A cashless economy is one when there is minimal or null flow of cash for financial transactions in the society and all transactions are done through the use of credit cards, debit cards, direct debit, electronic clearing and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS). With the demonetisation of the Rs. 500 and Rs. 1000 notes undertaken by the BJP led Government in November last year, there are numerous discussions being undertaken by economists and thinkers alike on whether our country can actually turn into a cashless society?
India has always predominantly been a cash-driven economy where almost all major financial transactions are carried out through cash. With advancement of banking channels and digital cards, the urban metro cities have marginally moved onto cashless transactions by swiping their debit and credit cards in various stores and online e-commerce websites. However, these electronic transactions account for less than 5% of all transactions being carried out in our country. India also has an enormous number of currency notes in circulation, which is far higher than in other large economies – India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US. The Reserve Bank of India has also set out a plan called “Payments and Settlement Systems in India: Vision 2018”, to encourage electronic payments to help India move and progress into a cashless society in the long term.
The Hardships
But the reality paints a dismal picture. There are a variety of reasons as to why India is still largely an economy driven by cash. Some of the major reasons are as hereunder:
- No Banks available – A large number of villages and towns in the rural areas of India are still bereft of banks. This leaves the people with no other option but to carry out their activities by the use of cash. Many villagers have to travel a long distance to visit a bank and withdraw cash.
- No extra cost for cash transactions – Whether one pays by card or cash, the cost of the product is the same. In fact, many establishments charge an extra 1% or 1.5% surcharge if you pay through cards. This is a major hindrance and doesn’t motivate people to spend more on the same product and they rather pay the amount through cash.
- Technical issues – Payments through cash is easy and convenient as there are no fears or technical issues faced as in card transactions. There can be network issues or internet non-availability or the fear of computer crashing in case of card transactions. India is still a country where there is no internet connection in rural areas or poor connection which makes it unfeasible for setting up POS machines for card transactions.
- Large unorganized sector – India has a large unorganized sector of traders, retailers and shopkeepers who may be illiterate or not having the means and resources to set up the infrastructure for offering card based payments. They do not have the inclinations to encourage the consumers to pay through cards either.
- Lack of knowledge and education – This is one of the primary reasons for cash driven economy.
- Jan Dhan Yojana accounts – Bank accounts have been opened through Jan Dhan Yojana but most of them are un-operational.
Benefits of a cashless economy
- Transaction costs will get cheaper – If the traffic of people using digital payments increase, this will automatically bring down the transaction costs being levied currently for digital transactions. This will also lower the cost of printing, transporting and storage of physical cash.
- Reduces risk of carrying notes – By making the society cashless, people wouldn’t need to carry lot of cash especially when they travel or go on holidays or for purchase of expensive commodities such as gold or real estate. This saves them from theft or mischief.
- Reduces corruption and black money – One of the major reasons for turning the society into a cashless economy is to reduce and eliminate corruption, money laundering and use of black money in the country. If all transactions are conducted digitally, this will leave a trail behind and the black money will be accounted and converted into white.
- Increase tax for the Government – Once the cash in the society is accounted for, people will pay the correct and stipulated amount of tax which in turn will increase the Government funds that can be used for the welfare of the state.
How can India be converted into a cashless economy?
- Access to banking facilities need to be improved – The Government should ensure that banking facilities are provided to all people in the country and should strive to set up branches in small villages and rural areas as well. The Jan Dhan Yojana accounts need to be monitored and encouraged.
- Proper technical infrastructure needs to be developed – Technically sound, safe and secure infrastructure and payment gateway systems need to be developed to carry out digital transactions. Banks should allocate the necessary resources to set up payment gateways and ensure more consumer friendly measures are adopted to motivate people to switch to digital life. People should be protected from cyber crimes and have faith in the digital payment gateway restored.
- Abolish card payment charges – There should be no additional fees levied on card transactions. People are skeptical to pay more than the required cost and hence resort to cash rather than card payment.
- Tax Rebates – The Government should introduce tax rebates for consumers and traders who base their transactions solely through digital payments such as e-wallets or cards.
- ATM withdrawal limits – Banks and the regulators should set up ATM transaction limits (some are already in place) to limit people from making unrestricted ATM withdrawals.
- Education – The poor and illiterate people should also be educated about the banking methods in the country and should be encouraged to keep bank accounts for their financial transactions. Even in metro cities, majority of the people are unaware about the latest software and means to carry our payments through their mobile phones.
India has a long way to go to turn into a cashless economy. It is still at a very nascent stage and strong and effective measures will have to be introduced by the Government to encourage more people to switch to using digital means of payments such as e-wallets, credit and debit cards and net banking.
Use of mobile and telecom industry sector will play an important role in the digitalization of India. The Government should provide incentives to the private sector banks and companies for mobilizing them to develop the requisite software and infrastructure to provide more people with means to use their phones to carry our digital transactions and help transform India into a digital economy. This should initially start from the metro urban cities and later switch on to the other rural areas.
