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Moving Towards Cashless Economy

Moving Towards Cashless Economy

Indian political class is known for their penchant for indulging in vote bank politics. The latest move of demonetization by the Union Government may seem to be one such skirmish, but it is going to have a larger impact in the Indian financial system, for the better. The objective is clear and aloud: amidst chaos and confusion, often sensationalized by the media and political opponents, India is inching towards ‘cashless economy’. It is not an option exercised by the political clans but a compulsion driven by economic prudence. Finance Minister Arun Jaitley in his press meet said “it will take India towards a cashless economy, it doesn't merely push the country in that direction, but significantly pushes it.” A new era has begun, albeit underprepared.

Let us leave the immediate fallout of this proposal to the political class and the media to sensationalize, who criticize anything and everything with twin objectives of: a) gaining political mileage and b) stopping the other party from reaping benefits of such endeavour. While the ruling dispensation is more concerned with saving its face from many of its debacles during recent times, the opponents want to prove to the voters that they are still alive and kicking in the political arena, lest they may become insignificant. 

It appears to be a hurriedly declared financial emergency, but it is a calculated risk taken by NaMo, necessitated by economic prudence. It is a ‘surgical financial strike’ to contain and control parallel shadow economy, it is claimed. But there is more than what meets the eye.

It is just a world trend which India is trying to catch up. Almost every country is bracing towards cashless economy, and many countries have made significant progress. Another significant trend found all over the world is banning of high-denomination notes.  If India doesn’t catch up with these developments now, we will be left behind in economic progress and financial inclusion. Now or never is the call.

The glass ceiling - broken

Psychologically we are obsessed with holding cash which is not only risky but also unscientific in the technology driven era.  We are the fourth-largest user of cash in the world.  The rate of cash to GDP is the highest, i.e. 12.42% in India. Whereas, other large economies have average cash to GDP ratio of 5%. In the year 2015, 78% of all consumer payments were in cash in India, whereas in US, it was 20% and in UK it was 25%. Usually cashless economies have low corruptions, and less black money.

The glass ceiling has begun to crumble the moment demonetisation was announced. Once the notes lost its ‘currency’, we started switching over to other modes of payment. PayU India (E-Commerce portal) registered 80% increase in transaction just within 24 hours of demonetisation. Paytm, a major mobile payment operator, witnessed five million daily usage post demonetisation as against their average transaction of three million. It also registered 700% increase in overall traffic, and 1000% growth in the amount of money added to its account in the first two days itself. Likewise, ‘Ola Money’ registered 1500% increase it its e-wallet. All these data suggests that consumers who are otherwise using cash mode of payments, have started switching over to e-payments.  There was 70% surge in debit card usage, and that of credit card usage increased by 40% which implies first time card usage by inactive debit/credit card holders.

Cash is not free

Old habits die hard. Once something becomes a habit, we start feeling comfortable with it. Once we enjoy the comfort, anything contrary becomes unacceptable and we become addicted to status quo.  Use of currency has been our habit for quite some time and as such we are more comfortable with it. Breaking this habit is not that easy as it is with any other human behaviour. As habitual animals, moving away from this habit requires not just logic but a certain amount of compulsion and coercion. That compulsion is the direct offshoot of recent demonetisation.

Even if banks and ATMs are just a stone throw away, we prefer to hold cash because ‘a bird in the hand is worth two in the bush’. It offers cent percent liquidity. A cash transaction is immediate and doesn’t involve any intermediary.  We don’t have to worry about a computer system crashing, power going off, and losing transaction midway. Use of cash doesn’t involve any extra cost as in the use of debit/credit cards or internet payments.

On the other side, cash is very expensive to manage. The cost of printing, managing and moving money around the country is huge. Cash can be lost or stolen, wet, torn, or become soiled over time. A significant amount of time and effort is expended in shepherding them through the system and finally into the consumer’s hands. RBI has spent Rs.32.1 billion just for printing the currencies that are in circulation. The cost of maintaining ATMs, loading them with cash involves huge expenditure annually. Adding and running ATMs alone costs banks   Rs.1,520 crores a year.  Every ATM transaction by a customer costs Rs.75 for the banker.

Once the life of currency is over, they have to be replaced with new currencies. The average age of the notes are usually less than a year, depending on the usage. Lower the value, higher the usage. For example, a Rs.10 note could last no more than eight to 10 months, whereas a Rs.1,000 note could remain fresh for a long time, as these tend to be stored and used carefully. Post demonetisation, to replace the entire stock of Rs.1,000 and Rs.500 notes with new notes, the RBI will be spending Rs.12,000 crores.

The absolute cost of cash to consumers, based on average transit time and cash access costs are high in India . One research estimates that residents of Delhi alone spend 6 million hours and Rs.9.1 crores to obtain cash from ATMs and banks. From this we can imagine the cost and time spent all over India just for using cash. It is said that the direct cost of running a cash based economy is close to 0.25 % of India’s GDP.

Cash drives shadow economy

Cash is the engine that drives shadow economy. As cash transactions are difficult to trace people can easily launder money and evade paying tax. If the data provided by the government is to be believed, the size of black money in India is Rs.15-16 lakh crores . This is the money which is unaccounted , being used to finance shadow economy. They are almost running a parallel government financing all illegal transactions. Most of them are used for financing terrorists, mafia gangs, bu ying and selling of real estate , elections, purchasing political decisions, betting, trafficking, and for hijacking democracy. This money has increased in alarming proportion recently. The currency with people rose rapidly during the last three years–2013 to 2016, against deposits kept by people in banks.

In 2007, currency in circulation was almost equal to bank deposits. But in the last three years, currency with Indians was more by 50 % than bank deposits. One can safely assume that this is due increase in corruption, unaccounted, and black money. Another reason for the surge in unaccounted money is ‘informal sector’ where cash is the norm. Nearly half the country’s output comes from this sector. Another worrying factor is counterfeit notes that are in circulation. It comes from the border across, mainly financing terrorism and illegal activities. The u naccounted money and illegal notes play havoc rendering policy initiatives ineffective and redundant. Demonetisation will put a short-term break on this.

Shift to cashless economy

The move has been around for quite some time, but now NaMo has pressed the accelerator little harder and there is no turning back. In fact, it is long due. If India has to contain and control unaccounted money, it has to necessarily shift from cash dependent economy to cashless economy. Banking and financial products should reach the masses to ensure financial inclusion. By reducing cash transactions, and by boosting e-payment system, we can achieve the twin objective of economic growth and financial inclusion.

Cashless economy is a situation in which the flow of cash within an economy is non-existent and all transactions are done through electronic media channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS).

Still cash rules the roost. This is due to lack of access to banking for a large part of the population as well as cash being the only means available for many. Large and small transactions continue to be carried out in cash. Even those who can use electronic transfers, use cash. A survey on ‘consumer behaviour at malls’ points out that close to 90% transactions happened by cash. Even in e-commerce transactions, cash on delivery (COD) is the norm. While the proportion of people opting for COD is decreasing, it still accounts for 60% of transactions. Even the luxury retail segment sees most transactions in cash.

By adopting e-payments and by reducing cash transaction, it is easy for the tax authorities to crack down on tax evasion. This becomes a self-checking mechanism for bringing more and more people within the tax net and curb black and unaccounted money. Nearly 40 to 50 percent of Indians either do not pay income tax or pay less tax. Direct taxes contribute only 35 percent of the total tax in India, compared to the OECD ideal of two-thirds.

The challenge

Though it is a good proposition to move towards a cashless economy, we have not fully harnessed the potential of IT sector. The Institute for Business in Global Context and Tufts University in their research titled ‘cost of cash India’ observed that “despite its prowess in the telecommunications field, India has been left behind by its peers in mobile payments. Though India has a fiercely competitive telecommunications market, possesses a well-developed financial system, and is a widely acknowledged technology exporter, fewer than 2% of Indians have used a mobile phone to receive a payment, compared to over 60% of Kenyans and 11% of Nigerians”.

According to the RBI, the growth in infrastructure has not kept pace with the growth in debit and credit cards. While debit cards registered a growth of 64% between October 2013 and October 2015, the number of ATMs grew about 43%, while point-of-sale machines increased nearly 28%. The current infrastructure to handle mammoth volume of e-payments transactions is highly insufficient and people need to realize the importance of e-payments and adopt it.

Ray of Hope

There is hope and there is greater scope for fast transition to cashless economy. A  report by Google India and the Boston Consulting Group states that by the year 2020, $500 Billion worth of transaction would happen online, increasing by 10 times. It is expected that the cash based payments would fall 40% by 2025.

Bank branches have been growing at 5% a year, ATMs, debit cards, and cart-swiping machines have doubled in the last four years. Online transactions have grown 20 times in the last 6 years.  O nline transactions through the NEFT rose from Rs.4 lakh crores in 2009-10 to Rs.83 lakh crores in 2015-16, a 2000 % rise. This data was before demonetisation drive. Going by the recent data, one can safely extrapolate that India will surpass these projections much earlier than as reported.

Now is the time, NaMo has knowingly or unknowingly pulled the trigger, to usher in a new cashless regime. If we learn to make hay while sun shines, ‘a big banking revolution can happen’ and should happen making India ‘the most sophisticated public payment infrastructure in the world’ as envisioned by the former RBI Governor Raguram Rajan.

(The writer is Associate Professor in Commerce, St. Joseph’s College, Trichy.)

(Published on 12nd December 2016, Volume XXVIII, Issue 50)#