As India moves to promote and incentivize digital payments over the use of cash in what is being described as a ‘surgical strike’ on black money, the country must address popular fears before the dream of cashless economy becomes a reality, Faisal Peer writes.
A cashless economy is the one in which all the transactions are done using cards or digital means and the circulation of physical currency is minimal. India is moving towards new developmental paradigm by introducing various plans and programs. Digital India is one of these programs. The program presents government’s main motto as to connect each and everyone, especially downtrodden societies of rural India, with its main Centre.
In this scenario, the government made a system of cashless economy whose main focus is to curb the infiltration of black money into the market and to make our social systems available to each and everyone.
When we look into past, our whole system was based on cash economy but day by day it got redundant in our society. As for the concern of history of decline of paper currency, the banks brought the need for paper currency. As banks had a limited supply of gold and silver and it realised that their lending capacity was constrained by this, hence they started issuing paper notes in excess of their reserves.
The problem was when people lost confidence in the paper notes and tried to redeem them for gold and silver, the system collapsed. Whenever the government has printed more currency than reserves, the value of the currency has depreciated. India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world: 12.42% in 2014, compared with 9.47% in China and 4% in Brazil. The number of currency notes in circulation is also higher than in other large economies. India had 76.47 trillion currency notes in 2012-2013 compared with 34.5 billion in the US. Some studies show that cash dominates even in malls, which are visited by people who are likely to have a credit card, where large and small transactions continuous to be carried out in cash. Even those who can use electronic transfers use cash.
For 2013-14, the amount of currency in circulation stood at rupees 3.1 to 12.83 trillion with a compound annual growth rate of 10% over the past two years. About 5% of the amount is within banks. This implies that almost the entire amount is in daily circulation. On another side, we see that Rs 32.1 billion is the cost of just printing the notes. Adding and running ATMs, cost banks Rs 1520 crores in a year. It cost banks about Rs 75 per transaction when a customer uses another bank ATM. The direct cost of running a cash-based economy is close to 0.25% of India’s GDP. There has been a big build up in the payments infrastructure. There are over 4.1 million points of sale terminals for over 500 million debit and 20 million credit cards.
Cash and cheques which earlier formed 94% of the transactions in 2003, may fall to 13% by the end of this decade.
The telecom industry is expected to boost the digital shift. Analyst expects the smartphone market to exhibit a growth of 4 times over the next 5 years. India has less than 40 million banking users while each of the top 3 Chinese banks have to excess of 100 million.
Many developed countries such as Sweden are already moving towards a cashless economy on the back of new payment technology. It will attack the problem of black money by leaving behind a transaction trial. There will be greater efficiency in welfare program as money is wired directly into the accounts of a recipient. It may prevent money laundering and even exploitation and even increase tax compliance. Usage of cashless mechanisms would also ensure that the loopholes in public systems get plugged. There will be efficiency gains as transactions costs across the economy should also come down. More personnel need to be recruited in the capacity of judges and that too with utmost urgency.
There will be redeemed instances of the tax avoidance because it is financial institutions based economy where transaction trails are left which will curb generation of black money. It will reduce real estate prices because of curbs on black money as most of the black money is invested in real estate prices which inflate the price of real estate market. It will pave way for universal availability of banking services to all as no fiscal infrastructure is needed other than digital. There will be greater efficiency in welfare program as money is directly credited to the accounts of recipients. Thus, once money is transported directly into the beneficiary accounts, the entire process becomes transparent. Payments can be easily traced and collected and corruption will automatically drop, so people will have no longer to pay to collect what is rightly theirs. There will be efficiency gains as transaction costs across the economy should also come down.
On the other side, the government is in the mood of implementation of Digital India. How they can succeed in this scenario, they have to accept many challenges which are real test for present government’s motto of Digital India. The challenges faced by the government to make India as a cashless economy is first as India is a diversified country where there is unavailability of internet connections and financial literacy. Though bank accounts have opened through Jhan Dhan Yojana, most of them are lying in-operational. Unless people start operating bank accounts cashless economy is not possible.
There is also vested interest on not moving towards a cashless economy. India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure. The perception of consumers also sometimes acts as a barrier. The benefit of cashless transaction is not evident to even those who have credit card. Cash on the other side is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better. Most card and cash users fear that they will be charged more if they use cards. Further non-users of credit cards are not aware of the benefits of credit cards. Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. There could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulator will have to take a tough stand against rent-seeking behaviour by the banks. But similarly the government in consultation of RBI is also promoting mobile wallets. Mobile wallets allow users to instantly send money, pay bills, recharge mobile, book movie tickets and so on. Recently the RBI issued certain guidelines that allow the users to increase their limit of Rs 1 lakh based on certain KYC verification. It should also promote e-commerce by liberalising the FDI norms for their sector. The government also launched unified payment interface (UPI) which will make electronic transactions much simpler and faster.
The government has also withdrawn surcharge, service charge on cards and digital payments. The other needs that have to be done are to open bank accounts and ensure that they are operationalized. It must also abolish government fees on credit card transactions, reduce interchange fee on card transactions, increase tax on ATM withdrawals, offer tax rebates for consumers and for merchants who adopt electronic payments. Besides, e-payments infrastructure must be made completely safe and secure so that incidents of cybercrime could be minimised and people develops faith in e-payment system as also by creating a culture of saving and faith in the financial system among the rural poor people. The RBI too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment impact key monetary variables such as the velocity of money. RBI will also have to shed some of its conservatism because it has often seen itself as the protector of banking interests rather than overall financial development. The regulators also need to keep a sharp eye on anti-potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payment business.
On demonetization row that is selling as India’s first strike against corruption, PM Modi has since pushed a tantalising side benefit. The move to eradicate 500 rupees and 1000 rupee notes representing 86% of currency in circulation would also force hundreds of millions of cash dependent Indians to use more online payments and bank accounts. That could be a key growth driver in years to come by boosting tax receipts as black economy is turned white and increasing bank deposits that can be used for lending.
Through demonetization, India has initiated the goal of a cashless economy in first digital villages of Maharashtra, Madhya Pradesh, UP and Rajasthan. In case of J&K state, we got first cashless village –Lanoora in District Budgam to go cashless. So we can say that through cashless economy, our country will get out the menace of corruption. Through that, black money infiltration can be curbed from our country that will lead us on the developmental path.
Peer Faisal is an aspiring civil servant from Lolab, north Kashmir. Reach him at firstname.lastname@example.org.