If India were to spend around Rs 60,000 crore over a period of five years in subsidising the appropriate equipment and in giving tax-breaks to promote digital payments, it could save over Rs 470,000 crore over the next 10 years by way of lower costs of managing a cash economy—that, in a nutshell, is what a Visa study on accelerating the growth of digital payments in India is saying. The country, it rightly points out, has among the lowest penetration of bank accounts in all BRICS countries and the highest usage of cash.
While the government has tried to remedy this through Jan-Dhan accounts, that hasn’t helped make India any more cashless since the money is withdrawn and then spent in cash. Apart from the issue of security, there are various costs involved in keeping cash, ranging from losing out on interest accrual if the money is kept in a bank to the sheer cost of handling the cash and, in the case of banks, setting up and servicing ATMs for this purpose—the poor and the SMEs, Visa tells us, bear the brunt of the cost. All told, Visa estimates this costs India around 1.7% of GDP each year and, for good measure, it adds around 3.2% of GDP to this number as the taxes not collected from the large cash section of the economy—in its maths on the savings, though, this tax-foregone is not added back, but were this to be done, the cost-benefit equation would become even more compelling.
Visa talks of the factors that promote digitalisation of payments, from mobile wallets to NPCI’s low-cost payment solutions, and sensibly points to the fact that lowering commissions—as RBI did for debit cards—doesn’t really help since this lowers the incentive to offer such facilities. Instead, it recommends the government subsidising the costs of Point-of-Sale devices and offering tax-breaks for digital payments. That’s sensible and Visa is right about the costs of holding cash, but this needs to be contrasted with the fact that, once payments are digital, avoiding taxes is not an option. In which case, a less-cash economy isn’t going to take place till the government is able to not just ban cash above a certain value, but actually enforce it; it will work only when the taxman is able to track-and-tax even those using cash, rendering the use of cash useless in terms of tax avoidance. Equally important, it requires the tax burden to be low—right now, for those who can, the equation is heavily tilted in favour of using cash and tax breaks aren’t going to change this.