After entering the Guinness Book with International Yoga Day, the Modi Government delivered another encore. This time, it was a seemingly more humdrum matter of digital payments. Unbelievable as it may sound, India with the largest number of software engineers in the world still relies on good old paper currency to pay for more than 90% of transactions. I am reminded of the hilarious scene from the movie PK where Aamir Khan's character (an extraterrestrial), thinks that any paper with Mahatma Gandhi's picture can be given as cash. Any tourist will be amazed that unlike in other developing nations, in India 'cash is king'. Even emerging economies like Brazil and Indonesia have lower cash transaction rates than us.
The reasons for our obsession with paper cash are too numerous to dwell upon. Partly cultural (remember our garlands of cash in weddings?), partly religious (see PK again!) and partly a problem with infrastructure. The last problem is what the government is trying to tackle. In a country of more than 50 million small businesses, less than half a million have installed card acceptance machines. And even if they have, in all probability they still encourage you to pay cash with excuses like 'line is not working' or 'machine out of order'. Some high-value merchants like jewellers go a step further and charge '2% extra if you pay by card'. No wonder, no Indian shopper steps out of home without a few thousand rupees in his pocket. The problem is more acute in the non-metro areas, where many of them aren't even aware that that you can pay through cards.
So what are the downsides of cash? From the consumer perspective, the most immediate is the risk of theft. From the businessman's perspective, the most immediate risk is counterfeit notes. There are other downsides too, like weak proof of payment, inconvenience, cash handling overheads, accounting costs etc. From a macroeconomic perspective, physical cash can prove to be the single largest roadblock in accelerating economic growth. Then, there are less obvious costs, like currency printing, storage, security, etc.
Now, the Ministry of Finance has put out a Draft Proposal for facilitating electronic transactions, and the six objectives are:
- Improve the ease of conducting transactions for an individual
- Build a transactions history to enable improved credit access and financial inclusion.
- Reduce the risks and costs of carrying cash at the individual level.
- Reduce costs of managing cash in the economy
- Reduce tax avoidance
- Reduce the impact of counterfeit money
The second objective is the most interesting: The Government clearly wants to capitalise on the gains of PM Jan Dhan to make credit easily accessible to the neediest. The last one is of significant import to India which is under constant threat from some hostile neighbours who can ruin our economy with counterfeit currency.
The biggest challenge to moving away from cash has been the lack of so-called 'card acceptance infrastructure'. You become acutely aware of that when you visit some offbeat holiday destinations within India, compelling you to carry loads of cash currency. The underdeveloped infrastructure has been a bit of a 'chicken and egg' situation. Merchants complained about high transaction charges and lack of consumer awareness about cards. Consumers on the other hand, fretted about how cash is still accepted everywhere and hence it's better not to leave home without it. Result: consumers getting the short end of the stick. Not many people are aware that card transactions provide consumers an added layer of protection with 'chargeback' rights i.e. you can dispute a charge on your card statement saying you didn't get the promised merchandise or service. Now, try disputing a transaction paid for in cash. You're completely at the seller's mercy. So, what in other countries is a 'no-brainer' is still hotly debated in India with some vested interests firmly in favour of 'cash is king'.
Little wonder then that the Reserve Bank of India and the Government are seized of this problem. Taking cues from other developing economies, they have determined that in India, most market behaviour change is led by carrot and stick regulation. The carrot is to provide tax rebates to consumers for card transactions, lowering the transaction charges, improving connectivity etc. and the stick is that merchants cannot levy surcharge for card transactions.
Of course, as the old saying goes, you can take the horse to the well but cannot force it to drink. So, will all these measures spur card transactions? This is a million-dollar (in cards) question. Mobile penetration has changed many rules of the game. Products like Paynimo can store all your payment details securely and you can use them by using second-factor authentication. Thus your phone converts into a virtual wallet. Paynimo can also be used as a merchant as a virtual POS card acceptance device. Thus, this liberates both seller and buyer from being physically proximate to complete a card payment.
The devil is in execution. Let's wait for the final guidelines to be published, and implementation thereof. The vision of a $10 trillion economy cannot be achieved without going cashless.