“One could make this argument [with TRAI]”, says my friend Dr Arun Mehta, “that the people who need it most are being denied mobile phone value added services.” We have been discussing, on the India-GII mail list, the enabling of money transfers through mobile devices.
But TRAI cannot act in this matter, unfortunately, and that’s to do with the implementation of the capital system (not political, I mean the nuts and bolts of the system). This blogpost looks at why, but (since it is difficult to shut me up once I have got started) it goes further, to chalking out a scenario where virtual cash rules.
In order to maintain the economic/fiscal situation, the government mandates RBI to make the rules. RBI in turn authorises two kinds of entities, [specific] banking and non-banking financial institutions, to handle financial transactions. Banking, in this context, is primarily retail banking. Any transaction that does not involve either of these kinds of entities is a cash transaction, unrecorded and not contributing to estimates/measures of the financial health of the economy.
As with any other kind of structures we create, the power implicit in these structures means that they act in accordance with the holding and exercise of power itself, rather than for their intended purpose. Meaning, of course they achieve their purpose as well, but they tend to do so only to the extent they consolidate or validate their power.
Now, virtual cash of the kind discussed here, transacted through a system entirely contained within the mobile network, is currently considered a transaction of the second kind, unless a linkage is built into the existing banking/non-banking [but the non-banking FIs are prima facie not authorised to handle retail banking, remember] network.
Is there any reason to continue with the existing regime? Well, the checks and balances built into the banking system have been built for a purpose, that of protecting the financial system. This works pretty well, as we have seen during bank collapses, when the larger system has not failed. These checks and balances are not at all convenient for a telco, which has no reason in particular to safeguard public money (ie money belonging to someone else, not invested in the company itself).
Telcos and their network operations are governed by the IT&T ministry, whereas banks are managed [largely] by the Finance ministry. This structure, in the Indian context, pretty well seals off the possibility of any chunk of the business moving away lock, stock and barrel from the FM [which has, by framing the rules about bank-telco cooperation, ensured they are kept in the picture].
So that pretty well answers Arun’s query. But is the real question answered, and why should we even care?
Our conversation on India-GII began when someone made the observation that the reach of the telco network is already significantly larger than that of the banking network. Not just the reach, but the quality of that reach, ought to indicate that the time is ripe for positive change. The penetration of mobile connectivity to poorer and more non-urban people is a reality, intuited from the fact that the installed base of telephones has already gone up too high, it is beyond the possibility that only the urban elite have, exclusively, bought up all the phones in the market.
Why should the economy seek to restrict those who are authorised to handle money? Why not throw open the doors to all and sundry to handle banking [retail banking]?
Oddly enough, (in my more cynical moments, I may think, not at all oddly) the answer to this question lies in greed, and power.
Not individual greed, and not individual power, but the dog-in-the-manger attitude of vested interests.
Historically, the government’s planning of public expenditures has been based on revenues from direct and indirect taxation. The former depends on the generation of income, whereas the latter is merely skimmed off from different kinds of transactions.
The former kind of taxation historically did not pay for itself until the economy took off (the point of inflexion was about 2-3 years ago, when the income tax department actually turned net positive in direct taxation. I wonder if it has also succeeded in recovering its losses accumulated over the past 60 years). As the economy keeps growing, the numbers of people contributing direct taxes will carry on increasing, hence also the collection.
However, they will also be carrying out more transactions, hence collections of indirect taxes will also keep climbing. In fact, this kind of economy is fueled by the creation of demand, so this is axiomatic.
Naturally, there is a significant amount of rivalry and one-upmanship between collectors of direct and indirect taxes. No way the direct tax folks are going to give up their noble heritage (well, it became noble only a couple of years back, when they began to pay their own way, but never mind). No way they are going to allow the suggestion at the end of this post to be institutionalised. None at all – unless public pressure brings about such a situation.
What has queered the pitch for such ideas to gain acceptance in the past is the fact that there is no physical aspect to mobile cash (or any other kind of smart cash). Fear of the unknown, and (lest you think I am totally naive) the need for some people to constantly generate unrecorded transactions. Since such people prominently include politicians, the way ahead is not all that smooth.
It is actually very possible to create a direct link between any smart cash transaction and the person to whom the cash device is issued. This is convenient for the collection of direct taxes, since the accumulated differences between a person’s (a taxable person) purchases and sales transactions is income.
It has no impact on the collection of indirect taxes, because there is no reason to believe that the appearance of cash convenience is going to increase the amount of wealth in the economy by itself.
One of the big problems with indirect cash collection is the fact that there is no way to automate the recording of every cash transaction. It needs the voluntary compliance of both buyer and seller, neither of whom, given the presence of direct taxes, is particularly interested. With non-electronic systems, it is extremely difficult to persuade people to overcome their reluctance to document their transactions, when this almost certainly means that some of the amount will be skimmed off by taxes.
With electronic systems, it is easy to build in some incentive or disincentive, say a minimum deduction on every transaction between non-person entities, that encourages people to correctly register the details of the transaction. Without this detail, only small transactions will be allowed (and a single device will have a limit of successive small transactions) between persons, and none at all between non-person entities.
This will push up collections on the indirect revenue front to near 100% (I do concede that there will be some smart cookies around who can subvert the best of the best), and obviate the need to collect direct taxes completely. Since the collection of indirect taxes is also automated, the need for managing the physical aspect of collections will be considerably reduced (oops! there went a lot of government jobs!).
Continuing the regime of physical money, when electronic alternatives exist, is therefore anti-economy – anti-national, if you prefer, although that doesn’t attract me as much, as an argument, since I have little desire to follow in Mr Hitler’s footsteps.
Let us turn this upside down.
While it is very convenient and definitely more equitable to use cash in place of barter, there is no particular reason for that cash to be in the form of currency notes or coinage. Such material matters are a function of technology, and metal or paper (plastic fibers, mostly, these days) is all we had as a [secure] means of exchange until the development of cheap flash memory.
What if we trashed the idea of paper and metal currency, and switched over to virtual money?
It would be quite simple to make it available everywhere, smart devices (starting with smartcards and moving up in complexity from there), together with ubiquitous readers in the kinds of shapes and sizes that shops need (in fact, ‘exchange’ could be a microbusiness in itself, just as mobile handsets found a valuable secondary use as public call booths).
Why isn’t it happening already? Every effort by the government, in recent times, has been to try and link smart communication devices to specific beings (I mean here in India). Aside from the threat of conspiracy to commit terrorism, there really is no reason to link phones to people. Mobile phones are sold in many countries without any such linkage (in Europe, I know for sure). Of course, mobile phones aren’t the only purveyors of smart cash, but they are already here, so it makes sense to liberalise their ownership wherever possible.
In fact, other issuers of virtual money, such as stores with special value cards, do it as a kind of loyalty management program, strategies to track customer preferences, so they have no interest in supporting the unlinkage of money and individuals.
Current cash has no such linkage, and is handed about freely, without any possibility of tracking (until the sums get large, for which every bank is mandated to report cash deposits and withdrawals above Rs 20,000). As long as the cash stays outside the system, it remains untraceable.
But cash outside the system is of no use to an economy, which is why India’s large black economy, variously estimated to range between 60 and 100% of the recorded economy, is of no use when judging India’s economic size in comparison with other major economic centers. Therefore every effort should be made to bring cash (and cash transactions) into the system. Nuisances like additional tracking and people-linking add – artificially – friction to the flow of money. When friction designed for large transactions is added to small transactions, such transactions are discouraged, and their volume, and therefore value too, remains nothing to write home about.
In simple terms, the poor remain poor and out of the system, the rich remain unaffected (and in fact, are so brainwashed into the sanctity of cash, that few people seem to think about the means of it). Bringing the poor into the economic system remains at the very core of the global development paradigm, and this is stymied by current fiscal structures.
Now, if the structures are to change, we need (doubtless more than this shortlist, but it’s a fairly complete starting point):
* New banking entities enabled, who can use ICT exclusively (which would truly add meaning to the proud banner “we have no branches”) for managing cash transactions (it would include issuers of standalone cash cards, telcos and oil companies),
* Abolition of personal income tax (and as a corollary, dismantling direct tax entirely), with harmonisation of indirect tax rates to compensate in the short term for the loss of direct tax collection,
* Design and popularisation of smart cash readers and exchange devices, featuring simple commandsets that enable cash transfers to link individually with particular exchanges of goods and services, and automated deduction of indirect (transaction) taxes at source,
* Linking electronic transactions together in a national Economy database (with transactions made between individuals anonymously lumped into one miscellaneous category).
I think it is important to keep cash the way it is today, anonymous, because removing the stigma of economic crimes from cash transactions immediately saves the country the most significant source of friction in slowing the velocity of money. While the size of the economy is doubtless important at some level (the per capita size, naturally, but even the overall size really pumps up the testosterone of some people who, apparently, matter), the health of the economy is directly related on the velocity of money within the system.
Now, when cash dominates a system uncontrollably, we have a situation called inflation. With current inflation rates in India hitting 12%, anything hinting of looser controls will naturally be dumped without so much as a how-de-do.
And here’s the value of smart cash – it is too smart to get added anonymously into the system, it won’t allow clever cheats to ‘forge’ money into the system. The less time (and money) wasted on tracking every person transacting and generally being paid-up members of the economy, the more intelligence can be built into avoiding abuse and forgery.
It is rather tiresome to me, to find investigative forces (police etc) seeking ways to increase the amount of citizen surveillance in form or another, on the grounds of national security/terrorism. But it really insults my intelligence when I find it being justified on the grounds of revenue collection.
Guaranteeing free citizens the freedom to do business and communicate effectively, is fundamentally at the core of democracy. We need the maturity to recognise this at the national level, to demonstrate the value of freedom, in a world that seems to have lost track of this goal.