THE BENEFITS AND CHALLENGES FOR INDIA IN GOING CASHLESS

The recent move of demonetization has rattled the dusty cages of cash based economy and forced the people to rethink the MO of transactions and trade. The demonetization drive was initially termed as a tool to tackle the problem of black money and fake currency, but since then, the narrative has clearly shifted base. Now it is a way to promote cashless transactions among citizens, which is really a good idea for the country. But the question is whether India is ready for it or how feasible it would be for the government to turn India into a cashless economy by 2020.

India has a large amount of black money. According to recent estimates around 1/4th of Indian GDP is the shadow economy of India, which is like a parallel dimension slowly sucking out energy and matter from our dimension (economic ecosystem). However, one thing needs to be made clear that of all the black money in India only 10% of it is in horded cash and the rest is in floating in the market or is in form of gold, stocks or real estate. The success or failure of demonetization as a means to curb black money and fake currency can only be determined after a couple of months but the fact that digital economy is good for the country, is overwhelmingly accepted as true.

What you need to know is, how it can be beneficial for our country and what are the challenges in front of India in going cashless.

Benefits of Cashless Economy

1.  Reduced Maintenance Costs: The logistics and supply chain of cash is costing the exchequer a fortune. The amount of money required in printing cash, its storage, transportation, distribution and detecting counterfeit currency is huge.
2.  Transparency in Transactions: Needless to say, electronic transactions or plastic money always leaves a digital proof beneficial for both the taxpayer (consumer) and the tax collector (government).
3.  Higher Revenue: A derivative advantage of transparent transactions is collection of tax will increase. Thus generating higher revenue for the government, which in turn will be converted into public welfare policies and schemes.
4.  Financial Inclusion: The will to have a cashless economy will promote financial inclusion of the people. It will compel the government to connect all the households with a bank and plastic economy.
5.  Lower Transaction Costs: Digital transaction is a boon in terms of processing costs and waiting time. If implemented properly, it will increase the consumption and production rates, thereby improving the economy.

Challenges Ahead

However, in a country of 1.3 billion people, not all is perfect and not all is rosy. Going cashless must be an exponential curve, slow initial buildup then fast paced in later stages, not a digital step signal. That could be counterintuitive to the whole process. India is a large country that needs a change that is systemic and systematic. Here is a list of challenges-

1.  High Cash Dependency: India has a high cash penetration in almost all of its transactions that happen as B2C transactions. Total cash flow in the market accounts for 12.04% of the GDP, which is among the highest in developing countries. This goes to show our dependence on cash is acute and it requires time to tackle it.
2.  Lack of Digital Infrastructure: The first and foremost requirement of a digital economy is the penetration of internet and smartphone. Although a billion mobile subscriptions (not users), only 30% of subscribers use smartphones. With 370 million mobile internet users, over 70% of them are in cities while 70% of Indian population lives in villages.
3.  Skepticism in Merchants: Small time merchants as well as users have high amount of suspicion over plastic money and they need to be educated over the potential benefits of using it. One cannot expect an overnight change in the perception of a majority of Indians over the use of plastic money. Government needs to come out with awareness and incentive schemes to promote digital economy.
4.  High Merchant Discount Rate: These are the percentage deducted from each purchase a merchant makes by the card issuing authority or bank. These are volume dependent and are more economical if the merchant is able to sell a large amount of products, thereby beneficial for big merchants. For smaller merchants, it does not provide enough incentive to make the shift from cash.