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Sunday, January 8, 2017

What is the Government doing to boost Cashless Economy?

In the last two articles we covered why India should move toward a cashless economy as well as whether the move is feasible. Toward the end of the article on whether we move toward cashless system, I had mentioned that the Government of India has offered a lot of Incentives to the Citizens of India to promote this move toward a Digital and Cashless Economy. You will learn about them in this article.

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.

Why these Incentives?

After the demonetisation of the old 500 and 1000 rupee notes there has been a surge in the number of digital transactions taken up by Indians. In order to further improve this as well as to reduce illegal activities like hoarding black money, hawala, money laundering, tax evasion etc, the Government of India has decided on a package of Incentives to help its citizens continue to use digital means of payment even after new notes are available sufficiently in the market.

What are these Incentives?

Incentive 1: All Central Government owned PSU oil corporations will offer a discount of 0.75% on the sale price of Petrol and Diesel sold through their outlets if payment is made through digital means.

Nearly 4.5 crore customers buy petrol or diesel in such petrol pumps every day totalling to around 1800 crore rupees. Only 20% of these transactions were digital before demonetisation and this number has risen to around 40-50% in the last 2 months. This incentive has the potential to motivate an extra 30% or more customers to move toward digital transactions. This will reduce the cash requirement of nearly 2 lakh crores per year at just petrol pumps.

Incentive 2: The Central Government through NABARD will extend financial support to eligible banks for deployment of 2 POS devices each in 1 Lakh villages with population of less than 10,000.  These POS machines are intended to be deployed at primary cooperative societies/milk societies/agricultural input dealers to facilitate agri-related transactions through digital means in rural areas.

This will benefit farmers from 1 lakh villages covering a total population of nearly 75 crore people who will have facility to transact cashlessly in their villages for their agricultural needs.

Incentive 3: Central Government through NABARD will also support Rural Regional & Cooperative Banks to issue “Rupay Kisan Cards” to farmers to enable them to make digital transactions at POS Machines and ATMs

Incentive 4: The Indian Railways through its suburban railway network will provide a discount of up to 0.5% to customers who purchase monthly or seasonal tickets if payment is made through digital means.

Nearly 80 lakh Indians use seasonal or monthly passes on suburban railways primarily through cash payments worth almost 2000 crores each year. As more and more passengers shift to digital means, this number is expected to come down.

Incentive 5: All railway passengers buying online tickets will get free accidental insurance coverage of up to Rs. 10 lakh each.

Nearly 14 lakh passengers buy railway tickets each day with around 58% being bought online these days. With this incentive more people are expected to shift to digital payment methods which would bring nearly 11 lakh passengers who take the trains each day under this accidental insurance scheme.

Incentive 6: All passengers using railways that avail paid services like food, accommodation, retiring rooms etc. will get a 5% discount if they make payment for these services through digital means

Incentive 7: Public sector insurance companies will provide incentive, by way of discount or credit, up to 10% of the premium in general insurance policies and 8% in life policies of Life Insurance Corporation sold through the customer portals, in case payment is made through digital means. This covers both new and existing insurance policies.
A 8% discount on life and 10% discount on General insurance policies would save a lot of money for the common man. 
Note: Even though the government release says such a big discount there seem to be many caveats around it. I heard from a trusted source who is working in LIC that the actual discount would only be applicable if the policy itself is purchased online and for other policyholders the discount is one 0.5%. If I hear more news on this, will share here. If you have any confirmed news, do share in the comments section for the benefit of everyone. 

Incentive 8: Government has advised public sector banks that a Merchat should not be charged more than Rs. 100 per month as the monthly rental for POS Terminals issued by them.
Cost of procuring and maintaining these POS Terminals is considered one of the main reasons why small merchants and traders don’t want to go cashless. By capping the monthly fees on POS machines issued by public sector banks, the government is directly helping bring more merchants into the digital payment umbrella.

Incentive 9: For all payments at toll Plazas on National Highways using RFID card or Fast Tags/Passes, a discount of 10% will be available for users in the year 2016-17.

Other Additional Steps taken by the Government:

Apart from these incentives, the government has also declared that Service Tax will NOT be charged on all digital transactions up to Rs. 2000 per transaction. Similarly, the government has instructed all Central and Stage government departments/PSU companies to ensure that all the transaction fee/charges for digital transactions be borne by them and this SHOULD NOT be passed on to the consumer. 

They have also offered a reduced tax rate on the digital turnover of small businesses with revenue of up to 2 crore. This will greatly help small businesses too. 

Some Last words:

Even though the government has announced all these schemes, it is up to the officials in the different responsible departments to make sure the benefits and incentives reach the people. This step will take time and will not be easy. 

For a country the size of India and with our population, such a big transition toward a more digital economy will be a very hard feat to pull off. It requires a lot of commitment from politicians, government officials, banking officials and most importantly Us The Citizens of this country.
When we look at China which is showing great progress in this transition to a cashless economy, it gives us hope because when they can do it, why can’t we?

Let’s hope for the best…

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.

Disclaimer: All contents in this article were taken from the official Press Information Bureau website. The Author is not liable for any errors or discrepancies.

Can India really Become Cashless and Digital?

In the lastarticle, we saw why moving toward a digital and cashless economy is beneficial for our country. To give you a quick summary, moving toward a digital economy helps bring in more transactions under the official list and contribute toward GDP as well as governments tax revenue. Also, the cost of printing and maintaining the cash infrastructure comes down. That all seems like a good benefit. But, the next question we all have in mind is, can we really do that?

Many people are quick to point out our population, infrastructure and many other reasons to say that we cannot and should not move toward a Digital & Cashless Economy. I hope that by the end of this article you get an idea of whether this move is feasible or not.

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.

Considering India’s Size and Population – Is this Move really Feasible?

People who are talking negative things about this move towards a cashless economy in India citing our size, population etc to say that it is an ill-advised idea. However, they conveniently ignore the fact that a country that is larger and more populated that us has successfully pushed towards digital/cashless transactions and the results show on their GDP.

Yes, am talking about China.

In the past few years, China has embraced the change toward a more digital and cashless society and have been making huge strides toward the same. The reasons quoted by the Chinese Government officials were pretty much similar to what our government has said. They want to reduce black money, reduce the size of shadow economy and reduce illegal activities like hawala, terrorist financing, money laundering etc.

Below are some key highlights that you need to know about China’s move toward a Cashless & Digital Society:
1.     Non-cash payments have grown by about 40% last year and China has now moved into 4th place in the world for Non-Cash payments after US, Europe and Brazil.

2.     China has approximately 4 billion cards issued to its citizens by Banks & other financial institutions. Considering their population, that’s approximately 3 cards per person.
3.     Chinese Government is encouraging citizens to use non-cash payments because it reduces the cost of printing, circulating and handling bank notes. It also helps in the battle against tax evasion and corruption as well as other illegal activities.
4.     In order to accelerate the use of non-cash payments, the Chinese government has increased the availability of Point of Sale (POS) machines and also opened up a domestic card payments system to the public.
5.     Other pre-paid and electronic wallets such as WeChat, Mi Wallet and Alipay are becoming extremely popular in china because people are able to shop and pay for services conveniently using their smart phones.

Not just China, many other countries in Asia like Thailand, Korea etc. are pushing toward a cashless economy to achieve the very same benefits listed down by our Government.

Asking the question again – Considering India’s Size and Population, Is this move to Digital and Cashless Economy Really Feasible?

Yes, I think so.

But, just scroll up and read points 3, 4 and 5 on the Chinese government’s aim at promoting digital transactions. Isn’t our Government doing the same thing? They are encouraging citizens to use digital and cashless payments. They have introduced a domestic card payments system and other electronic payment systems are becoming popular. Plus, the government has rolled out a lot of incentives to the citizens to use the digital & cashless payment modes (Will be the next article). 

If a country that is bigger and more populous than ours can do, we definitely can. No one can deny that this transition will be difficult and will have many problems when it gets implemented. Considering our size and population it would take a miracle for such a large change to happen smoothly.

Of course, it would require some discipline on the part of our government, government & bank officials as well as Citizens if we want this initiative to be a success.

Hope this initiative is a success and further helps India’s growth as a global economic powerhouse.

What are your thoughts on this article? Sound off in the comments section. Note that vulgar language or politically affiliated comments will be Moderated and WILL NOT be Published.

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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