By Somya Pahi Jena, NALSAR, Hyderabad.
India’s Dependence on Cash
India’s cash to GDP ratio indicating the dependence of an economy on cash stands at 12.2% as per the data revealed by the International Labour Organisation. India is considered to be one of the most cash intensive economies in the world with its cash to GDP ratio amounting to around four times of other markets, (the cash to GDP ratios of Brazil, Mexico and South Africa are 3.93%, 5.3% and 3.73% respectively). With a heavy dependence of the informal sector (broadly consisting of manufacturing, trade, transportation, agriculture, construction, etcetera) on cash, there does not exist an iota of doubt regarding the dependence of the Indian economy and populace on cash. As recently as 2012, around 86.6% of all transactions in India were made in cash. Data released by the Reserve Bank of India in 2013 revealed that while around 15,400 banknotes were issued around the world, China and India issued the maximum number of banknotes; 5,400 and 2,000 respectively.
The Demonetisation in November 2016
On the 8th of November, 2016 at 8 p.m., Prime Minister Narendra Modi, in an unscheduled live-telecast announced the demonetisation of the currency notes valued Rs. 500 and Rs. 1000, rendering them invalid as legal tender post midnight. While the Indian currency has been demonetised twice before in 1946 and 1978, this announcement came as a shocker to the Indian population. While the government cited reasons such as curtailing the prevalence of ‘black money’ and tax evasions in the economy, the move led to an acute shortage of cash due to the lack of infrastructure and adequate measures of implementation. The populace was greatly inconvenienced due to the non-availability of cash, on the 8th of November; the transactions in those denominations of currency amounted to 14.2 lakh crores, around 86% of total cash transactions. This move was followed by serpentine queues outside banks and also led to the death of 33 individuals in the queues.
The Motivation for a Cashless Economy
The primary reason behind the drastic move of discontinuing the high value currency notes that served as the life-blood of the Indian economy was the prevalence of ‘black money’ and tax evasions arising out of it. The larger aim was to reduce unaccounted income and target corruption, money laundering, terrorism, trafficking (drug and human), racketeering, and red-tapism, which was primarily being financed through these high-value currency notes. The Financial Action Task Force, a global institution that constantly tracks the criminal uses of financial systems across the world noted that high-value currency notes are most prone to being used for illegal activities. While the motives behind demonetising high value currency might have been benevolent, it is imperative to ask whether India possessed the adequate infrastructure to facilitate the move.
Evaluation of a Cashless Economy in India
There is a raging debate on whether India has the capability to make the shift to a cashless economic system. There are several schemes and government freebies that have incentivized digitizing transactions such as discounts on highway tolls, rail tickets, insurance etc. Online payment platforms like M-Pesa, BHIM, Aadhar Enabled Payment System, RuPay have been initiated to make the shift easier. Due to the implications of India’s high dependence on cash, it is imperative to analyse the advantages and disadvantages of the move.
The ease of conducting transactions with greater convenience comes with a shift to a cashless economy. The need to carry bundles of cash or visiting the ATM would disappear altogether. Different forms of financial transactions would also become faster – hospital emergencies, loan payments, bill payments and receipts for various utilities such as electricity, water, LPG subscriptions, tax, etcetera.
Apart from the benefit of tracking spends personally through digitised transaction records, the move to a cashless economy can ensure a stringent crackdown on tax evasion. This is likely to increase nation-wide financial discipline and streamline the economy. Digitising transaction records could help in filing Income Tax returns, prevent businesses from under-reporting turnover to evade service tax and value added tax, as well as large scale tax evasions by private individuals. The extent of tax evasion may be gauged from a report by the IANS which stated that under the Income Declaration Scheme announced in 2016, ₹67,382 crore was received from 71,726 declarants excluding two high value disclosures, one of which amounted to ₹13,860 crore. Since these transactions can be tracked, financing terrorism, money laundering, arms trade, fraud and illicit spending by political parties would take a hit.
Internet Live Stats surveyed that India has a low internet penetration of 34.8% in 2016 and only 26.3% of all mobile phone users have smartphones with working internet connections that are essential for cashless transactions as per data from Statista. The move to a cashless economy requires a great deal of banking and internet literacy which, at the present moment, is sorely lacking. The shift might cause problems for the elderly, rural daily-wage jobbers and virtually anyone whose account cannot be accessed without the requisite technology. As a large number of Jan Dhan accounts have been reported to have zero balance, villages have turned back to barter in the absence of cash in a cash-dependent economy and an administration that is fumbling to manage the economic slowdown because of the demonetisation move; it is still a distant dream to go fully cashless in India.
Electronic transactions are in their nascent stage in India, and this could mean several legal problems with respect to formation of contracts. Digital signatures and stamping procedures are yet to be notified by the Government for e-contracts. Further, due to the greater amount of anonymity, it is difficult to verify transactions, especially for minors. In certain situations, due to the existence of standard form contracts, online consumers may be subject to unreasonable conditions which cannot be bargained. In addition, laws have not yet been developed and redressal mechanisms remain lacking to address data fraud or identity theft.
The biggest drawback of the shift to cashless economies has been the risk of security threats, leak of private information, identity theft, etcetera. Due to a fledgling development of safeguards and the lack of an established culture of digital transactions, any person may fall prey to any of these threats. Click baiting, phishing traps and malware susceptibility remain high in such circumstances. In October 2016, around 3.2 million debit cards were compromised, affecting several prominent banks such as HDFC, ICICI and SBI.
Due to several drawbacks in terms of cultural and infrastructural conceptions, the move to a cashless economy may be more a paradigm shift than was envisaged by the Indian policy makers. There are certain safeguards that are still required in order to make this move bearable, especially for the rural populace, such as internet penetration, rural banking systems, internet and banking literacy, legal safeguards for transaction safety and protection of information.
The idea of a cashless society is inevitable and several countries such as Sweden, Belgium and Kenya have made policies to become cashless societies. It is only to be seen how that plays out in India, and the move is made comfortable for every citizen upon whom a new cashless day is dawning.