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Moving Towards a Cashless Economy

The Indian economy is largely dependent on cash. Only 5 per cent of the country’s personal consumption expenditure is done electronically. A sharp acceleration of economic growth is not possible with such kind of dependence on cash. Overdependence on cash is a major hurdle and a radical thinking and coordinated efforts are needed to take electronic payments system to the masses.

As per the annual report of the Reserve Bank of India (RBI) for 2013-14, the total amount in currency in circulation stood at `12.83 trillion with 10 per cent compounded annual growth rate over the last two years. The banks have about only 5 per cent of the entire amount. So a huge amount of cash is lying with the public.

There is a cost to cash. It is borne by the exchequer and ultimately the general taxpayers. A number of studies have been done on the subject by think-tanks and financial institutions. It is estimated that the cost of cash as a percentage of GDP ranges between 0.5 per cent to 1.5 per cent. These costs range from the cost of note and coin manufacturing to the supply chain and management of cash. Then there are imputed costs to the economy. Cash leads to tax evasion and black money.

So, shifting to electronic payments system is not only important from the point of view of accelerating the economic activities and growth, but also to curb the menace of black money and tax evasion.

It may also be the case that more than the existing players would be required to handle the projected volumes. It makes it rather imperative that there needs equal space for all the players to co-exist, innovate and service the growing demand with efficiency.

A concerted effort has to be made to reduce dependence on cash. The aim should be not to just move towards less-cash economy but to a cashless payments system. For this, huge investments and innovations are needed. There are several barriers that impede innovations in the sector. Efforts should be made to ensure a level-playing field. Companies won’t innovate and put their money unless there is a level-playing field in the sector.

When we talk of an open, competitive market environment, it is absolutely critical that all the enabling technologies, all the enabling participants should have complete freedom to determine how they innovate amongst themselves to create better products and services. This is critical for the e-economy to garner a bigger share in a $20 trillion economy.

We have to move to electronic digital transactions, but changing the habit at grassroots level is difficult. Unless an ecosystem is created, which is simple, cost-effective and technology-driven, we cannot hope to achieve this daunting task. There is need to take the electronic payments system to the masses.

Given the complexity of the economy, it would be a wishful thinking to say that the country would shift towards a 100 per cent electronic payments system any time soon. Therefore, a practical target of making at least half the transactions electronic should be set.

Infrastructure is a big challenge. Majority of the retailers, even in the metro cities, don’t use electronic payments system. They should be encouraged to shift to electronics system. In fact, small retailers across the country have shown resistance to shift to electronic payments system.

Experts say, electronic payments system is good for everybody, be it consumers or the sellers, even the small retailers and kirana store.

However, bringing down the cost of transactions is crucially important. High cost of electronic transaction is a major stumbling block in the growth of the payments system. Costs will go down if the volumes increase coupled with innovations in the system.

In current scenario, coordinated efforts are lacking and despite having presence of several players, electronic payments system still remains out of the reach of the masses. The masses would move to electronic payments once it is made as simple as cash transaction.

Team Inclusion

INCLUSION is the first and only journal in the country that champions the cause of social, financial and digital inclusion. With a discernable and ever- increasing readership, the quarterly relentlessly pursues the three inclusions through its rich content comprising analysis, reportage, features, interviews, grassroots case studies and columns by domain experts. The magazine caters to top decision makers, academia, civil society, policy makers and industry captains across banking, financial services and insurance.
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