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Is being a ‘cashless nation’ too big a dream for India?

Wednesday March 08, 2017,

5 min Read

There are always inevitable obstacles when attempting to effect change in behaviour on a large scale, especially for a country with such a large population as India. However, a significant push can lower such obstacles as the demonetisation drive did, impacting everyone in the country substantially. However, data released by the Reserve Bank of India indicates that transactions through debit/credit cards or digital payment instruments only increased marginally during the unavailability of cash in the market. The event has initiated a major debate in the country as to whether Indians are ready to adopt the cashless mode for daily commercial transactions.

A common argument is that the mindset of Indians is a key reason for most people’s dependence on cash for financial transactions and it will take some time to change, despite the alternative methods available. The other side of the debate argues that it is, in fact, an infrastructural issue that is impeding the shift to a digital economy and that the country is not well-equipped to bring about such a radical transformation in this short a time. There are several arguments, however, the data in the public domain leans towards the latter. Although cashless transactions through digital payments or plastic money at PoS (point of sale) terminals have risen over the years and continue to rise, the increase in devices aiding digital payments has not been complementary. The ratio of PoS terminals to the number of debit/credit cards in the country is much lower compared to other countries. Considering this fact, a direct assumption can be made that more instruments and payment terminals would lead to a higher number of digital payments.It is worth noting that most banks saw a significant rise in the number of applications for credit and debit cards between December to January.

In developed countries like Sweden, France and Belgium, cashless transactions amount to over 90% of total transactions. But that is also because the population in these countries is much lower, the infrastructure has been in place to support the move to digital transactions and large scale adoption of technology has been faster as compared to India. In India, the ratios are reverse. Another crucial reason for this is that a large section of the population in the country does not have a bank account. For most, it is not the physical distance that keeps them away from banks, but rather a psychological distance that arises from a lack of proper education about banking services and their benefits. Therefore, the foremost necessity is to provide the required education to the masses, so that the psychological distance is reduced.Schemes like Direct Benefit Transfer and Jan DhanYojana introduced by the government are a great step forward in the realisation of these goals and have helped open over 300 million new bank accounts giving a huge boost to financial inclusion.

India’s mobile phone subscriber base has already hit the 1 billion users mark and this milestone is only the beginning of a dramatic change of course in the Indian banking industry. Over 350 million people have access to the World Wide Web, making India the second-largest Internet market in the world. From 250 million smartphones, the market is now set to grow to more than 700 million smartphones by 2020. Digitisation of the services in the country has taken place at a very fast pace. Moreover, the affordability of 4G plans for the masses has helped in boosting the prevalence of online transactions. This is evident in the fact that online transactions in 2016, before demonetisation, increased by 22% as compared to 2015.It is an undisputed fact that the average Indian has become empowered with access to affordable Internet and smartphones. However, without the appropriate infrastructure, a large section of the population that resides in villages and small towns cannot avail the most out of technology in the absence of the necessary infrastructure and the availability of reliable Internet, where the penetration is still extremely low.

Even with the facilitation of infrastructure, there is no certainty that a change in behaviour will occur on a large scale. Demonetisation and the push towards a digital economy are nothing like the other infrastructural changes initiated by the government in the past. One reason for this is that such a move has many detractors. Cash hoarders and tax evaders are a few of the many symptoms of the problem of cash dominance in the country, but the damage they cause to the economy is considerable. The demonetisation period saw such individuals and even large business organisations apply inventive methods to turn their ‘black’ money into ‘white’ and move it into banks.

The shift to a cashless economy cannot be made in just one go.The shift towards being a digital economy calls for a consistent transformation across several types of economic transactions. Having the essential infrastructure in place, initiating campaigns for awareness and endorsements by leaders are critical in effecting a change in behaviour. The process of change must be natural and constant and not enforced on the public. It will take a few years, as people need to alter their habits with respect to conducting financial transactions for India to truly achieve the status of a digital economy.

Achieving a 100% cashless economy is not feasible for most countries and it need not be India's target at all. For a nation as large as India, going from under 5% digital transactions to anything above 50% would itself be a challenging but highly rewarding milestone. With the help of demonetisation, what would otherwise have taken a decade, might be doable in 5-6 years provided there is continued action, regulatory changes, policy updates, etc. in the right direction for years to come.