India and Cashless Economy

An economy in which all transactions are carried through electronic channels such as credit and debit cards, electronic clearing etc is called as cashless economy. Therefore the flow of cash is nonexistent or bare minimum.

Current Situation in India

• In India most of the transactions are done through cash. According to various data released: less than 5% of all payments happen electronically.
• 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.

Why Indians Prefer Cash Over Electronic Transactions

Lack of access to banking

Lack of banking access is one of the major hindrances in moving towards a cashless economy.

Consumer behaviour

Consumers prefer using cash more than electronic mode for day to day purchasing, payments etc. A cash transaction is immediate, as simple as a banknote moving from one hand to another. When A.T. Kearney surveyed consumer behaviour at malls, it found that close to 90% transactions happened by cash. Apart from illiteracy about electronic mode, consumer behavior is also guided by the fact that use of cash is simple and easy away from the hassels of understanding the computer system. Further new systems of electronic payments like digital wallet etc. do not attract the middle class consumer. For e.g.: 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.

Large unorganized sector

Most of the Indian work force works in unorganized sector. Accompanied by this majority of retailers, suppliers and service providers belong to the 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.

Lack of awareness among consumers

Non users of electronic mode of payment are not even aware of the benefits of credit or debit cards. Among debit card holders, who are the most obvious targets for conversion to cashless transactions, only 30% are aware that credit card usage offers a zero-interest credit for a maximum of 30 days. Just 55% perceive credit cards as providing hassle-free and fast payment; and only 22% know of the reward schemes. Further, nearly 75% debit card owners do not realise that with credit cards they can pay in equated monthly instalments (EMIs) without any paper work. Therefore consumer perception is also a barrier in moving towards cashless economy.

Benefits of Cashless Economy

• The direct cost of running the economy is huge. For instance: In the period 2010-11, the RBI spent nearly Rs 24 billion on printing money, and an additional Rs 455 million on distributing that money nationwide. Once the economy shifts to electronic transfers there will be efficiency gains as transaction costs across the economy will come down.
• The benefits of a less-cash economy are for individuals, too. No need for queues outside ATMs, no cashout during long holidays, no waiting for a deposited cheque to be credited, and no risk of carrying currency notes in the wallet. Cashless transactions with the enhanced security procedures address each of these problems.
• Use of less cash will also keep a check on generation of black money, prevent money laundering, increase tax compliance. This will ultimately help the consumers from side effects of above illegal activities.
• In India huge amount if money is spent on welfare programmes. However no significant results are achieved on ground level owing to corruption and lack of transparency. Once government switches over to electonic cash transfers there will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients making the entire process becomes transparent.
• Apart from direct benefits there are greater indirect benefits. Most important of these being increase in the pace of circulation of money. Cash, being material, can be prevented from circulation. For example, cash that a tourist brings back unused from a foreign visit will lie idle till her next trip. Cards and electronic channels act to alleviate this friction and increase circulation.
• Electronic transactions will also leave ample liquidity with the banks to lend to more sectors of the economy.

Steps Needs To Be Done To Promote Cashless Economy

Enabling access to banking is a pre requisite to promote cashless economy. So the success of initiatives such as Jan Dhan accounts linked to Aadhaar data will be of prime importance. A robust payments mechanism to settle a digital transaction is also needed, though the National Electronic Funds Transfer and Real Time Gross Settlement services.

The government has to come out with innovative ideas to promote cashless transactions. For eg: The government can offer 1 or 2 percent rebates to merchants who report atleast half of their transactions through online payment.

Further the government has to give incentives to private payers to make internet available to remotest corners of the country. Without internet services with competitive pricing the aim of moving to cashless economy remain unfulfilled.

Apart from this consumer needs to be awakened to the benefits of using debit and credit cards. Because without changing consumer perception any amount of efforts will go waste.

Scope Of Cashless Economy

Currently India is witnessing a huge demographic dividend and by 2030 or so it will highest number of youth population. So the analysts expect the Smartphone market to exhibit a growth of four times over the next five years. This will also bring a marked shift among the consumers behaviour to switch to mobile banking. Moreover we can estimate the upside potential from the fact that India has less than 40 million mobile banking users while each of the top three Chinese banks have in excess of 100 million.

Also the telecom industry is expected to boost the digital shift. Various innovative tools have been launched by the telecom companies to entice the customers. For eg: Prepaid cards are extensively used by telecom operators and also offer mobile users the benefit of lower liability in case of loss or fraud in the online space. Such a mechanism will help to accelerate the movement away from cash while mimicking the benefits of currency. If there was a prepaid payment card option available which consumers could preload with small amounts for use at grocer’s and neighbourhood retail stores with the benefit of receiving phone alerts for every transaction, it would perhaps be one of the effective ways of transitioning consumers from cash to cashless in a safe and easy manner.

The government is also giving incentives for electronic transactions. For eg: service tax waiver when credit cards or other forms of digital settlements are used.  Therefore apart from the need of the economy there is also a lot of potential to bring this change.