With the recent move to demonetize higher denomination currency, it is clear that the Government wants Indian economy to move towards a cashless economy.
The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.
However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that. So what are such distortions? Is it beneficial to move towards a cashless society? Is India prepared for a cashless society?
• Enhance the tax base, as most / all transactions in the economy could be traced by the government;
• Substantially constrain the parallel economy (black economy), particularly in illicit activities;
• Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment;
• Foster the adoption of new wireless / cashless technologies;
• Security of transactions as it is very easy to shut down a digital wallet remotely if it falls into the wrong hands;
• Your biometric ID is yours and yours alone, and therefore very hard to copy;
A cashless system could be convenient for users who like to combine multiple functions onto one handheld device:
– It eliminates the need to carry cash or plastic.
– Digital payments can be made with a tap or wave of a smartphone, depending on the technology used.
– It would make it easier to loan or borrow money – as with digital payments, lending and borrowing can be reduced to a tap or wave of a smartphone.
• The government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. It is one of the reasons of Greece crisis.
• Paper money costs you nothing to hold and carries no incremental risk (other than physical theft); converting it into bank deposits will cost you fees (and likely earn a negative interest) and expose you to a substantial loss if the bank goes under. After all, you are giving up currency directly backed by the central bank for currency backed by your local bank;
• This could have grave consequences for retirees, many of whom are incapable of transacting using plastic. Not to mention that they will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account;
• Ditto for poor people from the remote areas, many of whom don’t have access to the banking system; this will only make them more dependent, in fact exclusively dependent, on government handouts;
• Important to see if banks would actually like to deal with the administrative hassle of handling millions of very small cash transactions and related customer queries;
• If there is an event that disrupts electronic transactions (e.g. extensive power outage, cyberattack, cascading bank failures) people in that economy will not be able to transact and everything will grind to a halt;
• Of course enforcing a government mandate to ban cash transactions must carry penalties. This in turns means more regulations, disclosure requirements and compliance costs, potentially exorbitant fees and even jail time.
There is no doubt that there are huge merits in adopting a cashless economy over the conventional printed currency. But Government has to ensure that the marginalised groups do not further get alienated from the progress story of India. Moreover, India needs to build basic infrastructure required for the operation of a cashless economy (most basic of all – electricity). There is a long way to go to realise the dream of a cashless economy, but we have to start it from somewhere, so better start now.