In his book, Digital Economy, Don Tapscott describes the Age of Network Intelligence as an all encompassing and revolutionizing phenomenon fuelled by the convergence of advancements in human communication, computing (computers, software, services) and content (publishing, entertainment and information providers), to create the interactive multimedia and the information highway. This new age is gradually forcing us to rethink the way we perceive the traditional definitions of economy, wealth creation, business organizations and other institutional structures. Such a shift in economic and social relationships holds promise and peril.
The history of digital economy is not very old, rather it is a phenomenon of post-modern world. Keeping pace to the global economy, the current Government of India has started its massive drive of cashless economy, hoping to create a cashless society, in which, citizens will do financial transactions without money in the form of physical banknotes or coins, but rather through the transfer of digital information (usually an electronic representation of money) between the transacting parties.
Government of India has just launched the cashless economy as DigiDhan and with much fanfare, this economic product is introduced in different states of India. Digidhan Mela is an off-line official push to increase online payments.
Reducing Indian economy’s dependence on cash is desirable for a variety of reasons. India has one of the highest cash to gross domestic product ratios in the word, and lubricating economic activity with paper has costs. According to a 2014 study by Tufts University, The Cost Of Cash In India, cash operations cost the Reserve Bank of India (RBI) and commercial banks about Rs21,000 crore annually. Also, a shift away from cash will make it more difficult for tax evaders to hide their income, a substantial benefit in a country that is fiscally constrained[i].
To be sure, the government on its part is working at various levels to reduce the dependence on cash. Opening bank accounts for the unbanked under the and adoption of direct benefit transfer is part of the overall idea to reduce usage of cash and increase transparency.
RBI has also issued licences to open new-age small finance banks and payments banks which are expected to give a push to financial inclusion and bring innovative banking solutions. Things are also falling in place in terms of technology for India. The recently launched Unified Payments Interface by National Payments Corporation of India makes digital transactions as simple as sending a text message.
So, will the exercise to exchange currency notes and the ongoing currency crunch be a decisive factor in making India a truly cashless economy? As many experts believe it is “a defining point in India moving to cashless”. Shortage of cash has significantly increased the use of digital modes of payment.
According to a 2015 report by PricewaterhouseCoopers, a large part of the population is still outside the banking net and not in a position to reduce its dependence on cash. India’s unbanked population was at 233 million in 2016. Even for people with access to banking, the ability to use their debit or credit card is limited because there are only about 1.46 million points of sale which accept payments through cards.
In addition, about 90% of the workforce, which produces nearly half of the output in the country, works in the unorganized sector. It will not be easy for the informal sector to become cashless, and this part of the economy is likely to be affected the most because of the ongoing currency swap. Besides, there is a general preference for cash transactions in India. Merchants prefer not to keep records in order to avoid paying taxes and buyers find cash payments more convenient. Although cashless transactions have gone up in recent times, a meaningful transition will depend on a number of things such as awareness, technological developments and government intervention.
For instance, mobile wallets have seen notable traction, and it is possible that a large number of Indians will move straight from cash to mobile wallets. A study by Boston Consulting Group and Google in July noted that wallet users have already surpassed the number of mobile banking users and are three times the number of credit card users[ii].
However, it is important to recognize that cashless economy will depend on a number of factors. First, the availability and quality of telecom network will play an important role. Presently, people face difficulties in making electronic payments even in metro cities because of poor network. Second, as one of the biggest beneficiaries of this transition, banks and related service providers will have to constantly invest in technology in order to improve security and ease of transaction. People will only shift when it’s easier, certain and safe to make cashless transactions. Third, the government will also need to play its part. It will have to find ways to incentivize cashless transactions and discourage cash payments. Implementation of the goods and services tax, for example, should encourage businesses to go cashless. Government should also use this opportunity to revamp the tax administration, as more than taxes, small businesses fear tax inspectors.
The government will have to create conditions—not necessarily by creating cash shortages—to push cashless transactions to a threshold level after which the network effect will take over. India may not become a cashless economy in the foreseeable future, but it needs to reduce its unusually high dependence on cash to bring in much needed transparency
Faculty, North East Institute of Advanced Studies [NE-IAS]