Author : Renita D'souza

Expert Speak India Matters
Published on Nov 23, 2018
The goal of Cashless India requires a comprehensive long-term strategy.
Two years after demonetisation: Cashless India still a distant dream

On 8 November, India commemorated the second anniversary of the hurriedly-announced demonetisation campaign, which even after two years, is the cause of an unending debate on its pros and cons. One of its stated objectives of the unprecedented move was transformation of India into a cashless economy to check on black money. The government set an ambitious target of 25 billion digital transactions for the year 2017-18. However, data from numerous government sources show that the aggregate volume of digital transactions using Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), IMPS, National Automated Clearing House (NACH), Cheque Truncation System (CTS), mobile wallets, Prepaid Cards (PPI), UPI and the Point of Sale transactions using credit and debit cards for the year 2017-18 adds up to 15.83 billion. With about 95 percent of transactions in India still cash-reliant, ‘Cashless India’ is still a distant dream.

At this juncture, our policy makers need to contemplate on their understanding of the forces underlying the transition from being cash-based to cashless. Is this transition a short-term phenomenon? Are psychological and behavioural factors alone responsible for hindering this transition? Is the Indian economy ready for this transition in a structural sense? All these questions need to be answered to gain clarity on how policy needs to be designed for enabling the cash-based to cashless transition.


With about 95 percent of transactions in India still cash-reliant, ‘Cashless India’ is still a distant dream.


To begin with, there is a need to understand that becoming a cashless economy rides on many conditionals. These conditionals refer to the structure of the economy. After all, becoming cashless involves implications for the transactions ecosystems. Structural parameters of the economy — infrastructure; factors affecting the propensity of digital payments adoption; institutional factors; and innovation and change — interact to influence the digital transformation of an economy’s transactions ecosystem.

Physical infrastructure such as high speed internet and wide mobile network coverage, and financial infrastructure in the high penetration of banks are the obvious, most fundamental prerequisites of any digital transactions ecosystem.

Education and income levels exhibit a strong positive association with the uptake and adoption of non-cash means of payment. These consumer characteristics determine one’s ability to adopt digital modes of transactions. The financial health and business profitability of merchants influence the expansion and density of the acceptance infrastructure required by a digital retail payments ecosystem. The network effects of dominant cash use in a large informal sector vitiate prospects of a cashless economy.

While aspiring for digitalisation of transactions, the role of institutions in building and sustaining trust becomes important; trust that digital currency will be respected as legal tender, underpinned by contract enforcement clauses and the assurance that property rights will be upheld; confidence founded upon rigorous privacy and data protection; trust that entails a minimised probability of frauds and thefts. Countries across the globe have witnessed how regulation can facilitate an economy’s transition from being cash-based to cashless. In many countries, governments have added momentum to this transition and set an example for the rest to follow by digitalising wage and subsidy disbursements. The extent to which technology has been leveraged for ease of doing business also influences the penetration of non-cash methods in business transactions.


Countries across the globe have witnessed how regulation can facilitate an economy’s transition from being cash-based to cashless. In many countries, governments have added momentum to this transition and set an example for the rest to follow by digitalising wage and subsidy disbursements.


Technology makes digitalisation possible, while itself being an outcome of innovation. In order to aid the journey to becoming cashless, innovation must be accessible to and affordable for all. This necessitates innovation being sensitive to the education and income levels of the average citizen.

Empirical experience demonstrates how the volume of cash transactions in an economy varies inversely with the level of structural evolution of that economy. Countries such as Kenya, Russia, Columbia and Saudi Arabia suffer severe deficits in terms of the above mentioned structural parameters. These countries are highly cash reliant with over 90 percent of transactions use cash. Any progress towards being cashless demands a strategic intervention in ameliorating these deficiencies. Countries such as Brazil, China, Mexico, Malaysia, Spain and Poland have identified their structural weaknesses and launched measures to tackle them. As a result, they have succeeded in reducing the volume of cash transactions to about 70-90 percent of total transactions. In the US, Germany, Japan and Korea, about 50-70 percent of total retail transactions are in cash. These countries have succeeded in making significant strides in their structural profile. With less than 50 percent of transactions relying on cash, countries like Sweden, Canada, France and Belgium are at an advanced stage of becoming cashless societies. Any further increase in the volume of cashless transactions can be expected only from some disruption in the status quo, typically caused by innovation.

In order to understand how distant India is from being cashless, we need to appraise its structural profile and gauge the structural deficits that constrains the nation to remain cash reliant.

The stark digital divide characterising India has its source in the poor coverage and penetration of basic digital infrastructure, as well as in poor educational and skill attainment. This digital divide adversely affects leveraging technology for social and economic well-being.

According to the Report on Fifth Annual Employment-Unemployment Survey (2015-16), 84 percent of the employed and 67 percent of households earn up to INR 10,000 a month and 77 percent households do not have a single regular wage/regular salaried person. Based on the NSSO data, it was found that 72.5 percent of the population belongs to the poor and vulnerable category of expenditure class. On inequality in India, The Global Wealth Databook 2016, published by Credit Suisse AG, states that 58.4 percent of the nation's wealth owned by the richest one percent, 80.7 percent of wealth owned by the richest 10 percent and 96.2 percent of adults own wealth under USD 10,000.


The stark digital divide characterising India has its source in the poor coverage and penetration of basic digital infrastructure, as well as in poor educational and skill attainment. This digital divide adversely affects leveraging technology for social and economic well-being.


The NSSO data finds that in 2011-12, 31.7 percent of the Indian workforce was illiterate, 56 percent with education only up to primary level, six percent with educational level up to higher secondary and 1.9 percent were postgraduates or above. Furthermore, 75.8 percent of the workforce had no skill training, 3.05 percent with formal training, while 12.46 percent with informal training.

India’s reality of low financial inclusion has its roots in poor physical access owing to low penetration of bank branches and ATMs, lack of financial access due to high interest rates on credit and low savings that make bank accounts unviable, and low rates of financial literacy. Lack of access to formal modes of credit compels the Micro, Small and Medium Enterprises (MSME) in India to rely on informal sources and as such, most of their transactions are in cash.

Over 90 percent of the consumer retail market for essentials such as food, groceries and personal care and hygiene products is serviced by the unorganised sector. This sector comprises traditional formats such as kirana shops, convenience stores, paan-beedi shops, street vendors, hawkers, chemists, footwear stores, apparel stores and so on. These unorganised retailers are usually not profiteers, rather their business enterprises are marginal subsistence activities. Providing the acceptance infrastructure for digital transactions involves purchasing smartphones, and paying data charges, rentals on Point of Sale (POS) devices, and Merchant Discount Rates (MDR). All of these expenses amount to be financially burdensome for such small unorganised retailers.

The informal workforce accounts for about 90 percent of employed Indians. The informal sector receives its earnings in cash, and usually has low savings capacity and poor banking habits. Furthermore, the transactions ecosystem within which the informal workers operate is rigidly cash dominant.

Measures to enhance the ease of doing business in India have included those that leverage digital technologies; for example, online procedures for starting a business and obtaining construction permits, electronic modes for making payments to the Employees Provident Fund, electronic and mobile platforms for cross-border trading and so on. Online registration of property has also begun in states like Delhi and Maharashtra.


The informal workforce accounts for about 90 percent of employed Indians. The informal sector receives its earnings in cash, and usually has low savings capacity and poor banking habits.


Laws in India that seek to prevent cyber-crime, fraud and identity theft are weak. More specifically, laws in India regulate matters related to sensitive personal data, but issues about non-sensitive personal data are poorly regulated. The approach used to deal with permission related to matters of personal information is quite ambiguous. Matters associated with extra territorial jurisdiction in relation to data privacy and protection are not clear as well. While upholding the right to privacy, in August 2017, the Supreme Court has directed the government to design a rigorous and broad-based framework of data protection laws. The committee under the chairmanship of former Supreme Court judge, Justice B.N. Srikrishna, appointed by the government, has recently submitted its initial assessment and recommendations on data privacy accompanied by a draft of the legislation titled Personal Data Protection Bill 2018.

The launch of the Digital India campaign in 2015 is evidence of the fact that the government’s intent is aligned with the notion of a Cashless India. Some of the desired outcomes of this campaign include electronic access to government services, a common digital platform that unites people in contemplating on problems and their solutions, improving the level of digital literacy in rural areas, maintaining digital records of employee attendance, digitising services in the domain of health and so on.

Clearly, India has a lot to worry about its deficits on several counts: Physical and financial infrastructure, income and educational profile of the nation, size of the informal economy and the inability of unorganised retailers to provide acceptance infrastructure. During and post-demonetisation, the focus of the digitisation strategy was on offering discounts that subsidise the costs incurred in cashless transactions and cashbacks that incentivise such transactions. Of course, proclivity of cash use as a behavioural problem needs to be tackled. As much as it is important to circumvent the inertia of cash use, the indispensability of a structurally-evolved economy cannot be ignored.

Clearly, the goal of Cashless India requires a comprehensive long-term strategy to narrow the above-mentioned deficits. This strategy must focus on providing seamless access to electricity and improving internet connectivity, generation of formal sector employment, improvement of educational and skilling outcomes, and universalising access to financial products such as savings instruments, insurance and credit. It must be emphasised that all of the above mentioned measures are so basic that they must be achieved with or without the goal of ‘Cashless India.’ These measures are so critical to progress on every dimension that they become ends in themselves. The enterprise of getting the basics in order cannot be bypassed, irrespective of the goal in sight. This applies to India’s cashless dream as well, and any attempt to bypass the basics will only place the cart before the horse.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

Author

Renita D'souza

Renita D'souza

Renita DSouza is a PhD in Economics and was a Fellow at Observer Research Foundation Mumbai under the Inclusive Growth and SDGs programme. Her research ...

Read More +