CHAPTER 12

Demonetization as a Move to a Less-Cash Economy

In a country whose economy was dominated by cash transactions, demonetization was a drastic attempt to change the behavior of Indians, moving them away from the use of currency notes toward electronic modes of transferring money. However, cash still remains the oxygen of the Indian economy. Given the magnitude of informal sectors in Indian economy, unreported tax-liable income earned in cash even in the pursuit of legitimate activity is likely substantial. Taking into account the economy’s move toward less-cash economy, this chapter seeks to deal with the following issues:

The Concept of Cashless Transaction

A cashless transaction connotes an economic state whereby financial transactions are not conducted with money in the form of physical banknotes or coins, but rather through the transfer of digital information (usually an electronic representation of money) between the transacting parties. However, the focus is on an economy where cash is replaced by its digital equivalent—in other words, legal tender (money), is recorded and is exchanged only in an electronic digital form. The point to be noted is that “a cashless economy is a system where flow of cash or physical currency is non-existent and all monetary transactions are done electronically via internet enabled banking or wallets and debit or credit cards, at most abolishing or at times reducing physical presence between two transacting parties. Such transactions can be purchases, bill and utility payments and clearances or transfers.”¹ The aim is to minimize the circulation of physical currency as India uses too much cash for transactions.

Rationale behind Less-cash Transaction

There are several reasons why the government and the RBI bring up measures to promote cashless transaction in the economy. It is a universally accepted fact that a cashless economy is good for growth. Several studies have indicated that the alternative methods for money transfer and payments benefit all players in the ecosystem—the government, central bank, commercial banks, the industry, and the consumers (Kinger 2016). In India, such a move was considered to help the government and the RBI reduce operational costs resulting from managing cash and preventing counterfeit currency use. It can also help enhance financial inclusion, check tax evasion, and improve collections. Here, the terms less cash society and cashless-transaction economy indicate one and the same thing—reducing cash transactions and settlement rather than doing transactions digitally. Cashless transaction economy doesn’t mean shortage of cash; rather, it indicates a culture of people settling transactions digitally. In a modern economy, money moves electronically. Hence, the spread of digital payment culture, along with the expansion of infrastructure facilities, is needed to achieve the goal. The main merits of cashless transactions are as follows:

Rogoff offers the rationale for the merits of a “less-cash” economy. But small-denomination notes have to be available indefinitely. Despite its usefulness, using this system and eliminating the cash system require a number of policy changes. The eventual achievement of a cashless state is a very complex task and seems to be a distant dream. There are merits and demerits for both cash and digital transactions. The most common risk in cash transactions is that of counterfeiting of currency. However, the cost of a cash transaction is the lowest.

Use of Cash in the United Kingdom and the United States²

The world as a whole will go cashless, but predicting the same for any country is very difficult because cash is fighting back. People are paying more and more by card and phone, but the amount of cash in circulation continues to climb in just about every country, except Sweden. In 2017, the UK had more than £73 billion (about 67,000 crore) worth of notes in circulation—up from £67,819 million in 2016. That is much faster than inflation and growth combined and works out to be more than £1,100 per person. The number for the U.S. dollars was even more stunning. There are some $1.6 trillion notes in circulation, which on a quick tally is $5,000 per person in America. The U.S. dollar continues to be the preferred medium of exchange for the global drug-dealing community, but it is used around the world for quite legitimate transactions as well. The U.S. dollar has become virtually the international currency. The Euro, too, has a growing international presence, which explains why there is the equivalent of €3,300 (about 2.6 lakh) in circulation for every person living in the Eurozone. In Germany, cards are nudging out cash. According to the Bundes bank, in 2017, for the first time, cash accounted for less than half of all transactions by volume. On the one hand, there is a steady shift away from using cash across the developed world. On the other, there is an apparently insatiable demand for more banknotes to be printed.

There is probably some reaction too against the tracked economy. Some people, particularly those who have money, prefer not to have every payment they receive or make recorded on a bank or social network computer. But the number of those who are against tracking would have to be huge to account for the increase in the use of banknotes.

The Policy Measures taken for Less-cash Economy

In India, the RBI and the government are making several efforts to reduce the use of cash in the economy by promoting the digital/payment devices, including prepaid instruments and cards. RBI’s effort to encourage these new varieties of payment and settlement facilities aims to achieve the goal of a “less cash” society. In October 2012, the RBI had used the phrase “less cash”—and set it as its goal—for the first time in its 2012 to 2015 vision document for payment systems in the country. The RBI unveiled a document in June 2016—“Payments and Settlement Systems in India: Vision 2018”—setting out a plan to encourage electronic payments and to enable India to move toward a cashless economy in the medium and long term. The broad contours of Vision 2018 revolve around five Cs—coverage, convenience, confidence, convergence, and cost. To achieve these, Vision 2018 focuses on four strategic initiatives: responsive regulation, robust infrastructure, effective supervision, and customer centricity.³ The vision statement highlights the following plans:

The Telecom Regulatory Authority of India (TRAI) is helping a drive toward the adoption of mobile payments. It has recently published a consulting paper on the review of the regulatory framework for the use of the Unstructured Supplementary Service Data (USSD) technology for mobile financial services.⁴ This model for financial inclusion has been extremely successful in countries like Kenya, where the m-Pesa mobile money transfer has become the de facto standard for e-payments. After the growth of Internet banking and payments through NEFT, RTGS, and immediate payment service (IMPS), some recent policy decisions and program rolled out to help facilitate increase of noncash transactions. The government made fiscal measures for the encouragement of card culture in the 2016 budget. Exempting service charge on card-based and other digital payments was one such step. Aadhaar-based payment system will be a big boost for promoting the cashless transaction culture.

Soon after demonetization, the Ratan Watal committee on digital payments submitted its report.⁵Another committee of chief ministers was set up by the Niti Aayog under Andhra Pradesh chief minister N. Chandrababu Naidu, which has come up with an action plan to rapidly expand the use of digital payment platforms across the country. This committee spawned another committee for digital payments security under IT secretary Aruna Sundararajan. Niti Aayog has set up another committee helmed by chief executive officer Amitabh Kant to “enable 100 percent conversion of government-citizen transactions to the digital platform.” Meanwhile, the Ministry of Electronics and Information Technology (MEITY) has issued its own guidelines to facilitate the adoption of electronic payments and receipts for various government services. Demonetization also occasioned a host of other private reports. Such a surfeit of committees and reports has led to overlaps and repetitions (Singhal 2017).

India joined “Better than Cash Alliance (BTCA)” on September 1, 2015. In BTCA’s own words, its new partnership with India is an extension of the Indian government’s commitment to reduce cash in its economy. A less-cash economy means that money can finally flow into bank accounts, heralding a new era where subsidies can directly be deposited into the bank accounts of the poor as the aim is to protect the common man.

Post demonetization, the government has developed secure platforms for money transfer and encouraged private players in the financial space, including banks, to roll out e-payment services with adequate security features. The state-promoted unified payments interface (UPI) has seen rapid adoption over the past 2 years. Other payment modes, such as credit and debit cards, unstructured supplementary service data, prepaid payment instruments, and Internet banking, have also witnessed a surge in the number of users. To push digital payments further, the government has also decided to waive off the merchant discount rates applicable on debit cards, BHIM, UPI, and Aadhaar-enabled payments system of up to 2,000 for 2 years with effect from January 1, 2018. The center aims to grow India’s digital economy to $1 trillion by 2022 (Gupta 2018).

Challenges in Moving toward a Less-cash Economy

The inhibitions against adopting cashless transactions in India are mirrored in multiple issues. For digital payments, key issues are a higher risk of frauds, higher transaction cost (each transaction), and lack of privacy. In view of this, some major challenges in promoting a digital economy in the country relate to:

While reducing cash transactions in the economy, it is equally important to protect consumers and businesses from frauds that can happen on electronic and digital platforms. The major factor is trust. The increasing number of reports of online fraud and data breaches has heightened consumer worries. The trust factor extends beyond digital payments as well. India has experienced a number of prominent e-commerce frauds where customers have received something other than what they ordered. A poor telecom network only aggravates these issues. Cyber-security is a major concern, and there are many legal and practical problems and regulatory issues connected to it. All these problems will be magnified many times in small towns and villages. Cashless transactions are still rarely used in rural areas and in the informal sector, like roadside vendors; small shops; seeds, fruits, and vegetables sellers; wage payments in the informal sector; etc.⁷ In short, there are a number of transition challenges that need to be managed (Mishra 2016):

Prerequisites of the Success of Less-cash Transactions

Transition to a cashless economy depends on a number of factors:

The demonetization drive is not only about curbing black money but also about combating cash. Along with political pressure, outreach and initiatives at the grassroots level are the need of the hour. A pragmatic approach has to be swiftly put in place to educate and empower people to fend from being cheated. Right now, there is a need for financial and digital literacy. RBI should ensure the printing and supply of currency to every nook and corner of the country, in the denomination desired. The consequences of going in for a cashless dispensation by fiat/coercion will not be good for the economy. Further, incentives for moving to electronic transactions and lucky draws alone won’t suffice.

A majority of people do not use a bank for financial transactions not because of the physical distance from a bank branch but because of a psychological distance. The drive toward cashless India could further increase the “class divide” among the banked and unbanked in India. There is a risk of creating islands, where the unbanked transact with each other. This divide could seriously affect the government’s financial inclusion initiatives (Dominic 2017). The Jan Dhan scheme promotes financial inclusion, but it is not actively being used. Barriers to behavior change were lowered immediately after demonetization. The human brain loves the status quo. The common man experiences no problems while transacting in cash. Systems and infrastructure should be in place before a behavior-change initiative can begin. Even if the infrastructure is in place, there is no guarantee that the right behavior will take root. Getting people to use the infrastructure on a sustained basis is a different issue.

Making India cashless is not a single-event change project. Shifting to a digital format requires a sustained behavior change. There is a lesson to learn from the cash crunch of March to April 2018. Given the continuing nature of overwhelming cash transactions, the economy needs more cash, and it is for the RBI to balance the requirements, which admirably serves the purpose. There is a fear among people over the availability of cash, and there could be a tendency of small businesses withdrawing money and hoarding cash given that bank credit is not easily available to them.

The pace of growth in digital transactions was higher as long as the effects of demonetization affected currency circulation. However, the demonetization move paved the way for digital payments and transactions in a big way. More Indians from smaller towns and cities are paying digitally for goods and services, raising expectations of sustained growth for noncash payments. There is a general increase in the usage of cards for smaller-value transactions, which is a clear indication of the fact that it is eating into cash payments. Industry experts said that while debit card transactions may be slowing, more people are using newer modes of digital payments for daily purchases. As merchants started accepting wallets like Paytm or PhonePe for digital transactions, the trend has shifted and a lot of small-value retail payments could have moved away from cards. Visa and Mastercard are losing market share in India to indigenously developed payment systems of UPI and RuPay Card.

The shift to digital payments has also been boosted by the rapid expansion of the UPI. National Payments Corporation of India (NPCI), which manages the platform, recorded 482 million UPI transactions in October 2018 as against 0.2 million in November 2016. What demonetization has done for digital payments is more than what any other initiative could achieve before.⁹

Therefore, different trajectories need to be planned for migration to cashless for those having a bank account and for those not having one. In this context, socioeconomic factors would need to be considered. It may be helpful if a long-term plan with cost implications and with a stipulated timeline is prepared to decide on various aspects of building a cashless economy. Given India’s poor financial infrastructure, this could not be achieved in haste. Instead, it is prudent to follow an incremental approach toward creating a digital transformation in the economy.

Endnotes