Going cashless overnight
It has become imperative for the government to spell out the exact calculations that went into its demonetisation initiative, considering how in the month since the goal posts have been shifted several times. After sucking out 86 per cent of the currency, the government has failed to ensure adequate circulation of cash. In response to growing discontentment over the initiative, the Modi government has rapidly shifted the goal posts on the demonetisation discourse, from tackling the scourge of black money to battling terror to fostering a cashless economy. Going by media reports, the narrative now is all about going cashless, while the fight against black money has seemingly receded into the background. On Thursday, the government announced a slew of measures that seek to incentivise cashless transactions. Discounts and monetary incentives, including cheaper fuel and railway tickets for those who pay online, no service tax for digital payments of up to Rs 2,000, were introduced. The politics behind the idea of a cashless economy is part of Prime Minister Narendra Modi’s bid to tap into the aspirations of middle-class India, which wants to see India stand alongside developed nations. Smart cities and bullet trains are also extensions of that same aspiration. The quest for cashless transactions isn’t a new concept. In fact, the narrative in the West has extended to crypto-currencies, which are digital, encrypted currencies that operate independently of a central bank. Nonetheless, a little perspective is in order. By most estimates, 85 per cent of transactions globally are still carried out in cash. In the United States, the figure stands at 40 per cent. What’s more, most of these transactions involve small amounts of money. There are many reasons why cash continues to remain a popular mode of exchange. There is an element of convenience, privacy, and intuitiveness involved in cash transactions. More importantly, however, there are no transactional costs. Of course, the move to cashless will play a significant role in enhancing greater efficiency and transparency across the financial system.
But is India prepared to make that switch all of a sudden? Some fundamental structural concerns require necessary redressal. For starters, India is predominantly a cash economy. It’s estimated that between 90 and 98 per cent of all transactions in India involve cash. Going one step further, approximately 92 per cent of the country’s workforce is in the unorganised sector and earn their wages in cash. Moreover, a mere 6 per cent of retailers accept debit cards or mobile payments. Despite the government’s initiative to bring vast swathes of the rural populace into the formal banking system through schemes like the Pradhan Mantri Jan Dhan Yojana (DJY)scheme, the proportion of those who remain unbanked is still substantial. According to a report prepared by PwC India in October 2015, India’s unbanked population stood at 233 million. Since that report, the scheme has added a further 68 million accounts as of November 2016. Going by the assumption that ever JDY account has been issued to a new user, there are still approximately 165 million people that have not entered the formal banking system. For some perspective, the entire population of Bangladesh is about 161 million. The other structural concern is the weak state of our digital infrastructure. Figures suggest that there just aren’t enough people in India, who have mobile or internet connections. What’s worse, connectivity is erratic, even across metro cities. India also currently faces a massive shortage of point of sale (PoS) machines for card transactions. And then there are some key human factors involved in facilitating the transfer to cashless for millions, who have never used a debit card or accessed a digital payment platform. The habit of using cash for daily needs cannot be kicked overnight, as the government seems to suggest. It is a long-term and expensive process that will require a complete overhaul in the way people think about money. In a recent column for a leading Indian publication, Ila Patnaik, a Professor at the National Institute of Public Finance and Policy, writes: "When you wish to influence the behaviour of millions of people, consumers, businesses there has to be a change in the policy framework from targets to one that works through incentives. In this case, it has to be about incentives of banks, of payment service providers, of the payments regulator, etc. Pushing the economy into cashlessness cannot be forced by putting Rs 2,000 notes in the hands of the public so that people use electronic payments from lack of choice, where card companies provide the service at a loss and where some wallets could emerge as monopolies, from sheer neglect or not putting a competitive policy framework in place.
If we are moving towards the goal of cashlessness, a focus on technology and neglect of an appropriate competitive regulatory framework will be short-sighted. The policy framework must be based on competition, interconnection and consumer protection. Policy work and committee processes have been working on cashlessness for many years. This work needs to go into the government’s next steps." The government’s announcement on Thursday fulfils none of the above criteria. In fact, Thursday's announcement of insurance cover worth Rs 10 lakh for those buying tickets online is just bizarre. What about those who cannot buy tickets online? Are their lives less precious in the event of an accident?