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Exploring Pros and Cons of India's Move towards a Cashless Economy: Policy Paper


UPI India
THE CASHLESS ECONOMY DEBATE: A ‘LESS-CASH’ OPTION FOR INDIA?

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1.Introduction


“Cash may no longer be king”


Economies today are on the path to becoming faceless, paperless and cashless. The transition to a cashless economy is a significant phenomenon that has been gaining momentum in recent years. Based on the growth in digital technology, this paper explores the constant evolution, key benefits, witnessed and likely challenges, and potential consequences of a cashless economy. Digital transactions are witnessing an expected growth of 56% from about INR 71 billion in FY 21–22 to more than INR 112 billion in FY 22–23.


The increase is primarily a testament to the improvements in payment infrastructure, a regulatory framework that is responsive, and an emphasis on consumer-centricity. In FY 2022–23, transactions had grown by about 80% with a rise in the transaction value by close to 64%. Here, we explore the factors that affect a cashless society and offer key insights into the potential benefits and the likely challenges that follow this transformation. Finally, we focus on why a ‘less-cash’ economy is the ‘go-to’ for the Indian economy.


What Is a ‘Cashless Economy’?


Cashless economy is a system of economic functioning in which there is limited physical cash flow in the society, with goods and services being paid for through electronic media, using the internet.


Examples are Internet and mobile banking, digital wallet payments, and payments made through debit and credit cards that are replacing conventional means of payments made via cash or coins. The proliferation of digital means of payment such as wallets, cryptocurrencies, and central bank digital currencies (“CBDCs”) has expanded the scope of cashless transactions.



1.1 Benefits of Cashless Economy


1.Improved Efficiency and Increase in Economic Activity: Cashless transactions are chosen for their speed and convenience thus, reducing the strain of queues and processing payments. According to the National Payments Corporation of India (“NPCI”), the value of digital payments grew from about INR 1.4 trillion in 2016-17 to more than INR 5.3 trillion in 2020-21. The total number of digital transactions grew from close to 2.1 billion to  more than 22.2 billion during the same time period.


2. Improves Financial Inclusion: Digital payment systems proliferate financial services to underserved sections of the population, helping them through access to online banking transactions and targeted delivery of welfare schemes such as agricultural loans. According to a study by the World Bank, the percentage of adults in India with a bank account increased from about 35% in 2011 to more than 80% in 2017.


3. Reduction in Tax Evasion and other related Illicit Activities: Cashless transactions can leave a digital trail, which makes it relatively difficult to evade taxes and undertake illegal transactions. It brings transparency to transactions. Lower tax evasion cascades to higher revenue for the government. Activities like Havala and Money Laundering can be reduced. 


4. Can lead to Cost Savings: Individuals and businesses can save costs associated with securing and calculating physical currency. The NPCI found that the cost of processing a single digital transaction is estimated to be about 10 paise, whereas the same cost for a physical cash transaction is about INR 2, which means savings of billions for individuals and businesses every year, through a cashless economy.


5. Bring in more Foreign Investments: It becomes easy for an investor to track, make payments, and repatriate profits. All these will enhance investments from foreign investors.


6. Red Tapism can be addressed: This is because of the innate efficiency of digital transactions that can be processed speedily compared to cash transactions. This leads to reduced documentation for transactions, which can help to reduce red tape through reduced dependence on clearances and approvals.


7. Other Benefits: Better in terms of hygiene maintenance and epidemic control during situations like COVID-19, Better surveillance of NPAs, detection of Ponzi schemes etc.



1.2 Challenges of a Cashless Economy


1.Privacy: Concerns exist about the security of data, uninformed surveillance, and the misuse of personal information given to payment companies.


2. Technology Dependency: Issues such as system failures, foreign-sponsored cyber-attacks, or power outages by illicit elements could disrupt digital payment systems and leave people without a means of transaction.


3. Exclusion: According to a World Bank study, 1.7 billion adults globally do not have access to a bank account and are at high risk of financial exclusion.


4. Regulatory and Legal Frameworks: It is imperative to develop efficient fraud-prevention regulations for digital payments and cryptocurrencies.


5.Digital Divide: Lack of access to smartphones and digital illiteracy has a great potential to increase a gap in financial inclusion. Added to this are factors like poverty and illiteracy.


6. Other factors: The unorganized sector accounts for about 90% of employment and cash is extensively preferred in this. Additionally, there is also a linguistic barrier that prevents financial inclusion.



1.3 Implications of Becoming a Cashless Economy


1.Taxation, banking operations, financial policies, and more are directly influenced by a cashless economy. 


2. A cashless economy can lead to the loss of jobs in the unorganized sector while it creates jobs in the Fintech and digital spaces. 


3. A cashless economy necessitates businesses to invest in new technology and capacity building.


4. A cashless economy puts individuals and businesses at an increased risk of cyber fraud. 

It also increases the digital divide as a cashless economy requires access to smartphones and the internet. 




2.How to achieve a Cashless Economy in India?


A conjunction of an increase in digital payment culture and the implementation of a robust infrastructure, which involves educating the masses is needed to achieve a cashless economy. Central bank digital currencies that are designed to be more stable and secure can aid this process. Additionally, cryptocurrencies can be utilized effectively. 


Current Government of India Initiatives:


  1. Digital India is one of the leading programs that is geared at converting India into a digital economy. 

  2. BHIM UPI app: BHIM, based on UPI, facilitates e-payments and enhances cashless transactions. 

  3. Bharat: The common QR code developed by the National Payments Corporation of India (“NPCI”) allows businesses to accept payments over mobile, and this makes digital payments more convenient and accessible. 

  4. JAM Trinity: This scheme was launched in 2014, and as of now, over 450 million bank accounts have been opened under this scheme. 

  5. Demonetization accelerated e-transactions and made transaction apps prevalent.

  6. National Social Assistance Programme (“NSAP”): This scheme provides financial assistance to the poor and the elderly.

  7. RBI’s effort to encourage this new variety of payment and settlement facilities aims to achieve the goal of a ‘less cash’ society.

  8. Eliminating service charges in digital transactions.




3. Regulatory Landscape Surrounding Cashless Economy in India


While India is gearing towards digitisation, security and privacy concerns continue to exist among the masses due to the lack of robust legal frameworks in place. This is also a detriment to the faster adoption of newer technology by people. The government has taken several initiatives as highlighted above, to ensure a strong regulatory framework in this domain to safeguard the safety and security of digital transactions.


The Ministry of Electronics and Information Technology (“MeitY”) is in charge of developing the country’s digital infrastructure, which includes e-governance, digital literacy, and digital payments. All digital payments in India, including those made using mobile wallets, prepaid cards, and online platforms, are governed under the Payment and Settlement Systems Act, 2007 (“PSS Act”).


The PSS Act creates a framework for monitoring digital payment service providers, as well as standards for client protection and dispute resolution. It also authorizes and supervises payment system operators, as well as issues regulations to ensure the safety and efficiency of the digital payments industry. The Payment Card Industry Data Security Standards framework requires merchants to establish a secure network, keep cardholder data secure, monitor and test security systems regularly, and maintain an information security policy. 


India’s legislative framework for digital payments has undergone considerable changes in recent years. Overall, India’s regulatory environment for digital payments is strong and expanding, with a focus on maintaining security, protecting customers, and encouraging innovation and the use of digital payment systems. With the introduction of the much-awaited Digital Personal Data Protection Act, of 2023, there is a glimmer of hope in addressing the privacy concerns around  collection, storage, and use of personal data by companies involved in digital payments. 




4. Developments in the Digital Landscape of India: Data and Case Studies


1.Although there has been a preference for cash transactions in India, UPI has gained popularity and is encouraging a culture of digital payments. 


a. The share of digital transactions has increased from 11.26% in FY16 to 80.4%22 in FY22. 


b. The rise of digital payment options has contributed to this shift in consumer behavior. 


c. Customers can make payments at any time and from any location using a variety of payment options, including net banking, UPI payments, credit cards, debit cards, and e-wallets. 


2. UPI recorded the biggest year-on-year growth of 74.1% in transaction volume as of January 2023 and digital wallets grew from 5% in 2019 to 35% or POS value in 2022 stimulated by UPI, according to the 2023 Global Payments report by Global Financial Technology leader Fidelity National Information Services, Inc. (“FIS”).


3.With Cash declining from 71 % of POS transaction value in 2019 to just 27% in 2022, India has emerged as a global leader in payments with the development of its next generation real-time payments(“RTP”) infrastructure.


4. According to data, cash is expected to decline by 34% in transaction value by 2026 and digital wallets are expected to rise in transaction value by 88% by 2026.


5. Overall, the digital payments market in India is on a steady rise.   




6. The share of PoS (“point-of-sale”) transactions made via cash is seen falling to 14 % of the overall PoS transactions in India by 2026, as per the Global Payments Report 2023 by WorldPay from FIS.


7. Case Study: LocalCircles conducted its 6th-year survey since demonetization to better understand the use of cash.


a. The survey received over 32,000 responses from citizens located in 342 districts of India.


b. 68% of respondents were men while 32% of respondents were women.


c. 44% respondents were from tier 1, 34% from tier 2 and 22% respondents were from tier 3, 4 and rural districts. 


d. According to the survey, property transactions emerged as the top area of cash usage from a value-per-transaction standpoint in the 2021 survey. 44% of those surveyed who bought a property in the last 7 years said cash was part of the transaction.


e. Notably, the situation may look to have improved compared to the LocalCircles survey in November 2021 when 70% of the respondents had admitted to paying cash as part of the transaction for property acquired in the previous 7 years. As against 16% who admitted to having paid over half of the amount in cash in 2021, the new survey reveals that the percentage of such cases has dropped to 8% in the new survey.


f. Further, one of the other areas where cash use was reported to be high by people in the 2021 survey was for

i. home repairs

ii. salaries of household staff

iii. beauty services


g. 76% of households surveyed also stated that they used cash for 

i. groceries

ii. eating out and

iii. food delivery transactions in the last 12 months


h. This survey reveals that many are still to shift or adopt digital payment systems, maybe because it is more convenient to pay cash for the purchase of fruits, vegetables, or a few items of grocery from a store, or due to other reasons including voucher payment.


8. Households demand cash (banknotes and coins) mainly for three motives: for transactional purposes; to hold as a store of value; and for precautionary reasons. Data from recent years shows that the amount of cash circulating in the economy, as a percentage of the M1 monetary aggregate, has declined in most countries, and that this decline has even been accentuated in emerging economies.




5. Challenges to going cashless in the Indian context and the need for a ‘Less Cash’ economy


1.Disruption to businesses: A sudden transition to a cashless economy could disrupt businesses that are not prepared for it. This is because businesses would need to invest in new technology and train their employees on how to use it.


2. Privacy concerns: Some people may be concerned about the privacy implications of a cashless economy. This is because all transactions would be recorded digitally, which could make it easier for governments and businesses to track their spending habits.


3. Lack of infrastructure: In some parts of the world, the infrastructure for a cashless economy may not be in place. This could make it difficult to implement a cashless economy in these areas.


4. Digital divide: A cashless economy can widen the digital divide between those who have access to digital payment methods and those who do not. This is because digital payments require access to a smartphone or other internet-connected device. 




6. Less Cash rather than a cashless economy for India


Digital payment is not a panacea, nor is cash all bad. For developing countries like India, a 'Less Cash' Economy is better than a 'Cashless' economy. The Indian digital payments industry has been expanding steadily in the last five years at a CAGR of 50% transaction volume-wise and 60% transaction value-wise respectively.


The Government of India and the RBI’s efforts to make India a digital payments-first nation is one of the reasons for this increase. New players and evolving payment systems in the market are enhancing the user experience by offering quicker digital payments and providing a unique user journey to make it their preferred payment method/partner. This approach has increased transaction volume, particularly in metropolitan and semi-urban regions. The reach in rural regions has also increased due to the availability of infrastructure and the willingness of the masses to adopt digital payment methods. Based on existing literature and the data discussed above, we can say that there is scope for going cashless in India.


But, the evolution towards a cashless economy presents a complex landscape with both promises and challenges. As societies continue to embrace digital payment methods, careful considerations must be made to ensure inclusivity, privacy, and security for all individuals. While the benefits of a cashless economy are considerable, addressing the challenges and mitigating the potential downsides will be essential to achieving a balanced and sustainable financial future. 


There are certain advantages to promoting a less cash economy in a country like India, which has a large informal sector and where a significant portion of the population still relies heavily on cash transactions. Major concerns like Financial inclusion, technology readiness, privacy, security and fraud concerns etc. show that Less Cash rather than Cash Less can prove more beneficial for the economic landscape of India. When we talk about a cashless society, we are not talking about people in Mumbai, we are talking about people who are in the hinterland.


According to a report prepared by PwC India, the country had 557 million unbanked people in 2011. In 2013, a little fewer than 400 million people in the country had an account. By the end of January 2015, the Pradhan Mantri Jan Dhan Yojana had led to the opening of 125 million new bank accounts. Unfortunately, most of these accounts have remained inactive and with zero balance. The habit of banking has not been ingrained in Indians. All these people are not even remotely part of the aspiring cashless economy. Their earnings, savings and expenses are all in cash. 


It's important to note that a less cash economy doesn't mean the complete exclusion of digital transactions. Rather, it signifies a gradual shift from a predominantly cash-based economy to one where digital transactions are increasingly encouraged and facilitated, while still allowing for cash transactions to coexist. This approach allows for a smoother transition, ensuring that the needs and concerns of all segments of the population are considered. 




Meet The Thought Leader



Ashray Gupta, BCG consultant and SRCC alumni with a passion for leadership development. In addition to his professional work, he also dedicates time to mentoring individuals and helping them unlock their true potential. Through this experience, he has honed his abilities to provide guidance, encouragement and support to those seeking to accelerate their growth.







Meet The Authors (GGI Fellows)



Manu is a seasoned professional, currently working at Comcate Inc. as a Product Manager. He holds a B.Tech from NIT Surat. With a passion for Product, Tech and Innovation and as part of his organisation, he is dedicated to driving positive change in local government service delivery. He loves to read and make travel itineraries in his pastime.








Pratheekh Chandra is currently pursuing a Masters in Public Policy at Kautilya School of Public Policy in Hyderabad. He earned his BA in Communications and Media, English, and Psychology from Christ University, Bangalore. With a keen interest in policy and governance, Pratheekh is passionate about making meaningful contributions to the public and private sectors and driving positive change.







Promita Sinha is a corporate lawyer working as an in-house counsel with Navi Finserv Limited. She holds a BA LLB (Hons.) degree from Symbiosis Law School, Pune. Promita specializes in Indian corporate laws, mergers and acquisitions, and fintech laws. She is also keenly interested in international relations, policy and governance. In her leisure, Promita enjoys painting, and solving crosswords.





If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.


 

Sources:


  1. Times of India

  2. Financial Express

  3. Business Standard

  4. PIB

  5. The Mint

  6. RBI Website

  7. India Payments Handbook EY

  8. FIS

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