Should India Be A Cash-Less Economy - An Analysis

The finance minister, in his last budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money. In this Article we will discuss what exactly is a cashless economy? & How can we Achieve it…

A Cash Less Economy can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as 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) in India. Newer modes of payment like prepaid wallets along with mobile banking are also becoming popular means of e-transactions.

Cash is still king in India. While finance minister has highlighted the need for making India a cashless economy to rein in the problem of black money there are huge challenges in turning this desire into a reality. less than 5% of all payments happen electronically. 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.

India is the largest producer and consumer of currency notes after China. Currently, less than 5% of all payments are done electronically.

A primary reason for cash-driven transactions is that an overwhelming majority of retailers, suppliers and service providers belong to the unorganised, informal sector. They have neither the infrastructure to offer card-based transactions nor the inclination to encourage consumers to pay by credit cards or debit cards. Most do not even provide receipts or bills for items or services purchased. Not keeping a record of the transaction enables them to avoid payment of sales tax, and this further leads to low tax collections.

The other important barrier to cashless transactions is the perception of consumers. The benefit of cashless transactions is not evident to even those who have credit cards. It is universally believed that having cash helps you negotiate better.

The telecom industry is expected to boost the digital shift. We can expect the smartphone market to exhibit a growth of four times over the next five years. While there is growth in the electronic payment systems, going ahead, security concerns versus ease of doing banking will be the major dilemma facing the central bank when it frees up the retail payment space and allows the introduction of new payment instruments.

In order to enhance the use of technology to move towards a 'less-cash' society, the Reserve Bank of India (RBI) has announced that it will come out with a concept paper on promoting electronic payments, especially in smaller towns.

With the mobile phone becoming a must-have in all Indian households, it seems highly likely that Indians will leapfrog the point-of-sale (POS) credit card machine and go straight to mobile payments. Low-cost technologies like those used for branchless banking in remote rural areas can be deployed so that card swiping gadgets are attached to smartphones, thus making the smartphone a POS credit card terminal. This calls for the creation of a robust ecosystem that enables every small and micro supplier to accept credit and debit cards. Regulatory controls need to be put in place urgently so that consumer and retailer/supplier confidence is established in the system.

It took Indian consumers decades to move from paper money to plastic money. But a switch from plastic money to no money is happening at a much rapid pace, thanks to mobile wallets, which allow you to make payments through your smartphone without actual money transaction.

Here’s how it works:

Using any of the multiple mobile wallet companies—Paytm, Mobikwik, Freecharge—you can recharge a ‘virtual wallet’ with a certain amount of cash, and later use this to pay for shopping, bills, hiring a radio taxi, ordering food and a host of other services. It means you don’t need to carry paper money (or even a debit or credit card) at the time of payment—as long as the merchant or service provider accepts this sort of digital payment.

But the real revolution is yet to happen with Point of Sale (PoS) based services, which can facilitate the acceptance of mobile wallet payments at retail shops, unleashing a huge benefit to consumers and merchants alike.

A mobile wallet which does not find acceptance at retail shops will not be able to offer universal acceptability. There has to be a common system wherein all transactions, whether with or without mobile wallets, can be recorded at a single place in shopkeepers’ billing system.

This is exactly what PoS-based services can do—provide a common platform to record mobile wallet-based transactions in the similar way a cash/credit card transaction is reported at PoS. The PoS technology can allow a phenomenally large number of merchants, both offline and online, to be on-board for payment through e-wallets. Consumers need not worry about security either; transactions via PoS-based services can be verified by generating a one-time password (OTP) that the buyer receives on her phone.

There have been efforts by some mobile wallets to provide acceptance at specific offline merchants by providing customised solutions. But in the absence of a standard technology, mobile wallets will find a challenge if they try to solve this puzzle themselves. With the PoS technology, mobile wallets can now leverage it to enhance their coverage.

With the mobile wallet industry piggybacking on the growth of smartphones—you need a mobile device that can log on to the internet to make any virtual money transactions—it could also become a unique tool for financial inclusion. Now, thanks to the ubiquitous presence of telecom companies, areas in rural India where traditional banking hasn’t reached but the 3G network has could soon see aspirational rural customers—who don’t have either a credit or debit card—transacting digitally through their smartphones. The familiarity of the device, coupled with the assurance of security and ease of use, can provide impetus not only to the growing cashless economy but also the digital initiative of the government.

Benefits of Cash Less Economy for individuals:

• No need for queues outside ATMs.
• No cashout during long holidays.
• No waiting for a deposited cheque to be credited.
• No risk of carrying currency notes in the wallet.

Electronic payments will also help plug the leaks in government disbursement systems that drain precious resources away from the intended recipients. Once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs. 

India is the fourth-largest user of cash in the world. What makes cash-based transactions such an attractive prospect for most Indians? 

For one, there are no extra transaction costs involved when you pay with cash, costs that often make it financially unviable for smaller merchants to switch to electronic payments. 

A cash transaction is immediate, as simple as a banknote moving from one hand to another. You don’t have to worry about a computer system crashing and losing your transaction. 

A thousand rupees loaded into Ola’s digital wallet allows you to only buy taxi rides; the same thousand rupees as a banknote in your pocket can buy you “anything” under the sun. 

On the flip side, it’s also easier to launder money and evade paying taxes if you’re using cash, since those transactions are much harder to trace. 

Financial inclusion is one very good reason to shift from a cash-based system to one that operates on electronic payments, but there are other compelling reasons as well. Cash is a very expensive habit for the nation to cultivate. The cost of printing, managing and moving money around the country is as huge. 

How can the situation be improved?

i. By effective implementation of initiatives like Jan Dhan accounts.

ii. By putting in place robust payments mechanism to settle digital transactions.

iii. By giving incentives such as a service tax waiver when credit cards or other forms of digital settlements are used.

iv. The Reserve Bank of India 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 affect key monetary variables such as the velocity of money.

v. RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.

vi. The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.

Conclusion: Indian Economy is ripe for a transition to digital payments. While a cashless economy is not here, the move towards a less-cash economy has begun. Recent expansion in digital wallet usage and the introduction of specialized payments banks are good moves in this direction. But, a lot needs to be done before cash is eased out of the Indian economy.

- CS Rahul Harsh, An Associate Member of The ICSI and A Commerce Graduate from Kolkata, Currently Employed as an Assistant Company Secretary with Aanchal Ispat Limited.

Author Can Be Reached at : csrahulharsh@gmail.com