Summary:
According to the recently released data pertaining to payment, clearing and settlement systems in 23 major economies by the Bank for International Settlements (BIS), moving towards a cashless economy remains a herculean challenge for India.
Performance of India:
- India lags far behind both emerging market and developed peers in the move towards a cashless economy.
- India ranks the lowest among BRICS countries in terms of per capita non-cash transactions. Non-cash payments transactions in India amounted to only 11 per inhabitant in 2015, much lower than other BRIC economies, with China reporting 17 such transactions per inhabitant in 2014.
- Debit cards accounted for the most number of non-cash payment transactions in India in 2015. But, the number of debit card holders in India remains relatively low. In India, one in two people have a debit card, which also typically functions as an automated teller machine (ATM) card.
- Number of Point of Sale (PoS) terminals and ATMs in India are low by global standards when adjusted for population.
- Also, India lags many of the emerging market peers in terms of mobile money penetration. E-money transactions amounts to only a minuscule 0.05% of all non-cash retail transactions, while accounting for 5.5% of the volume.
What is a cashless economy?
It is 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.
Benefits of a cashless economy:
- Usage of cashless mechanisms would ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them. It also leads to increased efficiency in welfare programmes as money is wired directly into the accounts of recipients.
- Efficiency gains can also be seen as transaction costs across the economy 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.
- It also provides an on-ramp to financial inclusion and enables e-commerce growth.
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.
What perpetuates use of cash in India?
- A high propensity to save in and use cash.
- Cash intensive supply chains require many merchants to transact in cash.
- A large shadow and remittance based economy is also to be blamed for the situation.
- Gender imbalance in use of digital payments has further aggravated the problem. This is due to insufficient focus on financial literacy.
- Also, costs of point-of-sale terminals and operating costs are still high in India.
What needs to be done now?
- Effective implementation of existing initiatives like Jan Dhan Yojana and DBT helps to some extent.
- A robust payments mechanism to settle digital transactions should be put in place.
- Incentives such as a service tax waiver should be given 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.
- 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.
Way ahead:
Greater usage of digital payments will save trillions of rupees for the Indian economy as it will help bring down the cost of cash.
- In this regard, India can learn from other countries in the developing world, which have managed to reduce their dependence on cash even while bringing more people in the folds of the formal banking network.
- Kenya has been a well-documented success story, where mobile money has spread much faster and deeper than in India. Kenyan households with access to mobile money were able to manage negative economic shocks (like job loss, death of livestock or problems with harvests) better than those without access to mobile money, according to World Bank research.
Conclusion:
While the recent initiatives of the central bank and the government to make cashless transactions easier are laudable, India has a long road to travel in her journey towards a cashless future.