Cashless Economy: The Way Ahead
The Currency notes of Rs. 500 and Rs. 1000 which constituted nearly 86% of the whole money circulation in the country, were demonetized on November 8, 2016. The Government gave the option, either to deposit the scrapped currency notes in banks or exchange them against new currency.
According to the government, Demonetization is intended to combat untaxed black money, rampant corruption, encourage cashless transactions, check hawala transactions to counter terrorist activities and to bring more accountability in the informal sector of the economy. India's black money has been estimated by the World Bank in 2010 to be worth about one fifth of the Gross Domestic Product (GDP). In a country where 90% transactions are carried out on cash basis it was a revolutionary move to transform from cash to cashless transactions.
Demonetization is an act of scrapping the legal tender status of a currency note. When new currency is introduced to replace the old one, government demonetizes the old currency. The main objectives of demonetization are:
* To curb black money (untaxed liquid assets)/ corruption
* To discourage cash system
* To combat inflation
Demonetization is not a new concept to the world, as there have been many instances of demonetization in the recent past. In 2015, the Zimbabwe government demonetized the Zimbabwean dollar to control the hyper inflation in the country. Another example is when member nations of European Union adopted Euro in 2002. Governments fixed the rate of exchange for varied national currencies into Euros and demonetized the old currencies. Even in India, the government had demonetized high value currency notes (Rs. 5000, Rs 10,000) in 1946 and 1978 in the past.
The cash centric informal sectors like agriculture, real estate, fishing etc. have been affected by demonetization. However the experts say that it's a short term scenario and this move will give positive long term consequences. To bring the economy on track again, government is promoting cashless economy because scrapping of cash needs an alternative to cash.
According to a World Bank Report, bank account penetration in India in 2014 was just 53%, out of which only 15% users used their accounts to make or receive payments. In 2014, the NDA government announced Pradhan Mantri Jan Dhan Yojna to increase the financial inclusion of those who never had an account in a bank. Under this scheme, 250 million bank accounts have been opened in two years. As per RBI reports bank branches increased by 5% per year but Automated Teller Machines (ATM'S), debit cards and card swiping machines have doubled in four years and online transactions have grown 20 times in six years to 2016. All these data shows a gradual shift towards cashless economy. Demonetization has sped up this transition.
Cashless Economy: Positive Aspects
In a cashless economy, where major transactions are done through cards or digital payments, the physical usage of currency remains low, which lowers down the chances of unaccountable transactions. India remains to be a very cash reliant economy than any other country in the world. Even many multinational ecommerce companies like Amazon, Uber etc. accept cash in India, the only country in the world where the option of ‘cash on delivery’ (COD) is still prevalent, where even till date 70% online transactions are via COD. By adopting the policy of demonetization, the government has put the cash economy out of gear in the hope that more and more people could be brought into the cashless economy.
Within 7 days of demonetization announcement, Paytm registered over 25 million transactions worth over Rs. 150 Crore. Daily downloads of another e-wallet Mobikwik increased 40%. Digitally focused sectors like online grocery business have started blooming. Now even some small street vendors have started accepting digital payments through mobile wallets and swipe machines. This is revolutionary and shows that even smaller traders can easily shift to a cashless system. All these changes indicate towards a more transparent and inclusive economy.
A cashless economy will give the following positive effects on the economy:
*Clean and more transparent business transactions and money transfers.
*It will increase the taxation base. India’s informal economy contributes 45% in GDP and 80% in employment. It means transactions of millions remain unaccounted and untaxed. Currently only 1% of India's population pays income tax as per Income Tax Department. In the long run, with this system most of this sector will be compelled to function in a formal framework. It will also reduce the instances of tax avoidance.
*It will curb the parallel shadow economy (black economy) which runs majorly on cash basis. Cashless transactions are trackable and more transparent.
*Efficiency in welfare programs as money can be easily transferred to the accounts of the recipients. It will eliminate the role of intermediaries who usurp the share of welfare money spent on people. This cashless regime represents transparency and people will get all the benefits directly in their account without paying any bribe to any one.
*Improved financial inclusion and credit access through the linkage of all welfare activities with bank accounts. It will not only increase welfare for the people but would assist in creating a sense of belonging and faith in the banking system.
*Reduced money laundering due to easy traceability of transactions.
*Improved climate for foreign investments.
*Control on the issuance of fake currency and counterfeiting. As per official reports, an estimated 250 out of every million Indian Bank notes were fake.
*In the year 2015, RBI spent Rs. 27 billion on currency issuance and management. Cashless economy will reduce such costs.
Demonetization has unlocked the world of immense opportunities and has increase the speed of massive shift in every sector of the economy specially ecommerce. Cashless economy cannot be achieved in few days or months, it is a long process. People have to be prepared to adapt this change. Question arises why cash is so much important? In a country like India where poverty, illiteracy and unemployment are the major issues, cash in hand symbolized safety, security and respect. Government should assure the basic necessities and focus on developing infrastructure specially in rural areas.
Special drives through schools, colleges, panchayats etc. can help create awareness about cashless/ banking transactions. Financial Literacy is a must for bringing more and more people to digital platform. Digital payment or payment through banks eg. paying expenses and salary of staff through bank accounts instead of paying cash should be encouraged. Linkage of all welfare activities with bank account is very appreciative step. According to an estimate, urban areas contribute about 70% in GDP. So, initially more focus can be given to urban areas to make them cashless, where infrastructure is already developed. Rural areas can be covered gradually. A strong banking base is the basic prerequisite for the cashless economy. Cyber safety of the internet lack of which creates fear even literate people are not comfortable in doing money transactions online. Cashless economy is very transparent and clear economic structure which curbs black money, this structure will also help in combating cash financed terrorism in the country. With a clean and transparent economy everybody will get the fruit of development. In short run the move can slow down the economic growth and may cause some transactional inconvenience to consumers and producers. Jewellery and real estate sectors are the worse hit as these two sectors are the most preferable sectors to invest black money. In real estate sector black money works as working capital, absence of which will hamper it.
According to experts, in short run there will about 5% to 7 % dent in the job market, especially in real estate and allied activities like cement, construction iron etc. However, some businesses which receive direct benefit due to this cashless drive like Fin-tech, digital payment companies have started hiring exponentially to meet the increased demand. Many ecommerce companies have started 'Wallet on Delivery' in place of 'Cash on Delivery'. Some people are criticizing the demonetization move on the point that enough preparation was not done. Even banks did not have any idea about this move as it was top secret project of the government which was known to just few trusted people. However, preparation means involving more people and more involvement might have defeated the very purpose of this move that was to combat black money.
(The author teaches Commerce in Ramanujan College, Delhi University. She may be contacted at firstname.lastname@example.org)