A shift away from cash reliance will come only when the urban middle class finds plastic money more convenient, not with forceful government intervention.
The ideal of a cashless or low cash society, evoked to defend the disruptive effects of demonetisation, is now being promoted as part of the government’s long-term design to reform and modernise India’s economy. Ideologues on the Right who have created the narrative do not explain exactly how the economy would become more efficient if we reduce the use of cash in our daily lives.
Variations in the share of cash in the total volume of money transactions in different countries are explained by population size, per capita income and income distribution, levels of education and urbanisation.
In the advanced economies of the West, cash accounts for 50-60% of the total financial transactions, as compared to 90% in China and 98% in India. The high cash shares reflect the numbers of low-income rural population and the high proportions of income from agriculture and informal sectors of industry and services in the GDP. Compulsion or policy-induced behavioural change will not affect these objective realities.
Why exactly do we need to reduce the use of cash? Government’s thinking on this is unclear. First, it has argued – confusing cause and effect – that a lower cash ratio would lead to faster modernisation. The second is an equally mistaken view that less cash in the economy would reduce corruption, which is thought to be dependent on the hoarded cash. A third underlying idea is that if every financial transaction were recorded, tax evasion would be impossible. A more dystopian world would be hard to imagine.
A shift away from reliance on cash comes gradually from rising incomes and when the urban middle class finds plastic money more convenient to pay utility bills, in shops and restaurants. The transition from cards to digital comes even later, for the greater convenience of a payer. Banks and sellers of digital equipment accelerate the process without any compulsion. None of the actors in the process is motivated by a desire to reduce cash flows.
The extension of banking services to rural areas and unbanked semi-urban areas has been going on for decades, bringing millions of small farmers and urban traders into the financial system. The objective has been to promote saving habits and to make these savings available to banks for economic development. The purpose, again, was not to reduce normal cash transactions.
The government’s accelerated Jan Dhan programme was directed to facilitating future direct transfers of benefits, in some cases actually substituting cash for commodities.
It needs to be understood that cashless transactions are not costless. Besides the initial investment in a smartphone, for cashless transactions, an individual will need to pay for phone and internet use and the bank fees on cards for any transaction. These expenses may be worthwhile for substantial commercial transactions, but not for daily needs.
Likewise, on the suppliers’ side, there would be costs of point of sale equipment and user charges.
These costs are presently being offset by bank subsidies and tax incentives, which would not be sustainable if transactions reached levels imagined by proponents of a low-cash economy. To meet these goals, large countrywide investments on telecom infrastructure would also be needed.
As to the matter of efficiency gains from digitising financial transactions, we need to distinguish between information flows and cash transfers within the banking system and transactions involving individuals. In the former, digitisation is already well advanced; the coverage can be extended and systems improved. In the latter case, if the state is a party – paying out benefits or receiving taxes – both the identification of individuals and money transfers can be made more efficient.
All this is rightly a part of the Digital India programme. What is wholly unnecessary is forcing the pace of digital transactions between individual buyers and sellers in order to reduce the use of cash.
The wrong-headed approach, treating cash transactions as undesirable and hence to be curtailed, sets impossible targets and will lead to wasted effort. It won’t be in the foreseeable future that wages in the informal sector, purchases and sales of handicrafts, small workshops and food stalls, bus and auto fares in urban areas, and moneylending, mandis and kirana stores in the villages do not involve cash transactions.
The government would do well to concentrate on restoring normal cash flows in the economy in all parts of the country and dissuade the apologists from promoting absurd notions of the virtues of a cashless society.
The share of cash in consumers’ and traders’ transactions will decline gradually, with the efforts of banks and telecom companies in their own commercial interests, without the need for any government support.
Ajit Mozoomdar served as secretary in the Ministry of Finance and secretary of the Planning Commission. He received a DPhil from Oxford.