Demonetisation of high denomination currency notes of Rs 500 and Rs 1,000 has proved to be an experiment too risky for the government and too testing for the general public. The Centre is making a big push for online and card-based transactions in the country to achieve its target of becoming a largely cashless economy. However, it seems the country is not ready for such an immediate shakeup.
DEA secretary Shaktikanta Das on Wednesday announced incentives like cutting down on service charge and other levies on debit/credit card transactions. The government’s initiatives over the past year or so have been focused on promoting e-payments, plastic transactions, cashless payments. It is, indeed, the future for the Indian economy.
The question, however, remains whether India is ready for such an overhaul of its cash-driven economy. RBI figures for July 2016 show that banks had issued 697.2 million debit cards and 25.9 million credit cards to customers after deducting withdrawn or cancelled cards.
The number is huge. However, cards on their own can’t turn the economy into a cashless one. Important to note that number of cards does not equal number of individuals holding those cards. Usually urban residents have multiple cards and the trend is seen now in rural areas as well. Further, cards are used for 3 primary purposes–withdrawing money from ATMs, making online payments and swiping for purchases or payments at point of sale (POS) terminals at merchant outlets like shops, restaurants, fuel pumps etc.
A report by Google India and Boston Consulting Group showed that last year around 75 per cent of transactions in India were cash-based while in developed countries like the US, Japan, France, Germany etc it was around 20-25 per cent. Due to demonetisation business for mobile or e-wallet companies has boosted by up to 4 times and the figures are keeping up.
Much of the cash transactions in the country are small exchanges for goods or services and the penetration of PoS terminals is not enough. Millions of people still don’t have a bank account, access to PoS sale points, internet or infrastructure to understand and use online payment methods etc. So we need a large scale penetration of digital services and PoS terminals to facilitate digital transactions in small towns, rural areas, untapped markets in urban India.
There are at least 1.45 million PoS terminals installed by banks across the country with over 2 lakh ATMs. But, the retail locations for PoS transactions is nowhere near to the over the counter cash transactions.
Spending habits also say a lot. In July this year, 881 million transactions were made using debit cards at ATMs and PoS terminals. Out of these, 92 per cent were cash withdrawals from ATMs. The principal purpose for cards in Indian setup is thus a means to withdraw cash.
Another big hurdle is unachieved targets for digital India. Mobile internet penetration is crucial into deeper pockets since PoS works over mobile internet connections. Earlier banks used to charge money on card-based transactions which has now been pointed out as a hurdle. Also, the low literacy rates in rural areas along with lack of internet access or even basic utilities in many places, it becomes very difficult for people to adopt the habit for digital transactions.
Cash is definitive in nature and cash exchange carries with it the writ of the country to even the most remote locations.
Informal sector is the largest employer in India and runs on cash primarily. It also means that cash transactions on their own are not the generators of black wealth. It is a highly advanced and dynamic manner of doing business refined over centuries.
Already there are reports that in the slow demonetisation process, there are people like farmers and traders that are forced to transact with old currency. Massive amount of currency has been sucked out of the system and lack of assured transaction systems for rural pockets and informal sector will likely add to the woes. On realistic estimates, it seems the government will take at least 2-3 quarters to restore favourable liquidity in the system. Meanwhile, the informal sector remains under threat of moving to a parallel black economy for coming weeks.
People in urban areas are largely troubled as apart from the cash crunch, the budgets and finances of households are hit. Merchants insist on minimum amount transactions for PoS sale or online payments. Further, they add various taxes and levies, delivery charges etc. Articles bought online may be sold expensive with low quality but as there is a cash crunch people are forced to buy them. Small transactions and daily expenses are massively hit and plastic is no substitute for planned expenditure using cash.
Till the time this penetration for online payments doesn’t reach local stores, the transition will never be truly effective. For now it seems, the country is on the track to development but is rather hurriedly pushed into the reform.
Finally, financial security over the digital payment channels is imperative for pushing the cashless economy idea. When recently, data of lakhs of debit cards was rather easily stolen by attackers, the ability of Indian financial institutions to safeguard electronic currency and exchanges came into question. Also a big reason why people prefer cash as financial fraud has become too common and complicated for the common person.