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Insights into Editorial: Making the Transition to a Cashless Economy + Mindmaps on Issues

Insights into Editorial: Making the Transition to a Cashless Economy + Mindmaps on Issues

17 November 2015

India continues to be driven by the use of cash; less than 5% of all payments happen electronically. Various studies have shown that 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 or 4% in Brazil.
  • The number of currency notes in circulation is also 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.
  • Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.

Many developed countries such as Sweden are already moving towards a cashless economy on the back on new payments technology. Even developing countries such as Kenya have made immense strides in mobile payments.

What exactly is a cashless economy?

It 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 direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.

A drastic reduction in the use of cash has the following benefits:

  • There will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients.
  • There will be efficiency gains as transaction costs across the economy should also come down.
  • Reducing use of cash would also strangulate the grey economy, prevent money laundering and even increase tax compliance, which will ultimately benefit the customers at large.
  • Usage of cashless mechanisms would also ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them.

Benefits 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.

Barriers to cashless transactions:

  • Lack of access to banking for a large part of the population as well as cash being the only means available for many.
  • 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.
  • The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, 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.

How can the situation be improved?

  • By effective implementation of initiatives like Jan Dhan accounts.
  • By putting in place robust payments mechanism to settle digital transactions.
  • By giving incentives such as a service tax waiver when credit cards or other forms of digital settlements are used.
  • 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.
  • 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.
  • 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.

India 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.



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