India: A Cashless Economy
What is a cashless economy?
A cashless economy refers to an economy which does not involve informal cash transactions, rather, involves digital transactions at every level i.e. from day-to-day to large business transactions.
In the current times, where operating without cash doesnât seem a fantasy, it is very beneficial to go cashless. For a country like India, going cashless means working oneâs fingers to the bone for the government because for a metamorphosis this big, there has to be many complementary developments. However, if India can achieve it and achieve it fast then it will be the most favourable evolution since the I.T. revolution. All the advantages like protection from theft, ease of carrying money, elimination of the struggle for low denomination currency etc. are obviously there but the long term and the most salient advantages are:
Drastic decline in corruption-
Black money is something which is generated when a transaction is done through cash. Any transaction done through cash doesnât get recorded with the government authorities like tax department (unless intended by the party) and hence used as a medium to save tax. The result of this devilish practice is that the government collects less tax and to compensate for it, the burden is shifted onto the honest tax payers. So, what the government needs to do is create a system where such transactions are recorded and the foundation of that system lies in a cashless economy. If every transaction is done digitally, there is no scope for pilferage of tax because it will be automatically recorded in the database.
Dealing with the pandemic-
Covid-19 has hit the world hard, probably the longest most disruptive onslaught the modern world has ever seen. Cash is the king they say but that might not be the case now. Social distancing norms have been imposed all over the globe and amid that no one would want to be dealing in cash which will destroy the whole point of these norms. Already, digital payment firms such as PhonePe, Paytm, Amazon Pay and others have seen nearly 50% spike in transactions since the start of the pandemic. The focus in this situation should be to move ahead in the game and further remove all the hurdles from the digital payment ecosystem. In conclusion, digital payments can be a benison in this regard.
An economy grows when people spend and the money that is spent is either an asset on which they donât need to pay any interest or it is a credit which is subject to incur some form of cost like interest. Credit comes from banks and other financial institutions and these institutions can only give credit if they themselves have enough money. Now, to pay digitally you have to park the physical cash you have with banks which means more money in the bank. With more money in the banks, they will be able to extend more credit which in turn will provide businesses money to spend changing the course of economy for good. This system is especially very advantageous to MSMEs and startups which struggle to get their hands on credit.
What will it take to go cashless?
In India, going cashless is not something which is achievable soon because of the work to be done on the infrastructure, citizensâ reluctance in accepting change and the insignificant politics that becomes a stumbling block all the time. Building an infrastructure for a cashless economy involves
1. Every citizen having a smartphone.
2. Availability of High-speed internet.
3. Integrating banking services with technology.
4. A strong wall of cyber security.
Smartphone users in India are expected to grow to 760 million in 2021. According to PMGDISHA (a government initiative to make people digitally literate). There is only 41% internet penetration in the country i.e. only 41% people have access to proper internet services. In the wake of the pandemic, banks were forced to provide their services digitally. They introduced digital KYC (Know your customer) and started processing card and loan applications online. But despite having considerable developments in the digital space, still there are significant struggles and one such example is outages. In June 2020, within a period of 5 days, there were about 40000 cyberattacks on Indiaâs banking industry. To protect the industry from such ambush, there has to be a large and skilled workforce which is not the case as of now. According to DSCI (Data Security Council of India), there is a shortage of cybersecurity workforce in India. As we analyse the data, only the possession of smartphone is a striking factor and rest all suggest that the road to a financially digital India is a long one.
There is a flip side to every coin, so letâs look at some arguments against a cashless economy
A cultural-economic revolution-
Going financially digital is a cultural-economic revolution because Indians culturally believe in cash and a paradigm shift in thinking will require time and resources. Some sections of society in India still believe that depositing cash into banks means giving their hard-earned money away.
As of now, the banking system is not much favourable towards the poor because they conduct transactions in cash. Handling cash transaction is expensive for the banks because it brings additional costs of storing, processing, transporting etc.
Whenever there is an economic disruption like the 2008 crisis, business like fintech and banking suffer the most and find it difficult to pay back the money to its depositors. So, in such event, cash might be the best bet.
The burden of merchant fees-
Ever wondered how payment processing companies like Mastercard and Visa earn money? They charge a fee called a merchant fee on every transaction done through their platform. The fee is a percentage of the amount for which the transaction is done and a fixed charge per transaction (in some cases). The fixed charge can be a burden to the businesses which sell very low-priced products. Suppose there is a tea seller which charges 7 Rs per cup and the merchant fees is 2.5% + a fixed charge of 75 paise per transaction. The total merchant fee comes to 0.925 which is almost 14% of the price of the cup, irrespective of the scale of the business, loss of 14% of selling price is a threat. Now this wouldnât be the case for products sold at a high price because the fixed charge will be a very small percentage of the price of that product. So, if businesses as small as a tea stall start accepting digital payments, a large amount of their earnings will be spent for just processing the payments.
How can a blog on cashless economy end without the mention of cryptocurrency amid all the buzz around it. So here are some insights.
Ever thought that cryptocurrency might be the answer to the worldâs quest for paper free transactions? governments think not. As far as India is concerned, the government is not willing to give cryptocurrency the status of legal tender. But why?
Itâs because the cryptocurrency is decentralized i.e. it is not regulated by any body of authority which can be an advantage to those willing to evade taxes and deal in illegitimate activities. While the transaction details are kept in open ledger in the blockchain technology, the identity of the person involved in the transaction is hidden.
The second main concern is that cryptocurrencies are highly volatile with prices changing in a matter of seconds. With such uncertain value, it will destabilize the economy.
Not only India, but countries like China, Turkey, Algeria and Egypt have also banned or planning to ban cryptocurrency. Understandable, the concerns that the governments have with cryptocurrency.
So, cryptocurrency might not be the answer to a digital economy.
Opinion: Why banning cryptocurrency is not an option
India is the world leader in BPO (Business processing outsourcing) and is sitting on a gold mine that is talent, so just imagine if cryptocurrency is not banned, how willing the foreign companies will be to hire Indians because of the convenience to pay them. The coronavirus has fuelled the remote working culture across the world and it is predicted that even in the post covid world, many companies will resort to work-from-home framework. So, for the millions of talented unemployed Indians, it will be a life-changing move and therefore subsequently good for India.
Governments are planning to ban cryptocurrency because they fear the inception of a new black- market trade, but banning it might only change the type of black market and not eliminate it completely, hereâs how. Transferring crypto can be as simple as sharing a file via USB, so if it is banned, Indians will just have to find a person outside the country who can give the equivalent money in exchange of crypto creating a new black market.
If blockchain ban is a by-product of crypto ban, then India will miss out on something it can be a leader in. Think about it, the internet was created to share information across governments and government departments and then someone found a way to sell products on it. Similarly, blockchain was merely a technology on which cryptocurrency was based and now many financial products and some crazy innovations like user generated capital, decentralized stock market, user-controlled identity, decentralized social network are based on the blockchain technology and who knows what innovations the future holds.
I believe that an economy can never and should never go completely cashless, instead a widely used digital economic framework should co-exist with hard cash. What do you think?