Digital India

Cashless India – In depth Analysis

The GST Council has cleared a proposal to offer cashbacks to consumers for digital payments through Rupay cards, BHIM app and UPI system to promote cashless transactions.

About:
• The Government of India with the flagship programme, Digital India, envisions to transform India into a digitally empowered society and knowledge economy.
• “Faceless, Paperless, Cashless” is one of professed role of Digital India.
• The process has been greatly aided by 1-billion-plus phones, 500 million internet connections, and 350 million smartphone users in India.
• Progressive digitalization is also reflected in direct benefit transfers (DBT), the JAM Trinity (Jan-Dhan, Aadhaar, and Mobile) and Unified Payment Interface (UPI).

Cashless Economy:
• Economy in which the transactions carried out between two individuals will occur through payment gateways or plastic money.

Importance:
• Economic:
– It reduces the tax-burden of the population due to increased overall tax revenue of the government.
– Transparency in economic transactions reduces instance of black economy, tax avoidance, and money laundering.
– Reduction in cost of printing the cash and handling cost associated with cash for the banks.
– Digitalization has the potential to transform conventional banking and enhance the banking outreach.
– Macro-economically, it enhances efficiency and transparency by reducing Transaction Costs, a factor in the Corruption Perception Index.
• Social:
– It has a potential positive influence on growth and distributive social equity.
– It makes transactions more convenient rather than carrying the bulk of cash saving the opportunity cost of time for consumers.
– The World Bank’s World Development Report-2016 envisages that digital technologies have boosted growth, expanded opportunities, and improved service delivery.

• Political:
– Effects on terror funding, naxalism, insurgency, and corruption, etc. as all have a deep linkages with cash transactions.
– Effect on political funding using the black money and anonymous cash transactions.

Various Modes of digital payments available in India:
• Banking cards:
– Different types of cards available are- credit, debit, and prepaid.
– Banking cards offer consumers more security, convenience, and control than any other payment method.
– The cards provide 2 factor authentications for secure payments e.g. secure PIN and OTP
– RuPay, Visa, MasterCard are some of the example of card payment systems.
 • Unstructured Supplementary Service Data (USSD):
– This payment service *99# works on USSD channel, allowing mobile banking transactions using basic feature mobile phone without any need of mobile internet data facility.
– It is envisioned to provide financial deepening and inclusion.
• Point of Sale (POS):
– A point of sale (POS) is the place where sales are made.
– POS may be a mall, a market, or a merchant trader.
• Aadhaar Enabled Payment System (AEPS):
– AEPS is a bank led model which allows online interoperable financial transaction at POS through the Business Correspondent (BC) of any bank using the Aadhaar authentication.
– AadhaarPay connects the Aadhaar-enabled biometric identification as authentication process for mobile banking.
• Internet Banking:
– Internet banking (online banking, e-banking or virtual banking) is an electronic payment system that enables customers of a financial institution to conduct a range of financial transactions through its website.
– Different types of Internet Banking are:

a) National Electronic Fund Transfer (NEFT):

It is a nation-wide payment system facilitating one-to-one electronic funds transfer among individuals, firms and corporates. NEFT facilitates originators or remitters to initiate funds transfer transactions even without having a bank account.

b) Real Time Gross Settlement (RTGS):
The real-time settlement of large funds transfers individually without netting. As the settlement takes place in the books of the Reserve Bank of India, they are final and irrevocable. There is no upper ceiling for RTGS transactions.
• Electronic Clearing System (ECS): It is an alternative method for effecting transactions in respect of the utility-bill-payments such as telephone bills, electricity bills, etc.
• Immediate Payment Service (IMPS):
– IMPS offers instant and 24X7 interbank electronic fund transfer service through mobile phones.
– It enables bank customers to use mobile as a channel for making payments India, and helps RBI in Digitization of retail payments and building the foundation for mobile based Banking services.
• Unified Payment Interface (UPI):
– UPI is a system that powers multiple bank accounts into a single mobile application (of the participating bank), merging several banking features for seamless fund routing.
– BHIM app utilizes UPI to provide instant bank transfers.
• Mobile Banking:
– It is a service provided by a financial institution allowing its customers to conduct financial transactions using a mobile device.
– Banks provide their own mobile banking Apps for different mobile platforms.
• Mobile Wallets: A mobile wallet is a way to carry cash in digital format. e.g. Paytm, Freecharge, etc.
• Micro ATM: It is a device that is used by a Business Correspondents (BC) or local traders to deliver basic banking services to customers, like, deposit, withdrawal, fund transfer, and balance enquiry.

Issue Areas and Hurdles:
• Cash is predominant in India’s monetary ecosystem with estimates of cash transactions varying from 68% to 90%.

• >$2 trillion economy has high cash-to-GDP ratio of 12% vis-à-vis 3.9% in Brazil and 9% in China.

• ATM use is mainly for cash withdrawals and not for online transactions.

• Consumers are not ready to give up cash just yet;
– Digital transactions have explicit overhead costs like, merchant cost, transaction cost, and transaction time etc.
– Presence of a dominant informal sector.
– Reliance on cash is inevitable for economic activities to remain outside the tax net.

• Costs associated with cash are often not internalized when comparing cash to digital transactions.
• India had a low tele-density of 83%, with Bihar, Assam, Madhya Pradesh and Uttar Pradesh with tele-density of less than 70% which leaves out a major part of population.
• Low broad-band coverage with out of 342.65 million Internet connections by the end of March 2016, only 20.44 million were wired connections.
• Other issues like- lack of availability of reliable connectivity, issue of cyber-security, issue related to Adhaar and privacy.
• In cashless all transactions are tracked and documented; hence fears regarding the privacy of economic transactions.
• Rural areas are home to more than 65% of the population which will constitute almost half of all Internet users by 2020 and associated challenge of lack of digital literacy in these areas.

Recommendations:
• There’s a need of wholesome digital ecosystem which needs to be accelerated by public investment in digital infrastructure, public-private-personal partnership, complementary skilling and development of back-end infrastructure for high-volume, low-value transactions.
• Blockchain technology can be used to make all government contracts and transactions transparent and cashless.
• Behavioral shift to digital finance is needed which requires gradual improvements in financial literacy and formalization of the economy rather than coercion.

Way-Forward

• Digitalization has the potential to revolutionize India’s socio-economic landscape.

• Most developed economies transitioned to a cashless economy due to market-driven consequences. The Indian government, on the other hand, has taken an active part in incentivizing citizens to shift towards digital finance and providing the customers with choices among several digital financial instruments in the market.

Conclusion:
• Cashless economy is a misnomer because very few economies are ‘cashless’; certainly not the most developed economies. For example, the proportion of cash is quite high across countries- Germany 80 %, Australia 65%, France 55%, USA 46%, etc.
• “Digital transactions are a parallel mechanism, not a substitute, for cash transactions, and a cashless economy is actually a less-cash economy, as no economy can be fully cashless.”

—Finance Minister.