Sunday, January 8, 2017

Should India go Cashless?

Ever since the honourable prime minister of India announced the demonetisation of old 500 and 1000 rupee notes in November last year, social media and news channels have been abuzz about the subject. With the Governments renewed push towards a more digital and cashless economy there is a plenty of noise on the subject. Unfortunately most of the information in circulation in social media is false or cooked up just to support their theory (Supporters cook up facts to show cashless is good while the nay sayers do the same to show it will be a disaster). So, I want to help out at least my blog followers and friends to understand whether going cashless is a good idea or not.

Hope you are able to understand the facts and decide whether this move by the Government to push for a more digital/cashless economy is really good or bad for the country. 

Before we begin: As with many of the recent articles, this is NOT a Politically Motivated article. The contents of this article are entirely my personal views and is not aimed at supporting or opposing any political party. 

The Current Situation in India – Cash Vs. Card Vs. Digital Spending


According to statistics (thanks to Google) India is one of the highest “Cash Using” countries in the world with approx. 80% of our transactions still transacted as cash or other paper based instruments like Cheques/Demand Drafts/Pay Orders etc. Of the remaining; 13% transactions are Digital (Internet based) and 7% are through Card. 

Just to give you some more statistics for comparison – Among Emerging Markets our peers in Brazil use 39% card, 13% digital and remaining 48% on Cash/Paper. Similarly China uses 25% Card, 27% Digital and the remaining 48% on Cash/Paper. 

If we take Developed Markets the amount of cash transactions is even lower. For Ex: In United Kingdom 59% are Card transactions, 14% is Digital and only the remaining 27% is Cash/Paper based. In the US 49% transactions are Card based, 15% is digital and the remaining 37% is Cash/Paper based. In Australia 53% is Card based, 37% is Digital and only the remaining 10% is Cash/Paper based. 

Isn’t that Surprising? 

What is Wrong with a Cash Economy? 


Before we try to fix any system, we first need to understand the problem in detail and why the system is broken – isn’t it? Having so much cash in circulation results in two main problems. 

Before we get into the details, I want to highlight our GDP because we will be using % comparisons with our GDP in the upcoming sections. The GDP for the FY 2015-16 for India was Rs. 135 Lakh crores.  

Problem 1 - Cost of Keeping Money in Circulation: 


Approximately around 18 lakh crores worth of currency notes are in circulation in India right now. This comes at a significant cost of approx. 2.3 lakh crores. You may be wondering why is there a cost involved in maintaining this cash isn’t it? 

Below are the 4 major stakeholders and the different sub categories under which this 2.3 lakh crore gets spent: 

1.     Individual Households – foregone interest (due to keeping cash at home), time cost of the time spent in ATMs and Bank Branches, ATM Fees, Branch fees etc.
2.     Businesses – Time cost of Cash Handling, Foregone Interests due to keeping cash in offices, Bank charges etc.
3.     Banks – Operating expenses of maintaining ATM network, branch network, payment to the logistics company that puts money in ATMs, staff salary, security for ATM salary etc.
4.     Reserve Bank of India – Printing Currency Notes and distributing them to member Banks

Just to give you a bit more understanding of the amount we are talking about – 2.3 lakh crore is approximately 1.7% of India’s GDP. 

Problem 2: Shadow Economy & Tax Evasion 


As I had mentioned in my original article on Demonetisation, a Shadow Economy includes all legal production of goods and services that are concealed from public authorities to avoid payment of taxes. 

Do you know the size of the Shadow Economy in India? It is approximately 20% of our current GDP. 
Do you know how much money the Indian Government is losing due to this Shadow Economy just by means of Tax revenues? It is approximately 3.2% of our GDP. That’s just the official figure. 

Unofficially it could be much higher as almost all businesses enlist the help of competent chartered accountants who use their brains to identify the loopholes in our system to help their clients evade tax. 

I am reminded of the scene from the Rajnikanth movie Shivaji where he calls a meeting with auditors and accountants of rich people and asks for their to eliminate black money. Though it is a movie and a hypothetical situation, the reality portrayed about auditors & accountants knowing how their clients evaded tax or where their clients have stashed away cash is quite true. 

Problem 3: Uncontrolled Illegal Activities 


By illegal activities I am talking about – Terrorist Financing, Money Laundering, Printing of Fake Currency, Hawala etc. All of these activities deal predominantly in cash and when the amounts of cash in circulation come down, it would become that much harder for these guys to continue their operations. Yes, we cant eliminate them until there is literally 0 cash in circulation but at least their operations will become harder and harder as we embrace a more cashless society. 

Ever since our government released the news of old 500 and 1000 rupee notes being invalid, news about millions of fake currencies being burnt or destroyed is surfacing. These are usually printed in Pakistan and Bangladesh that get smuggled into India via West Bengal or Kashmir/Punjab. We all know the damage terrorists can cause not just in India but worldwide isn’t it? And we also know that this fake currency racket is directly linked to these terrorists in the region isn’t it?

Should India Go Cashless & Digital? 


If you read the problems/reasons above you would’ve already gotten the answer to the question on whether India should go Cashless & Digital. But, for the sake of completeness let me say it. 
Yes, I think India should strive forward and go towards a more Cashless and Digital society. 

Why do I say this? 

By reducing the currency in circulation, the government (and other stakeholders) will save a lot of money that gets spent in keeping this cash in circulation. Statistics & Experts suggest that if the currency circulation comes down by 40%, the cost of maintaining it will come down to around 92,000 crores which will be less than 1% of our GDP. 

Plus, by embracing digital transactions, the size of the shadow economy will come down. This will boost our GDP as well as increase tax revenues for our Government. Experts predict that with every 1% decline in shadow economy, approximately 1.35 lakh crores gets added to the formal economy. On top of this, illegal activities get controlled too. Isn’t this reason enough for India as a nation to strive forward toward a more cashless society? 

As a country, we are already in the top 5 countries in the world terms of GDP and this move toward a digital economy will add more transactions from the Shadow Economy into the formal economy and help boost the GDP even further. 


What do you think about this move? Sound off in the comments section. Note that vulgar language or politically affiliated comments will be Moderated and WILL NOT be Published. Thank you.

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