There is No Magical On-Off Switch That Will Allow India to Transform Into a Cashless Economy

India falls well short of the pre-requisites needed to become a digital economy.


Is demonetisation the solution to the problem of black economy? Credit: Venu Gopal/Flickr (CC BY-NC-ND 2.0)

The demonetisation step of the Modi government, for the most part, appears to be hugely problematic. Several expert commentators – including Ajay Shah, Prabhat Patnaik, Swaminathan Aiyer, Manmohan Singh and several others – have pointed out that given the high dependence on cash transactions in the Indian economy, the resulting liquidity crunch, the diminished purchasing power and the reduced ability to transact is likely to badly hurt the macroeconomy and the damage to the informal sector – especially to small firms and retailers – is likely to be severe and permanent. Also, being saddled with cash and unable to invest due to a lack of economic activity, the banking sector may face a crisis. Ultimately, the poor and the underprivileged will likely be the worst hit – as they usually are.

Given that 86% of the currency was wiped out overnight, it seems unlikely that the RBI can systematically pump money into the economy soon enough to mitigate the problem. We will have to wait and see how the events will unfold and how soon the economy can recover, but it will be naive to assume that the demonetisation step will eradicate the deep rooted corruption and the black money problem forever.

Given the likely negative impact, demonetisation is perhaps not even in the feasible space of solutions as far as combating black money is concerned, so a cost-benefit analysis is somewhat infructuous.

Towards a cashless economy?

The issue of black money – the money on which due tax has not been paid – is undoubtedly a huge problem. Not only are the estimates scary, the overall moral degradation and cynicism that comes with financial corruption also has damaging implications.

So, if not demonetisation, what may be the solution? The erstwhile governor of the RBI has suggested stricter tax administrationwhereas several voices in the government (for example, see here, here and here) and some others are clamouring for a cashless economy.

Perhaps they all mean the same thing, because what else but electronic monitoring and real-time auditing can bring in the necessary efficiency in tax administration? The anonymity of cash makes it convenient to hide transactions from the tax authorities, and, given the widespread corruption in the country, no manual audit can possibly be sufficient. The complaints can always be suppressed without tamper-proof records and the powerful can always favour the other powerful. Going cashless can definitely widen the tax base and contain the parallel economy; it can also encourage conversion of savings into consumption or investments by reducing idle assets, giving an overall boost to the economy.

But can we really go the Swedish way? Is it even desirable? The issue is far from resolved (for example, see here and here).

Are we ready?

About 68% of transactions in India are cash-based. Hence, despite some progress, and the enormous possibilities that the penetration of mobile network in rural India offers, we may still be far from ready. In fact, India falls well short of the pre-requisites specified in a 2013 report of MasterCard and ranks pretty low in their readiness score.

Also, apart from the consideration that the digital infrastructure is inadequate, even the desirability of a cashless economy in rural India, from a socio-economic point of view, has to be carefully examined. Although it is undeniable that the big ticket transactions of the formal sectors, the election spending of political parties, real estate etc. must come under the ambit of electronic auditing to the extent possible and also perhaps data mining to detect anomalies and irregularities in patterns of spending, one has to be extremely careful about the informal sector and the rural economy.

While most of the latter are outside the tax net, the majority of the transactions here are legitimate and honest, and payments are usually made against genuine goods or services. Bringing them into the formal sector should be done slowly and with utmost care and planning so as not to cause exclusions and distress. Running part of the economy cashless and part of it cash based, without furthering segregation and inequality, will require considerable tact in public policy design and execution, and adequate time and planning have to be given for the complex process of behavioural adaptation. If the Aadhaar experience is anything to go by, extreme care has to be exercised in order to avoid large-scale exclusions due to a disruptive introduction of technology. The potential of a cashless economy to cause havoc among the poor, the old and the infirm and the underprivileged, is enormous.

Privacy and security

The potential loss of privacy is an obvious concern that comes with a cashless economy. Possibilities of personal surveillance and electronic snooping as well as profiling without consent have been pointed out by many (for example, see here and here). A cashless society can potentially give the government of the day unprecedented access to information and power over the citizens and would require strong technical and legal frameworks to protect against misuse of power. The problem is compounded by the fact that data protection laws and public policies often lag way behind technology anywhere in the world (see, for example, here, here and here). In India, privacy is not a major concern and there is a lack of privacy or data protection laws.

The Attorney General of India has even claimed before the Supreme Court that Indian citizens have no constitutional right to privacy. Given the situation, the spectre of a cashless economy is scary indeed. Most of us do need the comfort of anonymity that cash provides, even while carrying out legitimate and harmless businesses. It will require a fair amount of informed debate before the privacy rights of citizens can be properly worked out, and it will definitely be premature to consider going cashless before that can happen. The government needs to clearly spell out the technical standards and the legal measures required to ensure the protection of privacy of its citizens, even from itself. The possibility of electronic mass surveillance on all monetary transactions does not augur well for civil liberty and democracy.

Security is yet another poorly understood issue. For example, cashless transactions presuppose that users have a working knowledge of public key certificate (among several other things), a crucial component for protecting passwords and credentials from getting compromised through man-in-the-middle attacks, but this is not usually true. Given this unfortunate situation, they may easily lose control of their bank accounts or electronic wallets in case of determined cyber attacks. Clearly, the government has to worry about user education and familiarisation in a big way and needs to work out the public policies and legal frameworks that may have to be invoked to give quick comfort and grievance redressal to its citizens who may lose their hard earned money because of ordinary ignorance. This is obviously not a mean task given the complex demography, and the problem is bound to get compounded as we move further towards cashless. Fiercely protecting our cash is a skill that we learn from our early childhood and is one that suits us naturally, and the skill may have to be completely re-learnt if and when we go cashless – which is not comforting. Besides, the government also has to define security standards for the back end infrastructure and make it as transparent to its citizens as possible. It also has to explain to its citizens why it expects their banks and wallets to be safe. So far it has failed to do so and we remain unaware of the data protection standards followed by the retail banks, Paytm or Airtel money.

Citizen’s rights

Most fundamentally, we need to know our rights as citizens. The government has reneged on the solemn averment of “I promise to pay the bearer a sum of…” written in bold on the cash that we carried. It was the understanding of most of us from childhood that the statement was a legal contract between us and the government, and we implicitly assumed that there was no last date of use. So, if some of us return from abroad or wake up from amnesia in 2017, we may suddenly find that we misunderstood the statement completely and we are holding on to some useless pieces of paper.

What will be the corresponding promise for the digital money in our accounts or electronic wallets? Can they also disappear with such impunity? 

Also, we need to consider what will happen if we have money in our banks and the will of our heart to procure some goods or services, but fail to do so because of technology failure. Will such transactions be denied to the poor or the elderly even in an emergency? If not, then how will such transactions be recorded? What will happen if there is a prolonged service disruption, perhaps due to a disaster? Will it result in us returning to primitive forms of bartering?

Can we be denied cashless facilities like wallets or credit cards? Can our transactions be censored? In the absence of any privacy law, there is no transparency regarding the kind of data mining or profiling that is carried out, for example by banks and credit card providers, on our transaction data. In fact, an article in the Financial Times proclaims MasterCard and Visa’s business model as a well-protected oligopoly. This is problematic, because if some such entity suddenly decides that some of us do not deserve a facility or are not credit worthy, we will definitely need a quick and efficient grievance redressal mechanism.

All of the above can potentially increase the inequality to dangerous levels if not done with a great deal of thoughtfulness and care. We definitely cannot afford to be flippant about migration to a cashless economy.

Subhashis Banerjee is a professor in the department of Computer Science at IIT Delhi.