This article gives strategic ways to bring the Indian economy back on track post the Covid impact and may also improve the government’s own existing efforts. India must lead the revival story as expectations are high globally for our country to achieve higher economic growth to come soon on par with the top countries in the world. In meeting this challenge times while conventional methods may continue, the new approaches should also be explored. So, we must use different methodologies including disruptive techniques to jump-start the new growth path. This aspect has been taken care of in this doctrine of Secured Governance a Self-sustained Techno-Economic growth through value creation for achieving seamless long-term planning with sustainability. Amongst a variety of sectors, the ones that are most impacted are, inter alia, the financial sector including banking, MSMEs, and, Travel & hospitality industry. This paper attempts a study of transactions of cash flows through different channels and gives some useful suggestions of resource raising which could assist in getting the economy back on track faster, without affecting the present policies and ongoing steps taken the revival. One of the keys focuses is to ensure that financial system risk is reduced as a priority so that effective credit can flow back to the needy sectors efficiently. It must be emphasized that in the new normal any suggestion should be uniformly applicable to both cash and cashless transactions equitably across all sectors.
The Currency Revolution
Coins initially derived their value from the precious metal used to mint them. Printed currency notes solved the problem of having to provide for precious metals for minting for sovereigns and governments. Essentially it was like a promissory note issued by the Reserve Bank of India as India’s central bank, to pay its bearer the equivalent value of gold or silver from the public treasury. (In India Section 21 of the Indian Currency Act 1861 with its subsequent amendments excludes Indian currency notes from the coverage of the Negotiable Instruments Act 1881). Soon, printed currency was widely accepted as a medium of exchange for goods and services and it became ubiquitous; it no longer mattered that the minimum reserve as provided in 1956 was inadequate to cover all the currency in circulation. But there is a revolution happening which will reduce the share of printed/formal currency as the Indian economy grows.
Implementation of Open Banking Reshaping the Banking Industry
The payments industry has been majorly driven by customer-centric models in recent times and is no longer a preserve of scheduled banks – there are several players outside the formal oversight of the Reserve Bank of India (RBI). Open banking is one such model that third-party services can use to access the banking data of consumers from various financial institutions (FIs) using application programming interfaces (APIs). Accessing consumer data enables financial service providers and institutions to be transparent in their approach and provide customized, optimal solutions to customers, and thereby strengthen relationships. Such data can also be used for conducting easy credit checks and risk analyses of customers.
Initiated by some of the leading private sector banks, open banking has now grown to become an integral part of the FinTech segment. As a result, the following changes in the digital banking space can be observed:
- The emergence of account aggregators will assimilate siloed data to provide a more comprehensive and 360-degree view of a customer’s financial details collated from various financial institutions.
- Increased availability of customer information will result in competitive pricing, improved use cases, and user experiences as the ecosystem will evolve with the onboarding of a greater number of players. Any initial hesitation will pave the way for greater adoption as the tipping point will be reached.
- Open banking will result in large incumbent banks becoming more competitive with smaller and newer financial institutions, thereby compelling the latter to upgrade their technology and legacy systems to offer new-age and tech-centered solutions.
- Easier access to customer data will now help FinTech start-ups and institutions to come up with more targeted, customized, and innovative solutions for new-age customers in insurance, digital lending, and various other banking services.
Digital payments have evolved from being plastic cards-based to mobile-based for online transactions. Offline payments, a largely unexplored area, are the next big opportunity in the payments space. They have so far been mostly used in transit use cases. However, offline payments catering to other use cases will be developed and help bring a significant portion of the unserved and underserved segments under the digital payments fold. This will be particularly beneficial in cities where internet connectivity is sparse.
The Reserve Bank of India (RBI) launched a pilot scheme last year to boost offline payments. Entities have been encouraged to accelerate the development of offline payments solutions via cards and mobile devices. As a result, several solutions have been launched. As far as cards are concerned, there have been attempts to create offline in-card purses that allow cardholders to complete the transaction at a point of sale (PoS) machine without any internet connectivity and the transaction is processed once the terminal is online. Many other companies are focusing on enabling payments through feature phones. Solutions range from encrypted messages and missed calls to sound waves.
With a plethora of innovative solutions in development, customer awareness and education will be the key areas that need to be expanded further before offline payments grow because of new customers using digital payments.
Banks & Payments Companies are expected to have Dedicated Platforms/Systems for Managing Payments
The rise of digital payments in India is largely fuelled by the increasing number of mobile device users, proliferation of the internet, demonetization, and Government initiatives like the Jan Dhan-Aadhaar-Mobile (JAM) trinity. As a result, digital payments have witnessed one of the steepest growth trajectories in 2020. The total number of digital transactions in 2019–2020 stood at 3,434 crores and grew at an annual growth rate of 44.1%.3 Over 2.2 billion UPI transactions were recorded in the months of November and December 2020. The Covid lockdowns also encouraged people to go in for cashless digital transactions and we will increasingly see a reduction from printed currency notes as a percentage of all financial and payment transactions.
However, the rise of digital payments has also led to many new challenges, viz., failed payments due to technical infrastructure-related issues, network outages, and server downtimes, among others. Many major banks faced such problems throughout 2020, which in turn negatively affected customer confidence and satisfaction, and acted as a hindrance to the continued adoption of online payments. Five of the top ten banks had a technical decline rate of 1.8% in 2020, with public sector banks accounting for the top three spots.
An RBI report on the deepening of digital payments suggests improvement of system design, monitoring, and architectural changes to address the issues of technical decline. It also suggests that PSPs and other institutions should ensure that a 25% year-on-year (YoY) decline in failure rates is achieved.
- A few players should also consider having dedicated platforms/systems for all payments apart from changing their IT infrastructure to improve latency and connectivity. This would ensure that the increasing load of payments transactions does not put undue pressure on entire existing banking facilities.
- A separate platform to process and authenticate high-frequency transactions could help ease the burden on core/legacy infrastructure. It will also enable faster integration and reuse of capabilities, and act as a single source of truth for customer and transaction data that can also be used for analytics. It is also expected to ease switching for third-party ecosystems in the future.
- Having a single platform will help in the following ways:
- Server switching ensures that a connected platform processes a transaction in case the primary server is down.
- Security can be improved with a dedicated full-stack platform that comes with end-to-end encryption and multiple verification levels.
- User experience will be highly improved with a one-stop platform for all services, and it can provide overlay services by providing open APIs for integration with multiple businesses.
- Leveraging a secondary UPI ID by automatically switching IDs when the primary PSP is unavailable due to technical issues.
- Faster transactions will be more convenient as a dedicated channel is utilized for all such transactions.
Given the ever-increasing number of payments avenues, the role of payments hubs will become more important. These are essentially systems that support multichannel payments and provide a unified banking platform and help with straight-through-processing (STP) as well. This increases operating efficiency and brings in flexibility and scalability while lowering operational overheads and costs. Further, payments hubs also act as repositories of comprehensive payments and transaction data on multiple products which in turn can be used for customized offerings.
Sustained Innovations in Digital Payments
With the implementation of the Aadhar Card and the opening of several bank accounts as a part of financial inclusion along with the increased telecom penetration, India has been at the forefront of global innovation in digital payments and this trend will continue throughout 2021. Stakeholders are trying to explore the global payments space and develop innovative solutions. Some of the initiatives that will gain prominence and aid in continued innovation are:
Cross-border remittances: The RBI is planning to set up an innovation hub to explore technologies and initiatives that can be used to recast and simplify the cross-border payments space, as well as make such payments more accessible and affordable.
Pan-India umbrella entities: The RBI has developed a framework defining the eligibility and governance criteria, along with a scope of activities for new entities. This was done to encourage healthy competition and strengthen the retail payments landscape. A consortium of banks, payments networks, service providers, and financial investors is expected to participate in this race to expand the market by providing innovative payments infrastructure, products, and services.
Payment Infrastructure Development Fund (PIDF): The PIDF will be used to strengthen the digital payments acceptance infrastructure focusing especially on tier 3–6 cities and northeastern states. The fund has been set up with an initial investment of INR 345 crore and will encourage innovations in the acceptance space in rural India where awareness, costs, connectivity, and other factors pose a challenge for the development of digital payments.
Impact of Lockdown Measures on Digital Transactions
Based on RBI’s annual report, it was observed currency in circulation has more than doubled in the last five years despite an increase in digital transactions. According to RBI, in the year 2020-21, a higher-than-average increase in banknotes in circulation was observed due to precautionary holding of cash by the public because of the pandemic and its prolonged continuance. However, restricted mobility due to lockdowns and the need to reduce physical contact to avoid infection could have encouraged more people into resorting to online platforms for financial transactions instead of cash. At the same time, severe lockdowns may have had an impact on digital transactions as most businesses except the essential ones were completely shut down. In other words, the lockdown measures while pushing people to hoard more cash also may have impacted digital transactions. We analyzed the data on various types of digital transactions to understand if the volume of transactions has grown or shrunk during the lockdown months. With improving incomes both in urban & rural segments and increasing mobile penetration, the number of financial transactions will increase, and so while digital transactions will increase in absolute but so also will transactions in printed currency space.
The promotion of cashless transactions and conversion of India into a less-cash society was an important goal of the program. In fact, one of the objectives of the demonetization exercise in November 2016 was to build a less-cash society and encourage people to use digital platforms.
The RBI Ombudsman Scheme for Digital Transactions (2019) defines digital transactions as “a payment transaction in a seamless system effected without the need for cash at least in one of the two legs, if not in both. This includes transactions made through digital/electronic modes wherein both the originator and the beneficiary use digital/electronic medium to send or receive money.” AePS, BHIM UPI, Credit and Debit Cards, IMPS, Internet Banking, Mobile Banking, NACH, NEFT, NETC, PPI, and RTGS are some of the popularly used modes of digital transactions in India.
Credit & Deposits Growth of Scheduled Commercial Banks
- Bank credit growth (y-o-y) decelerated to 5.6% in March 2021 from 6.4% a year ago.
- Combined credit by bank branches in top-six centers (viz, Greater Mumbai, Delhi, Bengaluru, Chennai, Hyderabad, and Kolkata, which together accounted for over46% of total bank credit) declined marginally during 2020-21; bank-branches in urban, semi-urban, and rural areas, on the other hand, recorded 9.4%, 14.3% and 14.5% credit growth, respectively, during the year.
- Public sector and private sector banks recorded 3.6% and 9.1%credit growth, respectively, whereas lending by foreign banks declined during2020-21.
- Aggregate deposits growth (y-o-y) accelerated to 12.3% in March 2021from 9.5% a year ago: metropolitan branches, which account for over half of total deposits, recorded nearly 15% growth during 2020-21.
- The share of current account and savings account (CASA) deposits in total deposits increased to 44.1% in March 2021 from 42.1% a year ago.
- Lower growth in credit vis-à-vis deposits led to a decline in the all-India credit deposit (C-D) ratio to 71.5% in March 2021 from 76.0% a year ago.
Banking System of India at a glance
The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks, and 96,000 rural cooperative banks in addition to cooperative credit institutions As of November 2020, the total number of ATMs in India increased to 209,282. The asset of public sector banks stood at INR. 107.83 lakh crore (US$ 1.52 trillion) in FY20.During FY16-FY20, bank credit grew at a CAGR of 3.57%. As of FY20, total credit extended surged to US$ 1,698.97 billion. During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$ 1.93 trillion by FY20. According to the RBI, bank credit and deposits stood at Rs. 108.6 trillion (US$ 1.48 trillion) and Rs. 151.34 trillion (US$ 2.06 trillion), respectively, as of April 23, 2021. Credit to non-food industries stood at INR. 108.02 trillion (US$ 1.47 trillion), as of April 23, 2021. Non-food industries grew at 5.7% in January 2021 as against an increase of 8.5% in January 2020.
Taxation should be optimal& equitable —it should neither diminish the drive for enterprise nor should it result in huge inequities due to the concentration of wealth by a select few. Kautilya’s principle of “Chautha” and more recently (Arthur) Laffer’s Curve reinforce that government revenues diminish once the effective taxation (both direct & indirect) increases beyond 30%. An unduly high tax rate and low exemption limits are constraining factors on consumption and enterprise. That is why having a transparent and forward-looking tax system is critical for any economy. A transparent and simple tax system can go a long way in helping people negotiate their way through it.
- Transaction Cost
- Ease Of Implementation
- Transparency &Openness
In fact, Secured Revenue Raising Strategy is being proposed could lead to a simpler &single-point system to be levied by Banks, NBFCs & Payment gateways on all bank transactions, it would also be easier for compliance and very efficient in terms of collection costs.
As per the RBI data reveals the total transaction is given below the table:
Month wise NEFT/RTGS/MOBILE TRANSACTIONS (in INR Lakh crores)
|Month 2021||NEFT||RTGS||Mobile Banking||Total|
[NOTE: The data from July 2017 includes only individual payments and corporate payments initiated, processed, and authorized using mobile devices. Other corporate payments which are not initiated, processed, and authorized using mobile devices are excluded. The data is provisional.]
Accordingly, the following changes to the revenue collection system are suggested by implementing a Cess on all financial transactions monitored by RBI’s payment system. As the velocity of the payment system and financial transactions increase, the Secured Revenue Raising Strategy would also be good enough to provide a large surplus as well.
The Secured Revenue Raising Strategy is what we see as a system to revenue source of government without burdening the common person; it will bring into its fold, almost everyone in the country from a revenue capture (currently, less than 10% of India is part of the direct tax system) and has the potential to give Govt larger compliance in tax revenues to the government by creating a formal system of tracking all financial transaction flows.
Year-wise NEFT, RTGS & Mobile Transactions in India (in INR Lakh Crores) if Secured Revenue Raising Strategy is 0.1% of total transactions
Outward & Inward(in INR Lakh Crores)
Outward & Inward
(INR Lakh Crores)
(INR Lakh Crores)
(INR Lakh Crores)
|IF 0.1% OF TOAL TRANSACTION
(INR Lakh Crores)
|FY 2020 – 21||50,261,819.2||2,112.00||86,772.81||50,350,705||50,350.70|
|FY 2019 – 20||184,785,447.2||2,623.15||57,815.15||184,845,885.5||184,845.88|
Even if we consider 0.01% of total financial transactions it will substantial as per the tabulated data given below:
Secured Revenue Raising Strategy will be (If 0.01% of Total Transaction)
Outward & Inward(IN. Lakh Crores)
Outward & Inward
(INR Lakh Crores)
(INR Lakh Crores)
(INR Lakh Crores)
|IF 0.01% OF TOAL TRANSACTION
(INR Lakh Crores)
|FY 2020 – 21||50,261,819.2||2,112.00||86,772.81||50,350,705||5,035.07|
|FY 2019 – 20||184,785,447.2||2,623.15||57,815.15||184,845,885.5||18,484.59|
Average Per day Transaction
Outward & Inward(INR Lakh Crores)
Outward & Inward
(INR Lakh Crores)
(INR Lakh Crores)
(INR Lakh Crores)
|FY 2020 – 21||137,703.61||5.78||237.73||137,947.12|
|FY 2019 – 20||506,261.50||7.19||158.40||506,427.09|
Changes Needed for Implementation:
Making necessary changes in Banking & Payment gateway software to deduct Secured Revenue Raising Strategy amount from the transactions and credit it to prescribed Cess fund as described below. To revive the Indian Economy from the massive blow of COVID – 19 Pandemic, the strategy is putting a pragmatic solution for serious consideration.
The Proposal in Brief
1. NEFT & RTGS, Mobile payment transactions mode in public and private banking system.
2. Every transaction routed through Bank / Digital Mode will attract a certain percentage deduction (start with say 0.05%) as a Secured Revenue Raising Strategy.
- This deducted amount will be credited to a Financial Sector Security Fund (FSSF) managed jointly by Central Government and RBI and subject to parliamentary review.
- Allocation priority for monies thus raised should be first for financial sector infrastructure, a credit guarantee fund to cover NPAs created due to acts of God (natural calamities), pandemics & financial emergencies, and augmenting banking sector capital. These will bring down financial sector risks thereby reducing credit costs and increasing the flow of cheaper credit.
3. And if eventually, revenues increase further, then other sectors of the economy could be prioritized and given an appropriate share.
4. Cash transaction Cess amount at 0.1%.
5. Cash Withdrawals below INR 10000 to be exempted.
6. Select transactions of Government and Banks will be exempt.
- Banks, NBFCs, and Digital payment gateways can act as the Cess collecting agency and in return would be entitled to benefit from the creation of the Financial Sector Security Fund. If there are any costs of collection, RBI could determine the amount and allow them to deduct that from their collections. This will provide banks& the financial system a de-risking mechanism through the creation of the FSSF as above. The Cess revenue would then act as an intermediate step for support (like a 1st loss piece)before the Union Government has to directly step in, thereby diminishing the contingent liability of the Union Govt.
- The Cess revenue would also give Union Govt an additional revenue which can be kept out of center-state planned transfer arrangement – and may also enable them to reduce excise & other indirect taxes on petroleum prices which can help reduce transportation&energy costs reducing input costs to the industry and help quicken their revival.
- The other priority from excess revenue is to help those industries that create more direct & indirect employment such as MSMEs, travel &hospitality industry, textile &garments industry, traditional village & cottage industries – many of which are unable to benefit from various other initiatives of the Union Govt.
Secured Governance– Concept
The role of infrastructure in spearheading the economic development of a country and setting its pace can hardly be over-emphasized. As a foundation in an edifice, the place of infrastructure as well as its soundness, are crucial to the nation’s total development. The economic growth of a country has evidently happened hand in hand with the development of its infrastructure. A sound infrastructural foundation is a key to the overall socio-economic development of a state. This acts as a magnet for attracting additional investment into a state and thus provides a competitive edge over other states. Availability of adequate and efficient infrastructural setup not only promotes rapid industrialization but also improves the quality of life of the people.
SELF–SUSTAINED ECONOMIC GROWTH THROUGH SECURED GOVERNANCE
“Secured Governance offers a strategy for the government to get all the basic infrastructure development with a negligible investment by the Government. It is a concept of developing Techno-Economic Corridors connecting HUBs which will act as a growth center for individual sectors. The very concept of “Secured’’ here implies a secured convergence or knitting with various sectors defining a growth for an economy.”
SECURED GOVERNANCE – A HOLISTIC APPROACH TO INFRASTRUCTURE DEVELOPMENT
Secured Governance is a concept that is catching the attention of many as a holistic approach to infrastructure needs, promising a great deal. It professes taking advantage of the valuation of assets created and delivering at negligible cost to the government. It aims at balanced growth in all sectors in need of better facilities, in a more holistic manner, rather than focusing only on saying expressways, or power or any one of numerous other sectors. While addressing any one of them, the others also get due attention ensuring all-around development. It promises more societal participation and benefit-sharing with transparency. Underlying this is a strategy of developing techno-economic corridors connecting urban areas across the country.
SECURED GOVERNANCE ADVOCATES A PRAGMATIC APPROACH OF TAKING ADVANTAGE OF THE VALUATION OF ASSETS CREATED
This is not a new concept. We all know when development takes place there is valuation in the property. Who benefits from this? Often it is incidental and taken advantage of by land and property sharks. Imagine a model where this valuation can be plowed back into the project and benefit the people around. First, the cost of the project is reduced and can be at negligible cost to the government if carefully planned. This will also help Union Govt to directly allow funding access to infrastructure creation. Next, the population sees it as benefitting them and so they participate more enthusiastically, helping with the early completion of the project rather than being an impediment.
Infrastructure Growth, huge investment toward a greater formalization of the economy are bound to lead to an acceleration in per capita income of the people and large-scale employment. The government clearly holds the key to realizing this potential and taking a proactive stance. The growth of digital payments also needs to be supported by robust and scalable infrastructure, strong regulations, and the participation of diverse players. Developing and implementing tighter cyber and information security guidelines to make the payment ecosystem more secure will help in ensuring that users are able to trust digital payment modes. In the future, all participants in the digital payment ecosystem – regulators, payment system operators, financial institutions, banks, FinTechs, and service providers – will be required to continue collaborating amongst themselves to sustain the growth achieved in the digital payment space over the last few years.
Once the above is done, it is expected that the various pillars of economic growth will automatically start to move and move at an increased pace. Over time, the shift to a Secured Revenue Raising Strategy approach should greatly help reduce interest rates for lending and make exports competitive, apart from helping to generate surplus funds for development (including infrastructure), enhance investment, and create jobs, and transform India into a rapidly growing, stable and inclusive economy.
The introduction of a simpleSecuredRevenue Raising Strategy should also help in building a more competitive industrial base in India, especially among the micro, small and medium enterprises (MSMEs) and also in manufacturing in general. Various manufacturing clusters that are doing badly should now be able to do better without a doubt, with local demand and exports will picking up. The move to Strategy (with additional reforms in the real estate and other sectors) should also enhance the overall size of the economy, especially given that the informal sector and the parallel (black) economy in the real estate sector would have been fully absorbed into the mainstream.
One last point is in order. Much has been tried for the past 72 years (with varying degrees of success) about building a vibrant economy and we strongly believe that it is a now or never situation for the Indian economy today. Here is a great opportunity to create a vibrant and dynamic economy and that should be utilized. That is what India needs today and that is what will cure our ailing age-old system of economic governance and push us into an era of dynamic and vibrant entrepreneurship based on sound fundamentals into a period of long-lasting (hopefully, double-digit) growth.
Dr. P. Sekhar, Chairman,
Global Smart City Panel,
Suneet Maheshwari, CEO,
EX. MD L&T Finance and Infra,
International Expert in Financial &Infrastructure Sectors