Banking

The Long, Winding Road India Must Traverse Before It Goes Cashless

India clearly lacks the adequate infrastructure required for becoming a cashless system. Among BRICS nations, in this regard, it is a laggard.

No end in sight. Credit: Reuters

No end in sight to India’s cash dependency. Credit: Reuters

One of the arguments in favour of demonetisation, that has been widely propagated by the government, is that it is a decisive move towards making India a cashless system. It has been argued that digital transactions are the future of India. It has been argued that electronic transactions can be tracked, and hence it is possible to monitor any shady transactions easily. However, the more basic question that needs to be answered is whether India’s economy and society are ready to become a cashless system, given our existing infrastructure. 

Infrastructure availability related to banking determines banking habits in any nation. For instance, the banking habits of an economy characterised by high financial inclusion and adequate access to ‘plastic money’ will be different when compared to another economy where these facilities are lacking.  

In this analysis, let’s take a look at how banking-related infrastructure has developed within India, other BRICS nations and Sweden. Sweden incidentally is about to become a cashless economy pretty soon, where cash transactions make up 2%of the value of all payments. Comparing and contrasting India with other BRICS nations with regards to banking habits and infrastructure is logically tenable since firstly these nations are in a comparable state of development and secondly these are some of the some of the biggest nations in their respective continents.

One of the basic criterion for making digital transactions a success is widespread Internet access. The two charts below show that Internet infrastructure in India is worse than any other BRICS nation and also in comparison to the world as a whole. Till 2015, only about one-fourth of Indian nationals had access to Internet facilities, while it is at more than half for other BRICS nations. Russia tops the group with about three-fourth of its citizens having access to the Internet; in Sweden almost 91 per cent of adults are Internet users.

A similar scenario emerges with respect to access to secure Internet servers. China and India have worst figures while the remaining BRICS nations are far ahead. Here, one finds that Sweden is way ahead as compared to India and other BRICS nations. How can we expect India to conduct digital transactions without the required security?

 

Financial inclusion is another crucial key for a system to become less dependent on cash. Till 2014, only about 53% of the adult population in India (more than 15 years of age) had an account in a financial institution. This is the lowest among the BRICS nations.

In Sweden, where cash transactions are minimal, every adult individual has an account in a financial institution. Financial inclusion allows socioeconomically weaker sections to get access to cheap financial services. Any government’s initiative towards to a cashless system, no matter how well intentioned it is, will not be successful without complete financial inclusion.    

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While government policy makers have been arguing for greater use of ‘plastic money’ as a step towards lesser reliance on cash, The charts and tables below show inadequate access to credit, debit and ATM cards in India. Till 2014, only 2% of adults had credit cards and not more than 22 per cent had debit cards; the scenario regarding ATM cards are no better. In all of these, India fares poorly as compared to other BRICS nations.  

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Table 1: Proportion of adults with credit cards, BRICS nations, 2011 and 2014, (in per cent)

Countries 2011 2014
Brazil 29 32
Russia 10 21
India 2 4
China 8 16
South Africa 8 14
Sweden 54 45

Source: World Bank database

Table 2: Proportion of adults with debit cards, BRICS nations, 2011 and 2014 (in per cent)

Countries 2011 2014
Brazil 41 59
Russia 37 44
India 8 22
China 41 49
South Africa 45 55
Sweden 96 98

Source: World Bank database

Lack of access to ‘plastic money’ is reflected in terms of deposits and withdrawals from banks. Automated teller machines were not the main modes of deposits for account holders in all the BRICs nations. In all these nations, bank tellers (employees) were the key persons through whom deposits were done. However, of all the BRICS nations, use of ATMs for deposits was lowest in India. Given low financial inclusion,

The chart below shows the meagre use of ATMs for depositing money in bank accounts in India. Almost 90% of deposits in India are done through bank tellers, which essentially implies that these transactions are not electronic.  

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The table below shows that for all other BRICS nations (barring India), the main mode of cash withdrawal in 2014 was through ATMs. However, in India not more than one-third of account holders withdraw their money through ATMs. While there has been an increase in the use of ATMs in India between 2011 and 2014, yet it is almost 18 percentage points behind as compared to China-its nearest competitor-and much lower when compared to other BRICS nations.  

Table 3: Main mode of withdrawal from banks, BRICS nations, 2011 and 2014 (proportion of account holders) (in %)

Countries ATM Bank agent Bank teller
2011 2014 2011 2014 2011 2014
Brazil 58 76 1 1 32 20
Russia 65 68 1 1 25 23
India 18 33 3 2 70 54
China 33 51 1 NA 63 44
South Africa 89 82 1 3 8 8

NA implies not available. Source: World Bank database

The analysis shows clearly that India lacks adequate infrastructure needed to become a cashless system. Financial inclusion and access to Internet services are the basic requirements for such a switch, in addition to attaining high human development indicators particularly education. In the absence of these basic pre-conditions, the dream of turning cashless, without hindering economic activities, will not be realised.