Though payments through debit cards grew just 10% over the year, to around R16,000 crore in September 2016, those through mobile wallets more than doubled to around R3,200 crore in September—and this, in turn, has increased dramatically after the demonetisation shock, with standalone mobile-wallet market-leader PayTM alone talking of hitting over 5 million transactions a day and being on track to process payments worth R24,000 crore a year. This may not happen if, once there is enough cash in the system, Indians go back to their old ways, But given the huge savings to be made, it is vital all attempts be made to deepen the digital payments culture. Indeed, a recent study by payments firm Visa suggests the costs of doing so may not be that high, while the dividends from it can be quite large.
According to Visa, just spending around R70,000 crore—of this, R58,000 crore is to be given via tax breaks and not through actual expenditure—over five years could result in a situation where the country’s cash-to-GDP ratio could fall from 11% in FY14 to 10% in FY19 and, more important, the share of digital payments in per capita consumption expenditure could rise from 4% to as much as 36%. While spending in cash implies no taxes have to be paid, and is therefore a big barrier to digital spending, according to Visa’s calculations, a 50% cut in tax liability on half of an SME’s revenues and a 5% tax break on a fifth of an individual’s electronic spending—with a cap of R2,000 per year for individuals—is enough to ensure a large number of individuals/firms will find it viable make the shift. The reason for this is that, while most look at the tax savings to be made from spending in cash, few look at the costs of the cash economy. For individuals, the obvious costs are not earning interest on the savings—the costs of going to the bank and waiting in lines, especially after the demonetisation, also need to be added—while for SMEs the fact of dealing with cash means a significant proportion of management time is wasted on just this. All told, according to Visa, the cost of cash is as high as 1.7% of GDP, with the bulk being borne by households. Once the necessary push is given, the study estimates, India’s cost of cash will fall to1.3% of GDP, or by a whopping R70,000 crore a year. While the tax breaks will make it more viable for people to make the switch, banks will need to spend around R12,000 crore to buy enough Point of Sale devices to facilitate payments across more merchants. A point that needs to be kept in mind is that, when RBI reduced merchant discount rates in an attempt to popularise more digital spending, this resulted in the opposite since banks no longer had an incentive to push digital. Also, while the desire to avoid taxes is a motive behind the cash economy, this is also related to the large size of illiterates/semi-literates in the population. The multiplicity of poor laws, interestingly, is another reason for this and going cashless can’t happen till this is fixed—rigid labour laws, for instance, encourage firms to have a bigger informal work force which lends itself to more cash payouts while only big dollops of cash can help deal with the inspector raj and the immensely hungry election machine.