Five hurdles to PM Modi's push for cashless economy

Modi and his ministers have launched a major social-media effort to promote cashless transactions

On 27 November, 2016, during an election rally in Kushinagar, Uttar Pradesh, Prime Minister Narendra Modi appealed that all Indians get familiar and make other familiar with cashless transactions.

The same day, during his radio programme Mann Ki Baat (What’s on my mind), he said: “Learn how this digital economy works. Learn the different ways you can use your bank accounts and internet banking. Learn how to effectively use the apps of various banks on your phones. Learn how to run your business without cash. Learn about card payments and other electronic modes of payment. Look at the malls and see how they function. A cashless economy is secure, it is clean. You have a leadership role to play in taking India towards an increasingly digital economy.”

Modi and his cabinet ministers have now launched a major social-media effort to promote cashless transactions, which include e-banking (or banking over computers or mobile phones), debit and credit cards, card-swipe or “point-of-sales (PoS)” machines and digital wallets.

These are some of the tweets his cabinet ministers and their ministries issued in the four days after Modi’s first cashless-economy push:

India’s internet users surpass the US, but smartphone, internet penetration remain low

As many as 68% of transactions in India are done in cash, according to this analysis by Business Standard, while other estimates say 90% of all transactions are in cash. There are five hurdles to Modi’s ambition of converting India to a cashless economy:

1. 342 million internet users, 27% of Indians: Earlier this year, India surpassed the US to become the country with the second-largest number of Internet users, according to this June 2016 report by investment firm Kleiner Perkins Caufield & Byers. There are 342 million internet subscribers (an Internet “penetration rate” of 27%) in India, data from Telecom Regulatory Authority of India (TRAI) reveal.

The global median is 67%, IndiaSpend reported in March 2016. India lags most major economies and performs worse than Nigeria, Kenya, Ghana and Indonesia, among other countries, the data reveal.

Put another way, 73% of Indians, or 912 million, do not have Internet access.

Of those who use the Internet, no more than 13% live in rural India (or 108 million of 833 million who live in rural areas), which has been worst hit by the November 8, 2016, invalidation of Rs 500 and Rs 1,000 notes that made up 86% of notes in circulation.

In urban India, 58% of people access the Internet.

2. Smartphone usage rate among adults 17%: For a majority of banking applications, a smartphone is a prerequisite. India is Asia-Pacific’s fastest-growing smartphone market, but no more than 17% of Indian adults own a smartphone, according to this 2016 survey by Pew Research. Only 7% of adults in low-income families own a smartphone; the figure for wealthier families is 22%.

3. 1.02 billion mobile subscriptions, but only 15% have broadband internet: India had 1.02 billion wireless subscriptions, but after scrubbing the data of inactive and duplicate connections, India has 930 million (90%) active subscribers, according to this November 2016 TRAI report. Of these, 154 million subscribers (15%) have broadband connections (3G + 4G).

4. Average page load time on mobile 5.5 seconds, China 2.6 seconds: The average time to load a page on a mobile phone is 5.5 seconds in India, compared to 2.6 seconds in China, 4.5 in Sri Lanka, 4.9 in Bangladesh and 5.8 in Pakistan, according to the “State of the internet Q1 2016” report by Akamai Technologies, a global content delivery network services provider. Israel has the fastest load time at 1.3 seconds.

Mobile Internet speeds will make users less likely to use their phones for banking transactions, with Oracle Maxymiser, a website optimisation tool by Oracle, a US multinational, reporting a two-second threshold before users stop an online transaction–although 68% of respondents reported they would not wait six seconds for pages or images to load on a bank’s website or mobile site.

5. 856 PoS machines per million Indians: There were 1.46 million PoS machines in use in India–that is, 856 machines per million people–according to this August 2016 Reserve Bank of India report. In 2015, Brazil–with a population 84% lower than India–had nearly 39 times as many machines (32,995), according to this 2015 report from Ernst & Young, a consultancy. The PoS machine rate was 4,000 per million people in China and Russia.

More than 70% of the PoS terminals are installed in India’s 15 largest cities, which contribute to more than 75% of transactions, says the Ernst & Young report. This has not changed after #notebandi, as the scrapping of Rs 500 and Rs 1,000 notes is called colloquially.

Most requests for more PoS machines are still from “tier 1”, or metropolitan, cities, a banker with a leading private sector bank told the Indian Express on 29 November, 2016. “In tier 2 cities, customers are now slowly making the shift from using their debit cards to withdraw cash to using them for payments. The demand is progressing slowly,” he said.

As an incentive to banks and manufacturers of PoS terminals, the government has waived 12.5% excise duty and 4% special excise duty on these machines, as it hopes to install an additional 1 million PoS machines by March 2017.

(Saha is an MA Gender and Development student at Institute of Development Studies, University of Sussex.)