Gradeup Magazine: Let's Talk Business #19

Q:When government introduces digital payment all over India, what would be the challenges faced by Rural areas? How will GOI overcome the problem?

There are 5 key challenges to government’s policy on going cashless in India:

1. Tech literacy - even reasonably educated often get stumped with many of the technologies.
2. Tech coverage - India’s cellular internet coverage [3G/4G] is not that good and so is the smartphone penetration.
3. Financial inclusion - Many don’t have easy access to banks, ATMs, Point of Sale terminals etc.
4. Transaction fees - the existing players like Visa and Mastercard charge exorbitant fees especially for smaller transactions.
5. Enforcing tax rules - In India, most shopkeepers escape from paying taxes as the rules are complicated and taxes are high. Getting them to comply is going to be hard.

Here are ways to tackle this:

1. Remove all taxes & duties involved in the import and sale of smartphones & data gear.
2. Incentivize the aggressive rollout of data coverage and increase the government funds for supporting cellular/satellite data coverage in remote areas.
3. A one-time subsidy of Rs. 1000 to a rural poor to buy a smartphone complying with government’s rules on Aadhar & digital signatures. They could buy this with their Aadhar card and the manufacturers could be forced to pre-install UPI app [instead of their usual bloatware] with a firmware tied to the person’s Aadhar. Since the entry level smartphones could come down to Rs. 2000 with the scale and without the import duties, most poor people could afford this. How do you define a poor? Now, that demonetization is done, you know how much each person has in their bank accounts. Anyone who has deposited less than Rs. 25000 should qualify [in fact, all future subsidies should be based on this - as that would punish those who use their accounts to deposit other people’s money].
4. Carrying your smartphone should be like carrying your id - used carefully and universally. That means women who are denied their phones [due to their local/family compulsions] will get the access too.
5. Build a new app to access all government services in one place in their native language driven mostly by voice and icons. A person should be able to open up the app and access forms, get food rations, banking services etc. Have this app pre-installed in the government smartphones.
6. Have the third app for reporting all kinds of issues with governance with location tracking- school closed, ration rice not available, road broken, drainage issues etc. This app again comes pre-installed and the data from this should be audited by a separate government body and data should be made available to all.
7. Have free wifi & usb charging stations in all ration shops, post offices, railway stations and other government offices. A person coming to do transaction with the government could be encouraged right there to use their new smartphone to buy train unreserved tickets, food rations, postal stamps etc. Cut the existing counters by half and use the staff to teach the people coming in.
8. Embark on a massive tech literacy program. Rope in companies that can go around rural India and teach people basics of Internet, e-commerce and mobile wallets with their new smartphone. Emphasize the importance of passwords and secrets. Most in rural India can get it quite intuitively if told properly. Maybe a subsidy of Rs. 100 per person in rural India for the basic class.
9. For the first year of that new person’s smartphone usage, the government could subsidize their basic data plan - say Rs. 30/month. You can rope in companies like Facebook, Microsoft, Google, Amazon, Paytm, Ibibo and Flipkart to foot in part of the budget for this [with no strings attached on what sites they could use].
10. For any mobile payment transaction below Rs. 100 there should be no transaction fees by law and banks should be asked to bear the costs. The shopkeepers who still don’t accept cards after that time could be reported for tax evasion.
11. Have a separate fund for improving online security. The government should insure all the poor in this new plan to avoid them being liable for hacks and data thefts. They should also fund new encryption algorithms and end to end security of transactions.

The government should plan this so aggressively that it should achieve all this by the end of 2017. It is ambitious, but possible. The budget is less about Rs. 80000 crores [40 crore rural poor * Rs. 2000 for the total cost of all subsidies above] and could be easily paid with the RBI’s profits from demonetization [even if 95% of black money comes back to the banks].

Imagine having the rural poor able to use their new smartphones for better news access, weather coverage for farming, getting notification on impending disasters like cyclones, access education programs, access all government forms, get government loans that they qualify for etc. Imagine that world and all of that is within hand’s reach.

It is the beginning of a new India. Jai Hind!

Q: Why does inflation depreciate the currency while deflation appreciates the currency?

Think of the modern currency as a promise. Let's take the example of two brothers.

Johnny is pretty careful with his words and never promises unless he means it. Since he doesn't promise a lot, people would trust him whenever he promises. Dad would given him the keys to the car if he gives just 1 promise.

His younger brother Tommy is pretty loose with his words. He would give a thousand promises and is pretty shabby at keeping up with them. Thus, people would never trust him. He would promise a lot of things for the dad to give him the key.

1 Johnny's promise = Dad's car keys = 10 promises of Tommy

If Tommy keeps getting worse at some point Dad might never give him the key.

1 Johnny's promise = Dad's car keys = 100+ promises from Tommy.

Or Tommy could get better at keeping promises and Johnny could get worse. Then,

2 Johnny's promises = Dady's car keys = 5 promises from Tommy.

Now, let's apply this example to the financial world

1. When a country prints currency, it is essentially creating a promise - to whomever using the currency - locals or foreigners. If it is loose with the promise, no one would trust the government and government cannot get the equivalent of Dad's car keys - investments to drive the economy. This is why responsible governments don't print more currency than they could deliver in economic production.
2. Most modern governments are tempted to give out more promises. They have plenty of voters to satisfy and they dole out plenty of money through public spending. By the time people realize, the leader would be long dead. In the second example above, we saw that the value of Tommy's promise go down. Now, he had to promise a lot more to get the same car key. This is called inflation.
3. Currencies are often compared against a common commodity to arrive at the relative value of each other. In the first example 1 Johnny Promise (JP) = 10 Tommon Promises (TP). In example 2, 1 JP = 100 TP. The same happens between currencies - Dollar, Yen, Euro, Yuan, Rupee, etc. This is called an exchange rate.
4. In the long term, inflation of a currency is directly proportional to the depreciation of the currency. That is by definition above.

A lot of Indians ask, why dollar is appreciating against the rupee over the past 70 years. The answer is simple: US has had a far less inflation than India. Indian leaders are used to promising a lot more than what the economy could sustain. Thus, the government constantly runs on a deficit, often far more than in the case of the US. If the Indian rupee has to appreciate, Indian leaders might have to lower inflation below that of the US, in the long term. That might or might not be good.

We talked about the long term. In the short term crazy things happen. Dad might be drunk and he might offer keys to Tommy without thinking too much. Same happens in the financial markets when investors go on a binge - buying or selling - pushing the currency up/down sharply. Eventually, booze gets out of the system, a hangover happens and things get back to reality.

(The author, Mr.Balaji Vishwanathan is a Top Writer on Quora with more than 216,000 followers.)