Cash-Mukt Bharat Still Faces Several Challenges

An unbanked population of an estimated 140 million, rising cyber security threats and a cash-dependent informal economy pose challenges to Narendra Modi’s Cashless India.

A RuPay sign is seen on the door of an ATM in Mumbai September 11, 2014. Credit: Reuters/Danish Siddiqui

A RuPay sign is seen on the door of an ATM in Mumbai September 11, 2014. Credit: Reuters/Danish Siddiqui

Between November 8 and November 27, 2016, the government changed its stated goal from that of removing ‘black money’ and ‘counterfeit currency’ to making India a cashless economy. But several challenges beset this dream, from a large unbanked population and rising cyber security issues to a drop in usage of digital transactions. The latest obstacle being the 21% drop in digital transactions since December 2016, according to RBI’s provisional reports.

India’s unbanked population

Recent data from the government and other sources seems to refute a 2015 claim that declared 99% of households to be in possession of bank accounts. In June 2016, for instance, a circular from the government stated that 40% of the Indians are “outside the ambit of formal banking institutions”. While the Pradhan Mantri Jan Dhan Yojana (PMJDY) has been credited with halving the number of the unbanked from 557 million in 2011 to 233 million in 2015, recent data – published in November 2016 – claims that over 165 million Indians still do not possess bank accounts.

Considering that an individual needs to have a bank account in order to use most cashless forms of transaction, the cashless economy demands financial inclusion. E-wallets, debit cards, credit cards or payment gateways such as the United Payment Interface and BHIM are the popular methods of payment, yet all of them are dependent on bank accounts, if not also smartphones and internet access. The government’s agenda of the monumental shift to digital payments from cash-based ones requires universal financial inclusion, which therefore becomes central to their objective.

According to the C. Rangarajan Committee report, financial inclusion is “the process of ensuring access to financial services” as also the “timely and adequate credit where needed by vulnerable groups… at an affordable cost.” Extending such a definition to digital financial inclusion, the Consultative Group to Assist the Poor states it as access to digital services and use of formal financial services by the excluded class. These services are to be promised at an affordable pricing, taking into consideration the customer’s needs.

But the problem that this ambitious venture faces, among others, is the problem posed by the cash-dependent informal economy. Consider this: 92% of the Indian economy is made up of informal workers, who contribute around 50% of the GDP; 80-90% of these workers are paid in cash which are often undeclared assets. These figures spell out the importance of cash in the Indian economy. Moreover, India is currently running on cash as high as 12-13% of GDP, which is the highest among the BRICS nations and is much higher than most developed nations and emerging economies around the world, like Indonesia (5%) and Brazil (3%).

Newer forms of payment have been recently developed in India which could greatly assist in this shift from a cash-dependent economy to a cashless economy. These have largely been technology-driven platforms, thanks to the Digital India initiative. One of the professed roles of Digital India programme is going ‘Faceless, Paperless, Cashless’.

However, the programme faces several problems. First, universal financial inclusion is yet to be achieved as understood by the fact that more than a 100 million Indians are unbanked; second, usage of the Jan Dhan bank accounts for increasing economic mobility is not taking place, which is understood through the high number of dormant accounts (61 million in May 2016) and finally, mediums like smartphones and internet connectivity are still unaffordable to a sizeable population, thus denying them access to digital forms of transaction. All these shortcomings assert that government’s goal of a cashless India faces multiple obstacles that need to be tackled individually.

Financial inclusion has been proven to be useful in achieving inclusive and sustainable growth. That is also why financial inclusion has moved up the global reform agenda within circles of policy makers, market regulators, researchers, market practitioners and banks. But financial inclusion needs to be supplemented by the utilisation of dormant accounts by the account holders, instead of just forwarding financial inclusion that only increases those accounts sans any concrete results. In South Africa, for instance, in a span of four years, six million bank accounts was opened, but around 3.5 million of them were dormant.

In India’s case, a World Bank report from 2014 claimed that 40% of Indian accounts were dormant. Similarly, the PMJDY was inaugurated as a part of Prime Minister Narendra Modi’s plan for financial inclusion. Under the plan, anyone could open an account without the need for putting any money in it, but there was a study conducted which claimed that 28% of bank accounts under the PMJDY were dormant.  More recently, finance minister Arun Jaitley said that 29% of the savings accounts in public and private banks were inoperative or dormant.

To tackle the problem of financial inclusion – or the lack of it – one needs to understand the basis of financial exclusion. The causes of such an exclusion can be classified into: geographical access, wherein banks are far from the excluded; access exclusion, restricted access due to bank’s risk assessment process; condition exclusion, the conditions of the service failing to meet the needs; price exclusion, charges associated with the services are not affordable; marketing exclusion, strategic exclusion of certain markets; and self-exclusion, wherein some decide to not approach banks because of ideas of being rejected.

There are both supply-side and demand-side barriers to financial inclusion. The most common supply-side barriers are non-availability of suitable products, physical barriers and non-eligibility on account of documentation issues. Demand side barriers are financial literacy and financial capability. Government paperwork, legal hurdles, travel distance and market failures are key barriers. But there is the recognition that most of these barriers can be overcome through the implementation of better policies.

Benefits of a cashless economy

In a cashless society, consumers can make their payments on the internet, at unmanned vending machine, manned POS (Point of Sale)-using mobile devices, smart cards and other cards like debit and credit cards. Innovations in technology have greatly assisted financial inclusion in Sub-Saharan Africa and South Africa. With innovations like mobile payment, mobile banking and borrower identification using biometric data, providing access to financial services has become cheaper and more secure. According to some studies, if the regulators allow competing financial service providers and consumers to take advantage of technology, the power of this new technology can be harnessed for the purpose of greater financial inclusion.

Studies have shown that with digital transactions, transaction costs will reduce since the money spent in transit will automatically become negligible. Studies have also shown that digital transactions help reduce the burden and risk of carrying excess cash.

Transparency in transactions reduces the black money in circulation. Moreover, digital transactions remove the possibility of physical money being stolen and help the government be aware of people who come under different categories of income tax.

Challenges in India for a cashless economy

Recent data reveal that since demonetisation, the usage of digital transactions increased for a month, but dropped in January by 10% even though the economy has not been fully remonetised. Only 30% of the population is connected to the internet and the system often faces outages. According to a senior National Payments Corporation of India official, only 25 million of the total 100 million who became users of digital transactions stayed users.

survey conducted by Bill and Melinda Gates Foundation in 2014 found that only 6% of Indians were aware of mobile money existing and only 0.3% of people responded by saying that they have used it. Gender too acts as an important category in the case of mobile phone penetration. The same survey found that though mobile penetration in India is high, women are less than half as likely to own a phone. Sixty-eight percent of men and 32% of women nationally owned phones. In some states like Haryana and Uttar Pradesh, men are three times as likely to own a phone as opposed to women. Altogether, it was concluded that mobile money awareness was the highest among urban men. Similarly with use of bank accounts, urban males actively use the accounts more than urban females. Rural women are least likely to use their accounts. These urban-rural and male-female disparities need to be reduced in order to make this a successful programme.

One interesting and positive turn is that migration has assisted women in having bank accounts, since the male migrant worker usually transfers the money to either his mother or wife.

Smartphones are still expensive for a large portion of the population like auto rickshaw drivers, mechanics and others working in the informal sector. Till December 2016, 350 million smartphones have been bought in India. Internet data is still expensive, despite the costs coming down due to market competition. Because of the few number of people using digital transactions, the need for shifting to cashless methods is not felt by the informal sector or even the formal sector.

The government should also focus on making the internet more secure so that digital transactions are safer. Reports suggest that 2017 will see an increase in internet fraud which needs to be curtailed through different measures. The last year saw 3.2 million debit cards getting hacked due to outdated systems.

For a smooth transition to a cashless economy, the government will need to ensure that the largely cash-dependent informal sector in India is assimilated into the system. The use of cash is still high in India despite the general increase in digital transactions and financial inclusion. Through the use of mobile phones, last-mile banking problems are expected to disappear. Affordability of smartphones and internet connectivity to informal labourers are still in question. Without informal labourers having access to suitable financial products and awareness on them, digital financial inclusion and a cashless India will remain a dream. Though ‘Digital India’ and a cashless India could help push the Indian economy to become more transparent, the infrastructure needs to be in place and institutions need to make the option of going cashless more economically viable to the average Indian. Considering that the per capita income of India in 2015-16 was merely Rs 94,178 and that over 90% of the total workforce depends on cash transactions, the task of removing barriers to digital financial inclusion cannot be undermined.