Shubhashis Gangopadhyay: A cashless India

Last Updated: Sat, Sep 15, 2012 04:49 hrs

Reserve Bank of India Deputy Governor H R Khan, speaking at an event, mentioned that the circulation of a large amount of cash in the economy leads to many problems, including corruption. His suggested remedy was to move to a system where payments were less in cash. In addition to reducing corruption, such a move, he felt, will solve transmission issues of monetary policy as well as cash management issues in the banking system.

In a recently concluded study carried out by the India Development Foundation (IDF), it was argued that, in addition to these, the move towards a less cash-using economy will lead to an improvement in financial inclusion, more digital record-keeping of transactions, a reduction in the costs of transactions and encourage greater growth.

According to the Reserve Bank of India (RBI), the provisional estimate of the amount of currency in circulation (as of June 2010) stands at Rs 8,64,333 crore, out of which only five per cent of the currency is with the bank - implying that almost the entire volume of currency is transacted every day. Over the period April 2006 -June 2010, currency has shown a yearly growth rate of 17 per cent. It is estimated that for 2009-10, the RBI incurred an annual cost of Rs 2,800 crore to just print the currency notes. This is 0.4 per cent of the total currency in circulation. The need to move towards a cashless payment economy is perhaps more in India because of the cost of printing, distributing and processing cash. This cost does not include the cost of storage, transportation, security, detection of counterfeits, etc .

To the printing cost, if we were to add the cost of storage and maintaining these currencies through ATMs alone, the cost of printing and disbursing currency comes to approximately Rs 70 per person per year. However, the interchange costs are much lower than Rs 70 per person. As of January 2010 estimates, there are around 60,000 ATMs in India. It costs around Rs 7 lakh to install an ATM machine and an equivalent amount to maintain it for a year. Given that we plan to add 10,000 ATMs per year, the total cost of printing and distributing currency (through ATMs alone) amounts to Rs 8,400 crore. In other words, the cost of printing and distributing cash constitutes about 0.2 per cent of India's GDP. Alternately put, a moderate growth of cashless transactions by five per cent a year will save more than Rs 500 crore annually. Therefore, there is a direct benefit (in terms of cost savings) of moving towards cashless transactions in India. However, it is the indirect benefits that are perhaps much more important for India, especially given the country's objective of inclusive growth.

While it is necessary for financial inclusion that every household should have access to a bank, mere physical access is, of course, not sufficient. This is particularly significant given that more than 90 per cent of the workforce in India is in the unorganised sector, and physically accessing banks implies huge opportunity costs for them (measured in terms of daily earnings). In the absence of an infrastructure that can accept cashless payments at various outlets, these households would still have to incur transaction costs while using cash in order to buy or sell various goods and services. An enabling system that promotes cashless transactions would, therefore, be the natural extension of the existing policies directed towards financial inclusion. In the IDF's report, we highlight those specific cashless instruments that can facilitate and enable financial inclusion.

Recording financial transactions has many advantages. First, it aids the government in its effort to collect appropriate tax revenues; second, it can effectively detect, and help curtail, illegal transactions; third, it will give us a better estimate and understanding of the huge unorganised sector in India; and last, but not least, it will help plug the "leakages" in various government programmes. The Justice Wadhwa Committee Report on the public distribution system recommended the use of computerised platforms that will keep a record of all PDS transactions.

With appropriate technology and instruments, the need to be physically present during any financial transaction can be dispensed with. This is obvious with online payments, mobile banking, mobile purses and so on. However, even though certain transactions may require that the two parties be physically present, one can reduce transaction costs by redesigning the transactions in a way that does not use cash (use of tags at toll booths, for example).

A 2010 study by Moody's showed that global GDP registered an additional 0.2 percentage points in the growth rate because of electronic payment instruments. For 51 countries in their sample that, together, accounted for 93 per cent of the world's gross domestic product, electronic card usage added $1.1 trillion in real dollars to private consumption and GDP from 2003 to 2008. With a very low cashless base, clearly, there are opportunities for India.

Systems need to be put in place to move the economy from one that uses predominantly cash to one that uses more cashless instruments. However, such a switch would require a concerted effort to develop a network of critical mass that deals with cashless transaction. The development of this network is important since there is a switching cost for individual users to shift from cash to cashless. Simply put, users will find it more attractive to switch to cashless transactions if more users are using them. It is important, therefore, that policy initiatives are in place to develop a critical mass of this network (of non-cash users). This critical mass may vary across geographies or across sectors. Once this is developed, it becomes more lucrative for individuals to leave the existing network of cash transactions and join the network involving cashless transactions. Building up this critical network requires a co-ordinated effort, and that is where the RBI and the government need to get together.

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