the poor the same level of security – central bank money as earlier. As I wrote in my post, I am quite fine with your saying that the taxpayer should not incur the cost of digitizing cash. But if so, you should not propose a cashless society. If the tax payers want a cashless society, they must pay for it. They cannot get it free by stealing cash from the poor.

      I am as free-market as they come, but I cannot stand crony capitalism – increasing the business of some fintech companies by taking away from the poor something they enjoy today.

  3. Orient Views December 10, 2016 at 9:17 pm

    I agree with your point that cash gives the poor access to retail.. but the larger issue is being neglected here.

    The cash is not the real money. It is just a tender for silver. A hundred rupee currency note is a bond promised by the central bank that they are bound to pay 100 silver coins in exchange for this note.

    SO when currency note itself is not real money, how can we accept digital payments as real ? I completely reject the bitcoin concept.

    Digital payments should play the role as a mere electronic receipt of transaction which we normally do using paper. It should not be converted in to totalatarian economic system. I deposit my cash in my account, transfer it to my friend, and my friend should be able to get back the cash at his branch. Currency NOTE should be the basis. And the currency note should be tallied with the amount of silver / gold in stock. which means, the govt should print only the amount of currency notes for which it has corresponding silver and gold.

    However, if we see the past history, the UPA govt has ordered printing of abnormal number of currency notes without the backup of real money.

  4. Pingback: If RBI launches an e-wallet, would you make an account? | The Indian Economist

  5. Pingback: Demonetization as a window to force a Digital flip | Reality Check India

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