 "Photo: Shutterstock")
Before demonetisation, the currency in circulation was Rs 17.54 lakh crore. With currencies worth Rs 14. 73 lakh crore demonetised, the currency in circulation fell to Rs 2.81 lakh crore immediately. On November 18, the government announced that with
Rs 4.18 lakh crore in circulation, it has already achieved 60 per cent of the liquidity it wanted to maintain in the market post demonetisation. It means the Union government wanted to reduce the currency in circulation from the pre-monetisation value of Rs 17.54 lakh crore to Rs 6.96 lakh crore. Assuming that the currencies in hoarding was Rs 8 lakh crore, the currencies in mainstream economy during pre-demonetisation era was to be Rs 9.54 lakh crore.
How does the government expect that people will adjust themselves to this 27.25 per cent reduction in the currency circulation in such a short span of time? The non-cash transactions in terms of value increased from 9.4 per cent in 2006-07 to 32 per cent in 2016-17. However, the lion’s share of non-cash transactions comes from business transactions, as only 3.6 per cent households in country had gone for electronic transactions as on February 2016.
With the demonetisation move, there has been a drastic improvement in electronic transactions. The daily demand of 3,500 HDFC PoS machines from shops after demonetisation is equal to about a monthly demand from shops pre-demonetisation. The number of Paytm transactions and its average value had grown 300 per cent and 200 per cent, respectively in the first week of post-demonetisation. All forms of electronic transactions that includes debit cards, credit cards, online money transfers and mobile wallets tripled after demonetisation. Although this clearly indicates that people are ready to adopt the electronic transactions for which the infrastructure is already there, the adoption of electronic transactions has been too slow to achieve the goal set by the government to promote cashless transactions.
Photo: Shutterstock
Also Read
At present, India has about 66.18 crore debit cards, which includes 25.45 crore RuPay cards. That means, 25.45 crore families of poor have access to one format of cashless transactions, provided the service providers are equipped themselves for cashless transactions.
In spite of 66.18 crore debit cards, why did cashless transactions not grow as fast as it should have been in India? Because there is no push-pull policy framework that forces people towards cashless transactions for larger non-recurrent spending and pull people towards cashless transactions for smaller recurrent spending. Essentially, the poor growth of cashless transactions may be attributed to three reasons. The first is the lack of universal availability of digital transactions for small and large transactions. The second is the substantial difference in the cost of services between establishments that accept electronic transactions and those that don’t. As reported in Business Standard’s “Going cashless comes at a cost” (November 21), the weekly expenditure on regular items would cost about Rs 3,629 and Rs 3,444 for Delhi and Mumbai, respectively when paid digitally. However, the weekly expenditure on the same would cost about Rs 2,070 and Rs 2,093 for Delhi and Mumbai, respectively when in cash. The third reason is that users of digital transactions have to pay switching charges on digital transactions. These hygiene factors have been stopping people using digital transactions, in addition to the business-as-usual attitude of consumers in using cash over digital transactions.
To bring a substantial progress towards cashless economy, the first policy instrument of command and control is that moderately high value non-recurrent transactions (say more than Rs 10,000) should be through cashless transactions. The second policy instrument of incentives is that the smaller cashless transactions that are recurrent and generally of lower value (beginning with ten rupee to a few thousand rupees) may be given small time-bound incentive (say two per cent each for the payers) with a cap of say Rs 50,000 per year per family, in addition to bearing the cost of switching charges. On November 23, 2016, the government announced that all switching charges of RuPay cards will be waived till December 31, 2016. The service providers of debit cards also agreed to waive switching charges till December 31, 2016. However, this will be a stop-gap arrangement as the revenue of the service providers of digital transactions depends to a large extent on switching charges of digital transactions and they may withdraw this concession sooner than later.
Both these instruments are aimed at removing cash in transactions that would bring much larger benefits to the economy. This benefit also includes the reduction in the cost of printing and replacing currencies and coins. I have estimated that the cost of replacing old currency and printing new currency between 2016-17 and 2021-22 would cost about
Rs 86,084 crore in the business as usual scenario. The cost of incentive up to two per cent to each family in addition bearing up to two per cent of the switching charges for small-time transactions with an upper limit of Rs 50,000 per year per family for
30 crore families in India would cost Rs 60,000 crore per year. Once cashless transactions pick up and reach a substantial level, the incentives may be reduced or stopped.
With the proliferation of digital transactions and the associated economies of scale and business opportunities in digital transactions, there is a fair possibility that switching charges will come down substantially. The Union government has shown its mettle in the Jan Dhan and Digital India programmes. The focus should shift towards encouraging cashless transactions with the framework of command and control and incentives on a war footing.
The author teaches at TAPMI, Manipal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
