Far removed from the concerns of fake currency, terrorist funding and even a crackdown on the black economy, the dominant narrative fuelling the demonetisation drive now is one of making India a cashless economy. But whether it is the physical infrastructure or the legal framework to support a cashless economy, India is woefully lacking on several key parameters. For instance, according to the Reserve Bank of India, only 38 per cent of all bank branches of scheduled commercial banks (SCBs) are in rural areas. As such, as of July, four out of five villages and one in three semi-rural areas did not have a bank. Similarly, there are reportedly just 120,000 banking correspondents for the whole country, including over 593,000 villages. This means that rural and semi-rural population of over 600 million doesn’t have easy bank access. There are approximately 650 million bank accounts, but many people own multiple accounts and as such around 300 million adults don’t possess bank accounts. Further, Aadhaar claims to cover around 94 per cent of adults, which means about 60 million adults don’t possess the minimal documents necessary to open a bank account. It gets worse. Power shortages often make it impossible for rural bank branches to conduct any operation. Poor internet coverage makes it hard to connect to central servers to retrieve and reconcile data, making it impossible to run automated teller machines (ATMs), or to check the validity of credit card or mobile wallet transactions.
Prime Minister Narendra Modi has been urging people to look at their mobile phones for banking services. But, rural teledensity is only about 51 per cent, indicating that many rural folks don’t have phones at all. Moreover, reportedly, of the 900 mobile handsets in India, up to 650 million are feature phones and only about 250 million are smartphones, which are required for mobile transactions. Rural smartphone penetration is very low, further limiting the scope for UPI or mobile wallets. There are about 350 million internet connections and here, too, there is an urban bias. There are only 1.4 million point-of-sale (PoS) machines in India and the locations are again heavily skewed towards the urban. At 693 machines/million, India has one of the lowest PoS to population ratios in the world. China has over 4,000 machines/million while Brazil has 33,000 machines/million. Mobile wallets such as Paytm charge high commissions of two per cent per transaction. This is prohibitively expensive for small businesses working on minimal margins and volumes. Compounding these gaps in physical infrastructure, India does not have a data security law. There have been multiple hacks of data and identity theft in the past few months to underscore this glaring loophole. Nor does India have a data privacy law. Hence, data harvested from transactions can be sold by merchants and service providers.
To be sure, the government is, almost as an afterthought, trying to fix some of these gaps. For instance, it is actively pushing telecom companies to support the roll-out of unstructured supplementary service data (USSD), an inexpensive technology that will allow even feature phones with no internet connection to conduct basic banking functions such as small fund transfers. Similarly, the government has cut excise duties on PoS machines to make them more affordable. There’s even been the formation of a Chief Ministers' Council to push for the adoption of cashless transactions. But, all these measures beg the question: Shouldn’t the government have first completed the necessary groundwork before it took the drastic step to demonetise and ask people to go cashless? The truth is, it will take substantial time and large investments before people, especially in rural and semi-rural areas, can reliably shift into a cashless mode.
