By P M Mathew
Bengaluru: One of the prerequisites for the development of a national economy is to encourage a payment system that is secure, convenient, and affordable. In India cash is the main mode of payment. This makes the country a heavily cash-based economy.
A cash-based system of payment has many inherent merits and demerits. Since the demerits exceed the merits, many countries, especially the developed ones are trying to replace the paper currency system of payments with electronic payment systems.
Money serves as a unit of account, a medium-of-exchange and a store-of value. It is considered one among the three basic inventions of mankind, the other two being wheel and fire.
Money was badly necessary to tide over the inherent drawbacks of barter system. In a cash-based system cash circulates and provides full and final settlement of a transaction. It allows for anonymity.
India has one of the highest cash to GDP ratios in the world and using paper currency and coins has its costs. Cash must be printed, minted, securely transported, counted and reconciled, kept secure and maintained for re-use time and again. The per-payment cost of cash transactions is high. In the electronic system of payments, the cost per transaction is very low.
As per a 2014 study by Tufts University cash operations cost the RBI and commercial banks about 210 billion rupees annually. Other problems resulting from high-cash usage include; robberies and cash-related crimes, revenue leakage arising from black money generation and the growth of informal sector. In India, large volumes of liquid cash are a big source of corruption and black money.
There is also the danger of over issue of currency notes that can lead to inflationary situation in the economy. The current policy of demonetization is necessitated mainly by the need for curbing the generation of black money and counterfeit currency notes.
The government’s recent efforts at reducing the dependence on cash should be understood in the above backdrop. In a cashless economy money’s role as a medium of exchange and store of value is relegated to the background.
Cashless economy does not mean the total abolishing of cash transactions in the economy. It only ensures that cash-based transactions are kept to the barest minimum. It is a less cash economy.
The functioning of a cashless economy is facilitated by e-finance, e-banking, e-money, e-brokering, e-exchanges, etc. Ideally in a modern dynamic economy, the use of noncash payment methods such as cards (credit and debit) should dominate the mode of payments.
The card based payment system has several advantages for both merchants and cardholders such as the convenience of electronic transactions, the ease of credit availability, increased sales, increased purchasing power etc. EPS (Electronic Payment System) can help displace shadow economies and increase transparency, confidence and participation in the financial system.
For the government, the benefits include increased tax collections, greater financial inclusion and control of unaccounted money. Cashless policy can help deepen bank deposits, thereby increasing the funds available for lending for commercial and investment purposes.
In India, the government has already initiated steps to reduce dependence on cash such as the direct benefit transfer to bank accounts, granting licences to open new-age small finance banks and payment banks and the recent Unified Payments Interface by National Payments Corporation of India.
It is hoped that the recently launched digital payments app ‘BHIM’ will enable fast and secure cashless transactions using mobile phones.
Adoptinga cashless system poses several challenges for the government, financial institutions, individuals and other stakeholders.
In India, a large section of the population to the tune of 233 million is still outside the banking net and realizing financial inclusion through banking services for the large army of the informal sector workforce is a formidable task.
Not all banks in the country are expected to use innovative products and marketing techniques. Low level of internet penetration and poorly developed telecommunication infrastructure are roadblocks in the smooth development of e-payments and e-commerce.
Basic knowledge of ICT (Information and Communication Technology) is necessary for transactions in a cashless economy. High cost of Internet access, frequent power interruptions, resistance to changes in technology among customers and bank staff are also challenges.
There is therefore the need to create more awareness to entice the unbanked people into the banking system. An effective transition to a cashless economy will depend on cost effectivetechnological innovations, quality telecom network and active government involvement like incentivising cashless transactions and discouraging cash transactions.
(The writer is a Bengaluru based professor of economics.)