With cash back to pre-demonetisation levels, you would think the government would be thinking of ways to drive up digital payments. After all, the Watal committee report talked of DeMo aiming to bring down cash-GDP ratio from 12% to 6% within three years. Though a high cash-GDP ratio is not always an indicator of a large illegitimate economy, the government was happy to push increasing adoption of digital payments as a goal of the currency ban. Given the electronic trail digital transactions leave, they are indeed desirable. So, it is difficult to understand why the government would have went ahead and limited cashbacks on digital payments on the UPI platform to Rs 150 in an user’s lifetime from Rs 750 a month. To be sure, there are people gaming the system and the government has already spent Rs 1,000 crore on cashbacks in the just the last three months. However, drastically reducing incentives for the entire user base instead of cracking down on the cheats—the government has enough bandwidth to sieve legitimate transactions from the fraudulent ones—will end up discouraging digital adoption.
What is also disturbing is that the cashback scheme is now only available for the BHIM app, and not to banks’ UPIs that were covered earlier. It is true that the government will have to push BHIM adoption since that has not really taken off. But queering the pitch for banks’ UPIs in the process is not the way to do this, since the larger digital payments ecosystem is dependent on wide reach, through multiple platforms. This is not to say that the cashbank incentives should continue ad infinitum, but a sunset clause should have been worked in instead of a knee-jerk repsonse. For instance, the government could have identified those users who have received cashbacks beyond a certain cap and gradually shrunk the cashbacks for them while letting the new users benefit. After a certain metric of usage (including number of users and transactions, apart from transaction size and overall amount transacted) had been achieved—and not just in person-to-person transfers—the government could have ended it entirely. The present move is likely to have a chilling effect on digi-pay adoption.