India’s march towards Cashless Economy – challenges and prospects.

India is an ardent effort to move towards a cashless transaction economy by minimising the use of physical cash. The leading advantage of building a cashless economy is elimination of black money. Digitalisation of transactions is the best way to move towards cashless economy. Such a cashless economy is realisable by promoting electronic money instruments, developing financial infrastructure and spreading digital transaction habits among people. RBI’s Payment and Settlement Vision document 2018 gives objectives and guidelines towards cashless economy.

Challenges and prospects for cashless transaction economy

Government’s demonetisation drive is also supposed to benefit cashless economy. Still there are several constraints as well as prospects in the journey towards cashless economy.

Challenges

  • Currency dominated economy: High level of cash circulation in India. Cash in circulation amounts to around 13% of India’s GDP.
  • Transactions are mainly in cash: Nearly 95% of transactions takes place in cash. Large size of informal/unorganised sector entities and workers prefer cash based transactions. They don’t have required digital and fintech literacy.
  • ATM use is mainly for cash withdrawals and not for settling online transactions: There are large number of ATM cards including around 21 crore Rupaya cards. But nearly 92% of ATM cards are used for cash withdrawals. Only low level of digital payment using ATM cards. Multiple holding of cards in urban and semi-urban areas show low rural penetration.  
  • Limited availability of Point of Sale terminals and poor transaction culture in POS: According to RBI, there are 1.44 million POS terminals installed by various banks across locations at the end of July 2016. But most of them remains in urban/ semi-urban areas.
  • Mobile internet penetration remains weak in rural India: For settling transactions digitally, internet connection is needed. Bu in India, there is poor connectivity in rural areas. In addition to this, a lower literacy level in poor and rural parts of the country, make it problematic to push the use of plastic money on a wider scale.

Prospects

  • The JAM infrastructure can encourage digital transaction culture: The JAM infrastructure is spreading to reach each remote corner of the country as well as to every citizen. Almost 24 JDY Accounts, 124 Aadhar identity cards and nearly 90 crore mobile phones. Similarly, 33 million internet users are in India. This means that the JAM infrastructure can be used to promote cashless transactions.
  • A large number of government transfers (DBT) are made through JAM mode. This will help people to get digital transaction awareness.
  • The growth in volume and value of transactions using prepaid payment instruments (PPIs) issued by banks and authorised non-bank entities has also been significant.
  • NPCI promoted Aadhaar enabled Payment System, IMPS etc and they have registered big turnover in transactions. Newly launched UPI (Unified Payment Interface) is expected to give a big boost to cashless transactions.
  • Number of credit and debit cards are increased to 25.4 million and 691.1 million, respectively. The demonitisation drive may encourage people to learn and settle transaction using online.
  • RTGS and NEFT volumes increased almost threefold between 2013 and 2016 reflecting greater adoption of the system by all segments of users.
  • As more people start using RuPay debit cards and Aadhaar for digital payments, it will facilitate a less cash economy.
  • With increasing mobile banking services, growth in e-commerce and use of mobile payment applications, the use of cash will decrease.

The RBI has made several efforts to promote digital settlements. Most important of them are launch of a regulatory set up for Prepaid Instruments (PPIs). Similarly, encouragement to mobile banking and internet banking will help to reduce the use of physical cash.