Can India move towards a cashless economy?
Many economies in the world rely upon the physical exchange of coins and currency notes, with India being one such country. In 2016, however, Prime Minister Modi announced the demonetisation of Indian currency notes of INR 500 and 1000 in an attempt to decrease the “black money” laundering that occurs through India’s economy. For context, 500 INR is equivalent to approximately 6.70 USD. Modi’s declaration was a move toward curbing corruption, the production and use of counterfeit currency and the terrorist financing which plague India today. Following Modi’s 2016 speech, 86% of India’s currency was withdrawn from of circulation as people scrambled to deposit their cash into banks. Over 200 million new bank accounts were opened and Modi’s order boosted bank surplus deposits to 6 trillion rupees, or approximately 84 billion USD. With the decrease of currency circulation, could India be headed in the direction of Canada or Sweden in its implementation of a cashless economy?
In a cashless economy, digital modes of payment, such as credit cards, debit cards, and digital wallets, become the norm. Platforms such as Paytm, an e-commerce payment system, have seen an increase in users following the 2016 ban on currency. While Paytm was founded in 2010, it capitalised on the demonetisation days by enabling a “Nearby” feature, which allowed consumers to find retailers that accepted their digital wallet services. In addition, Paytm “has clocked 25 million offline transactions in the past six days alone… The offline transactions total Rs 150 crore in value”, which is equivalent to approximately 1.8 million USD (Srinivasan 2016). One challenge that many e-commerce platforms face is their lack of accessibility to users in India. India is a nation with over 22 major spoken languages and 13 scripts, making it difficult to provide a service in every user’s preferred language. Paytm has attempted to tackle this problem by offering their services in 10 major regional languages. This change alone is projected to grow their business by 80%, showing the importance of multi-lingual delivery. Paytm is far from the only company trying to capitalise on the push for a cashless economy, but the challenges posed have proved too much for some.
What are the challenges of implementing a cashless economy for India?
There are three main challenges which could undermine the prospects for a cashless India. Firstly, there is a lack of demand. Many international companies that do fully online based retail, such as Amazon and Flipkart, have had to offer a “cash-on-delivery”, a service which allows users to pay cash for their online purchases to increase their sales revenue in India. Amazon is typically a fully cashless service, but in order to meet the demands in India had to resort to incorporating cash into their business model. This low demand is compounded by relatively little digital literacy regarding online banking and digital currency forms. This needs to be reformed before India can truly embrace the cashless system. The second challenge is the lack of internet access in rural areas. A majority of the digital systems for cashless transactions require a robust internet connection either through cellular data or broadband services – the kind of connectivity which, for rural areas, is simply unobtainable at the moment. To fully transform India into a cashless society, digital infrastructure must be revamped and there must be more widespread access to affordable internet connection. The final challenge is lack of additional digital infrastructure outside urban cities. With only 2.3 lakh (270,000) ATMs across the entirely of India, mostly condensed in metropolitan areas with little access in rural areas, it is difficult to activate and use cards on point of sale (PoS) terminals, or places where a retail transaction is completed). While these challenges cannot be mitigated immediately, there is hope to address the growing inequalities between the urban and rural populations regarding the future of digital commerce.
What are the benefits of a cashless economy for India?
The two major foreseeable benefits for both the people and government of India are the decrease in the production costs associated with paper money as well as a decrease in corruption, tax evasion and the shadow economy that runs alongside India’s legitimate economy. First, maintaining a cash economy is expensive. The Reserve Bank of India has spent over 32.1 billion rupees to print the currency in circulation today. “The direct cost of maintaining a cash-based economy is close to 0.25% of India’s GDP” (The Hindu). The second benefit is the deterrence of the shadow economy that is prevalent in India. Cash is not easily traceable. The unaccountable cash flow was used to fund illegal activity such as corruption and terrorism, and with the reduction of cashflow it will be more difficult to engage in these illicit activities. Digital money is traceable and accountable, meaning a decrease in the ‘lost’ money in the economy and increase legitimate sales and businesses.
Will it be possible?
Given the emergence and increase usage of platforms such as PayTM and the increase in vendors accepting this mode of payment, it is possible for India to move toward a cashless economy. The true challenge will be to convince the population of India to adopt this method and move toward this economic transition.
Sources:
Baba, Moyuru. “Modi's demonetization haunts India, weighing on central bank.” Nikkei Asian Review. Last Modified December 28, 2019. https://asia.nikkei.com/Economy/Modi-s-demonetization-haunts-India-weighing-on-central-bank
Maurya, Pooja. “Cashless Economy and Digitalization.” SSRN. Last Modified January 4, 2019. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3309307
Srinivasan, Supraja. “Paytm finds Rs 150 crore bounty offline.” The Economic Times. Last Modified November 17, 2016. https://economictimes.indiatimes.com/small-biz/money/paytm-finds-rs-150-crore-bounty-offline/articleshow/55468466.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Technology and Operations Management. “PAYTM and India’s Cash Driven Economy: Opportunity for Online Payments.” Last modified November 18, 2016. https://digital.hbs.edu/platform-rctom/submission/paytm-and-indias-cash-driven-economy-opportunity-for-online-payments/