Notes to remember

If even the United States has not yet given up on cash, should India?

December 30, 2016 12:07 am | Updated 01:49 am IST

EAT THE PEAS:  “The government’s drive seems to focus on virtually eliminating cash in a wide range of payment situations, even in small-value transactions.” Picture shows a part of the Dabri market, at Nasirpur Dwarka in New Delhi.  —  PHOTO: V.V. KRISHNAN

EAT THE PEAS: “The government’s drive seems to focus on virtually eliminating cash in a wide range of payment situations, even in small-value transactions.” Picture shows a part of the Dabri market, at Nasirpur Dwarka in New Delhi. — PHOTO: V.V. KRISHNAN

If three-quarters of the population in an advanced economy like the United States appear to either favour cash payments or a mix of both cash and non-cash payments while making purchases, how challenging will it be for a developing country like India to transition to a so-called cashless economy?

Cash use in the U.S.

A survey on online shopping and e-commerce conducted by the U.S.-based Pew Research Center revealed that nearly a fourth of Americans use cash for all or almost all of their purchases during a typical week, in an economy that is overwhelmingly dominated by non-cash payment options, unlike India. Less than a quarter of those surveyed go for non-cash or cashless purchases and more than half tended to use a mix of both cash and cashless payment modes, according to the survey findings released in December.

The Pew survey also found that 60 per cent Americans “try to make sure that they have at least some cash on hand, just in case they need it,” while another 39 per cent “don’t particularly worry about having cash on hand at all times”.

There are other interesting revelations in the survey that might hold lessons for India — (i) Income has a bearing on payment preferences: the more affluent folks tend to favour non-cash payments while the less affluent tend to use cash (those with annual household incomes of $75,000 and $30,000 respectively in this case); (ii) demographics too had a bearing on the situation: African-Americans tend to favour cash payments more, Latinos and whites less; (iii) age makes a difference: compared to older people, the young are less worried about not having cash on hand.

What this survey reveals is that cash has not vanished from most people’s lives in the U.S. despite non-cash options being widely available. Other reports too suggest that while the share of cash in total consumer transactions has declined in the U.S., it is nowhere near being written off as a significant option.

For instance, a report released in November by the Federal Reserve Bank of San Francisco makes four points: cash continues to be the most frequently used consumer payment instrument in retail transactions; it is widely used in a variety of circumstances; it dominates small-value transactions; and the average value of cash holdings has grown. The report, ‘The State of Cash: Preliminary Findings from the 2015 Diary of Consumer Payment Choice’ also does say that cash is facing competition from other payment instruments: “In 2015, 32 percent of consumer transactions were made with cash, compared with 40 percent in 2012”.

India’s rush for cashless

Compare this with the current rhetoric in India about going cashless: the government’s drive seems to focus on virtually eliminating cash in a wide range of payment situations, even in small-value transactions.

And also note this: currency in circulation has been steadily increasing in the U.S., and demand for higher denominations has grown since the 2008 financial crisis. “Despite innovations in smartphone technology and mobile payment apps, Fed data on the amount of currency in circulation suggest that demand for cash is strong,” the November report says.

The big picture, as outlined in the Finance Ministry’s Committee on Digital Payments’ medium-term recommendations (released in December), reveals that India’s cash to GDP ratio of 12.04 per cent is considerably higher than ‘comparable’ countries. Cash to GDP ratio of Brazil, for instance is 3.93 per cent, Mexico, 5.32 per cent and South Africa, 3.72 per cent.

The committee quotes estimates suggesting that the dependency on cash costs the country about Rs. 21,000 crore on account of various aspects of currency operations including cost of printing new currency, operating currency chests, maintaining supply to ATM networks, and interest. “Some estimates indicated that the net cost of cash (including cost of currency operations, as well as other costs borne by households, businesses and banks in handling cash) as 1.7 per cent of India’s real GDP in 2014-15,” its report said. These figures do not reflect other costs in relation to counterfeit currency and black money.

But at what pace and how far do we go the cashless way? The committee’s vision will involve the reduction of cash to GDP ratio to about 6 per cent in three years’ time, which means that the value and quantum of cash in circulation will have to be brought down significantly during this period. Correspondingly, the digital payments landscape should develop to the extent that “an ordinary Indian should have the choice to be able to safely, reliably and conveniently transact money digitally at a price which is affordable and at a place where needed”. It also means that financial inclusion should engulf almost the entire population.

This is quite an uphill climb. The report acknowledged that there was no reliable indicator of the share of digital transactions as a proportion of total transactions. Available data indicated that it could be about five per cent of total personal consumption or two per cent of total transactions. Some other estimates pegged the share of retail transactions as high as 22 per cent.

Some number crunching

Figures released by the Reserve Bank of India show that it took 16 years from 1978-79 for the value of notes and coins in circulation to increase from about Rs. 100 billion to Rs. 1,000 billion. It has accelerated thereafter: from Rs. 1,046 billion in 1994-95 to Rs. 5,042 billion in 2006-07, Rs. 10,663 billion in 2011-12 and Rs. 16,634 billion in 2015-16.

Notes of Rs. 500 and Rs. 1,000 denomination accounted for Rs. 14,179 billion of the Rs.16,634 billion of notes and coins in circulation in 2015-16. Post-demonetisation, it is this currency space that has shrunk to a fraction of its original size, making a difference, sometimes very huge, to the lives of ordinary Indians. It has severely restricted, and maybe eliminated, the option to transact in cash in many situations.

How will the cash option shape up in the future? Will it remain a meaningful option at all? The Committee on Digital Payments is clear about this — people should have the choice to decide whether they want to use cash or go digital while making transactions. “We do not know the future but it is not the intent of the Committee to replace all cash transactions with digital ones. It is for the people to have the incentives to decide whether it makes sense for them to transact in cash or in digital form. It is important for them to have this choice. This choice must be a real choice.”

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