Cashless economy is the term that is used to describe the situation where the flow of cash doesn’t exist within the economy. All the transactions take place through electronic channels. Going cashless eases one’s life. It also helps formalize the transactions. This helps to curb corruption and the flow of black money which results in an increase in economic growth.
In the Union Budget 2019-20, the Finance Minister had stated that 2% tax deducted at source will be levied on cash withdrawals that exceed Rs.1 crore in a year from the bank account. In short, the purpose was to discourage the practice of making business payments through cash transactions. The government had also said that businesses with an annual turnover of over Rs.50 crore can offer low-cost digital modes of payments. Moreover, no charges or Merchant Discount rates will be imposed on them or their customers. This is a great move by the Indian Government to incentivize people to adapt to the emerging cashless economy.
Nearly 90% of all transactions in the Indian economy were dependent on cash before the pandemic. This is due to the large informal sector that employs 90% of the labor. India cannot become cashless unless this sector adapts to digital payments. Incentivizing the people alone is not sufficient. The government needs to develop the supporting infrastructures and technologies for India to become a cashless economy.
Why should India be a Cashless Economy
India should shift to a cashless economy. The reasons for this statement are as follows:
- Cash is expensive: A lot of time and money goes into printing cash. RBI has spent Rs.32.1 billion on printing the currency. Also, there is the cost for the setting up of and maintaining of the ATMs. Furthermore, the paper currencies have shelf-life after which it needs to be replaced.
- Cash is the driver of the shadow economy: Cash is difficult to trace. Illegal activities like tax evasion, black money, etc can also be carried out with cash. In 2007, currency in circulation was almost on par with the bank deposits. However, in the last three years, the currency with Indians was more than the bank deposits by 50%. The amount of black money (unaccounted money) in India is 15-16 lakh crores. It may be used to finance illegal activities like terrorist activities, purchasing votes, smuggling, betting, trafficking, etc.
- Enables financial inclusion and increased tax revenues: A cashless economy makes it necessary for all citizens to have bank accounts. This will ensure a higher financial inclusion rate. It will also guarantee transparency in the transaction of money within the economy – minimizing the possibility of tax evasion exponentially.
Measures taken by the Indian government?
- Demonetization: Demonetisation drive has not curbed the black money. However, it had pushed India towards being a cashless economy. It has become a radical ‘reform’ to transform India into a cashless economy. Paytm witnessed 5 million daily usage post demonetization as opposed to their average transaction of three million. It also saw a 700% increase in the overall traffic and a 1000% increase in the amount of money added to its account in the first two days of post-demonetization. Ola Money too saw a 1500% increase in its e-wallet.
- Pradhan Mantri Jan Dhan Yojana: One of the biggest financial inclusion initiatives in the world launched in 2014. It is a national mission on financial inclusion that has an integrated approach to bring about comprehensive financial inclusion and provide banking services to all households within the country. This scheme ensures access to a range of financial services like availability of basic savings, bank accounts, access to need-based credit, insurance, and pension. It has played a significant role in the opening of bank accounts for the poor.
- Direct Benefit Transfer (DBT): It is a scheme launched by the Indian Government to transfer the benefits and subsidies directly to the bank account of the beneficiaries. The welfare scheme included LPG subsidy, Old Age Pension, Scholarship, MGREGA, etc. This allowed for the penetration of digital banking into rural India.
- Unified Payment Interface (UPI): It is a system that powers multiple bank accounts into a single mobile application (of any participating banks), merging several banking features, seamless fund routing, and merchant payments into one hood. This makes digital transactions a simplified process. Transaction via UPI had increased the monthly transaction from nil to 754 million in less than 3 years.
- The implementation of GST has encouraged businesses to opt for cashless transactions.
- Sitharaman announced in this year’s budget earmarking Rs 1,500 crores for a proposed scheme to promote a digital mode of payment. This scheme is to further boost the digital revolution in the country.
- Financial Literacy Centres: This was a part of Pradhan Mantri Jan Dhan Yojna. This initiative has provided financial education programs to spread awareness of banking products and benefits.
- Other promotions like e-banking, debit and credit cards, card-swipe or PoS machines, and digital wallets have made the transition to a cashless economy easier.
- A targeted financial education drive can be undertaken by the government to improve the knowledge of e-transactions to the public, even the illiterate.
- The banks must make sure that the transaction fee is either free or affordable to all.
- The banks must encourage the opening of zero balance accounts to encourage the poor to make use of the bank accounts.
- The government must improve internet connectivity in rural India and other isolated regions.
- Availability of ATMs in rural and suburban areas should be ensured. Just the availability of bank accounts alone cannot address the problem of India being overly dependent on cash.
- SMEs should also start operating cashless. There are a lot of benefits for SMEs if they adopt the digital form of payments. For example, there will always a record if whatever transaction has been made. Companies like TranZact are helping SMEs to adopt digital transformation.
With a change in the world, there is a need for development in the economy of India. India has started to aim at a cashless economy. The paperless transaction movement will help the economy in immense ways.