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A Cashless Economy in India: Is It Possible?

From cash obsession to going cashless, India is readying itself for a massive shift. Though progress towards a cashless economy has been made, challenges still exist. How can India wean consumers and retailers away from cash?

In November 2016, the Indian Government banned ₹500 and ₹1000 currency notes and took them out of circulation, which has forced consumers to increasingly turn to digital payments and credit cards. This provoked the idea of making India a cashless economy, which seemed to be a possibility in the wake of the ongoing government push for “Digital India”. Countless measures and policy decisions followed, providing a further boost to digital payments. However, many continue to speculate whether this goal can be achieved. Is this really possible and how has India fared so far in truly "killing" cash?

From a Cash-Obsessed to Cashless Economy

India continues to be the fourth-largest user of cash in the world and its present currency-to-GDP ratio stands at 11.23%. While this number is slightly (0.53%) higher than 2018, it is likely due to economic growth instead of losing the steam on the cashless economy, as there is a clear willingness in the country to adopt non-cash payment methods. For example, the number of retailers accepting digital payment rose from 1.5 million in 2016-17 to 10 million in 2018. Consumers are also increasingly resorting to cashless methods, and more than a third of the total consumer spending now involves non-cash payments, which has led to a 54.3% increase in these transactions in 2018-19, according to a report released by the Reserve Bank of India.

Non-Cash Payments as a Percentage of Total Transactions

Additionally, credit card transactions grew by 22%; digital wallets were up by 86% and UPI (United Payment Interface) saw a 400% rise in 2018. The Indian success story in UPI, a mobile-based real-time payment mechanism allowing multiple bank accounts to link to a client app, has become a role model for other countries. Monthly transactions through UPI now stand at 900 million, a huge surge compared to 0.093 million when it was launched in August 2016, putting India ahead of Singapore and Hong Kong, Asia’s financial hubs, in UPI use.

Total Volume of UPI Transactions (millions)

More than 140 banks, Amazon, Google, Paytm, and WhatsApp have joined hands to offer UPI payments in India, which derives its strength from growing smartphone use, low data costs and widespread incentives. According to the National Payments Corporation of India, the value of total UPI transactions in August 2019 totalled ₹1.54-lakh crores, exceeding the total value of transactions for all of 2017.

From Less-Cash Economy to Cashless: Challenges

The progress towards a cashless economy requires India to build a versatile transaction ecosystem underlined with a robust financial infrastructure, high-speed Internet and wider mobile network coverage. With 39 lakh point of sale (PoS) terminals, India has just 0.003 POS terminals per resident and lags far behind other countries, such as Brazil, Indonesia and Turkey. Inadequate infrastructure and the lack of digital payment awareness are major issues in the suburban and rural areas, where weak internet connectivity continues to obstruct the adoption of cashless transactions. Tax laws are another hindrance for merchants to go cashless. Under the tough tax laws, those with the reported higher income must maintain, audit and generate more reports, pay higher taxes and comply with stringent GST requirements that impact the cost-effectiveness of the business. For example, one with a million rupee income in a year has to audit his accounts and file advance taxes quarterly. Business turnover after a slab leads to more stringent GST procedural compliance. The limit for exemption from payment of goods and services tax (GST) to Rs 40 lakh and the higher turnover cap of Rs 1.5 crore for availing composition scheme of paying 1 percent tax. Cashless transaction means this income income are reported and leads to more taxes and procedures.

Easier banking and tax procedures and financial incentives would likely encourage businesses to forgo cash transactions. The recent digitalization of wages and subsidies is a welcome step and may help facilitate cashless transactions by the working class and beneficiaries of government’s schemes. Still, the unorganized sector services make up approximately 90% of the consumer retail market in India, which means that consumer spending is still largely dominated by cash. Most of these retailers are not big profiteers and digital transactions that require them to pay banking charges, data charges, or PoS rental are financially burdensome.

Making India a Cash-Lite Economy: Lessons From China

Nandan Nilekani, who led the high-level committee on promoting digital payments, has advocated for creating a system similar to the Chinese WeChat mobile payment. WeChat's rise to becoming the de-facto mode of payment in China was fueled by incentives for users to develop a habit of paying through the app. This includes a high rate of interest (4%) to keep money on the platform as well as substantial discounts to consumers paying for products and services through the mobile app. Ultimately, it is a simple but effective strategy: provide an irresistible amount of rewards for mobile payment users to encourage them to build a habit of using it over time.

Convenience & Incentives Will Help India Go Cashless

India must ensure that cashless payment methods are universally accepted and that residents can pay digitally for all of their daily necessities. At the same time, it is equally important to make sure merchants won’t have to feel the burden of forgoing their cash business. They must feel that mobile payments will help them to succeed. For example, a mobile payment app offering a 10% discount coupon on all purchases from neighbourhood grocery stores may offer a win-win situation for both merchants and consumers. It would surely help small grocery stores that accept mobile payments attract more customers compared to those that do not, while also giving consumers an easy way to save money. Tax incentives for bills accepted via non-cash payments, reduced bank charges and subsidies for PoS machines could also be effective. The Nilekani panel has advised steps to reduce payment network fees, PoS charges and interbank money transfer fees along with tax incentives to compensate merchants accepting non-cash transactions.

Considering the challenges, a cashless India may not be imminent. However, a “less-cash” economy is about to unfold. The discussion of a cashless economy is focused on how to make it more convenient and seamless for both users and merchants. However, it's important to recognise that convenience may not be appealing enough to persuade them to go cashless. They may also need incentives to develop and stick to their habit of using digital payment methods. In a country where cash obsession is an important part of socio-economic life, monetary incentives are a must to induce people to give up using cash. Once they build a habit, the convenience of using digital payments daily might dissuade them from returning to using cash.

William Hofmann

William is a Senior Research Analyst at ValueChampion Singapore, focusing on banking and SMEs. He previously was an Economic Consultant at Industrial Economics Inc.