Synchronised pursuit of a less cash economy benefits everyone across the development spectrum. Customers get security and convenience.
Progressive digitalisation reflected in DBT, the JAM Trinity (Jan-Dhan, Aadhaar, Mobile) and unified payment interface has altered ground realities. The adoption of new technology and digital payments has transformed conventional banking. This overarching process has been aided by 1 billion-plus phones, 500 million internet connections, 350 million smartphones and the possibility of making all the 5.5 lakh ration shops Aadhaar-enabled.
Revamped digital ecosystem have provided an enabling environment for the new normal. Given the humongous potential of digitalisation, its full realisation will revolutionise India’s socio-economic landscape.
The macroeconomic case for demonetisation, as finance minister Arun Jaitley emphasised, stems from the fact that “…counterfeit currency to terrorism, everything is a result of heavy dependence on cash economy”. Despite the hit to the GDP and the impact on sectors, such as, tractors, cars and UVs, commercial vehicles, two-wheelers, cement, etc, demonetisation will have a positive impact “because a lot of money that operates in the shadow economy will now become part of the banking structure”. With banks flush with low-cost funds, interest rates have significantly reduced. SBI slashed its marginal cost of funds-based lending rates (MCLR) by 90 basis points, whereas PNB, UBI, Kotak Mahindra Bank, Dena Bank, etc, cut their lending rates by 45-50 basis points.
Cash is predominant in India’s monetary ecosystem with estimates of cash transactions varying from 68 % to 90 %. Asia’s third-largest $2 trillion economy has a high cash-to-GDP ratio—nearly12%—vis-à-vis Brazil (3.9%) and South Africa (3.7%). Cash in itself is not cost-free. According to an analysis (The Cost Of Cash In India-Tufts University, 2014) optimised cash could save RBI and commercial banks up to R21,000 crore annually.
Digital drive is facilitated by electronic payments because of convenience, discounts, tracking spends, lower risk and gains. Further, macro-economically, it enhances efficiency and transparency by reducing transaction costs (India ranked 76 out of 168 countries in the Corruption Perception Index). This would enable banks to foster economic development and increasingly identify borrowers by CIBIL, credit scores. A systematic record will also drastically reduce tax evasion and avoidance.
In a cashless economy, the flow of cash is non-existent and all monetary transactions are done electronically, thus, eliminating or drastically reducing physical presence between two transacting parties. Less cash is a win-win situation for all stake-holders, viz, customers, bankers, government, etc. However, ‘cashless’ economy is a misnomer because very few economies are ‘cashless’—certainly not the most developed economies. For example, the proportion of cash is quite high across countries—Germany 80 %, Austria 80 %, Australia 65%, France 55%, Canada 52%, Netherlands 50 %, USA 46%.
Post-demonetisation, digital payments grew robustly both in terms of number of transactions and value with cumulative growth of electronic transactions among various instruments ranging between 95 % and 4,025 %. But such fast-paced growth has to be maintained over the long haul.
Synchronised pursuit of a less cash economy benefits everyone across the development spectrum. Customers get security and convenience. Merchants manage less cash and cheques. Online and mobile transactions create new revenue streams and extend reach of goods and services. A less cash economy, thus, positively influences the process and pattern of economic growth, including financial inclusion.
This can be possible as smartphone users are expected to rise to over 700 million by 2020; and intense competition in the telecom sector will lead to drastically reduced prices for mobile telephony and data usage. But this process needs to be accelerated by public investment in digital infrastructure, public-private-personal partnership, complementary skilling and development of appropriate back-end infrastructure for high-volume, low-value transactions.
But there are issues of internet “penetration rate” of 27 % (342 million internet subscribers) in India, adult smartphone usage rate of 17 %, internet conspicuously absent in rural areas (only 15 % of 1.02 billion mobile subscriptions have broadband internet), and higher average page load time on mobile 5.5 seconds in India vis-à-vis China (2.6), Sri Lanka (4.5), Bangladesh (4.9) and Pakistan (5.8). The e-payment option is also hampered by conspicuous absence of interoperability between wallets, abysmally low level of 1.46 million PoS machines in use and presence of large share of the workforce in the unorganised sector. Hacking and other internet crimes have caused security and privacy concerns necessitating indigenisation of cyber-security products and systems. Hence, the Indian Computer Emergency Response Team has formed a Botnet Cleaning and Malware Analysis Centre for detection, cleaning and securing of systems of end users and a digital payments division in CERT-In with more cyber-auditors.
Given India’s socio-economic peculiarities, the promotion of an ecosystem of digital payments is challenging and necessitates, inter-alia, a road map for e-payments, enhancing AEPS, robust online banking systems, incentivising cashless transactions and, successfully implementing country-wide digital transaction mechanisms. The surge in digital payments post-demonetisation needs the complete support of all stake-holders to meet the challenges of the present and the expectations of the future.
-Manoranjan Sharma, general manager, Canara Bank. Views are personal