Prospects for Cashless Economy in India

Cashless Economy is when 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, and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) in India.

As of now, Cashless Economy has only academic importance. The Indian Economy continues to be driven by the use of cash; less than 5% of all payments happen electronically. in India, the ratio of cash to gross domestic product is 12.42% in GDP, which is one of the highest in the world. It was 9.47% in China or 4% in Brazil. Further, 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.

There are several reasons as to why Indians prefer Cash over electronic transactions. Firstly,  lack of access to banking leaves no option other than cash for a large fraction of the population. Secondly,  since, there are no extra transaction costs in Cash payments, it affects the consumer behavior. Electronic payments had been so far unviable for small value transactions but things are changing fast. Thirdly, Cash provides flexibility and simplicity as a transaction needs only moving from one hand to another, there are no worries about crashing of computers and losing the transactions. Fourthly, India has a large unorganized sector with overwhelming majority of retailers, suppliers and service providers. They have neither the infrastructure to offer card-based transactions nor the inclination to encourage consumers to pay by credit cards or debit cards. Lastly, the lack of education / awareness among consumers regarding use of cards.

Benefits Of Cashless Economy

The cashless economy has its own advantages. The transaction costs are coming down and will further go down. Once a substantial part of transactions are cashless, it would bring down the cost of printing, managing and moving money around. Further, the cashless economy automatically solves the problems of cash out on long holidays, risk of carrying currency notes etc. Further, the lesser use of cash strangulates the grey economy, prevents money laundering and increase tax compliance. Increased tax base would result in greater revenue for state and greater amount available to fund the welfare programmes. Lastly, Cash being material, can be prevented from circulation but electronic channels alleviate this friction and increase circulation of currency.

What Steps Should be Taken towards 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 very important. 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 Indian central bank will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.

What Is The Scope Of Cashless Economy?

The expansion of telecom and smart phones would provide a digital shift to the economy in near future. The private sector the driver of this change. Government is also mulling to provide incentives for electronic payments for example waiver of tax when electronic settlements are used.

The private sector has to come forward to drive the change. Apart from this government should also give incentives for electronic transactions.