With the abundance of technological solutions available, it is prudent that in public interest, the government and RBI devise means to move to a less-cash economy
Ashish Das
In his budget speech, the finance minister said that by using the Aadhaar platform for direct transfer of subsidy into the bank accounts of beneficiaries, substantial economies in subsidy outgo can be achieved.
As the Aadhaar platform is now ready to support e-payments directly to the beneficiary accounts for several state-sponsored schemes, the government is proposing to increase Aadhaar enrolments. Such initiatives by the government to promote electronic payments will not only benefit the country to check leakages but also reduce cash in the economy by promoting e-payments.
What should be the country’s model to move away from cash and cheques? For devising an appropriate model, one should first understand the business model behind cash and cheques in the payment system of the economy.
Today, in a cash transaction at a bank, it apparently appears that receiving and giving cash (and, similarly, cheque) is free for a customer. However, the expenditures towards such transactions in a bank, to a great extent, are borne by the bank, which, in turn, passes them on to their customers in the form of lower returns on the deposits held by the bank (no interest offered on current accounts and about 4% rate of interest for savings accounts).
On the other hand, the Reserve Bank of India (RBI), which has the mandate of currency management, spends a considerable amount of its revenue in managing cash in the country (printing and distribution, storage, management, accounting, etc.).
The expenditure towards this cash management reduces the balances that are transferred by RBI to the government’s kitty. Similarly, the government also spends money (out of its revenue) to manage cash payments and receipts through its various departments, social programmes, etc.
The other significant drawbacks of cash:
(i) A cash economy reduces the reserve base of the banking system. Stock of currency held outside of the banking system constitutes a potential source of unproductive economic resource because these cash stores are not available for credit expansion—thereby impeding monetary growth.
(ii) Cash-use reduces accountability. A predominance of cash in retail sales leads to a deterioration in business accountability as transaction tracking is not possible; it enables tax leakage, diminishes financial inclusion and enables the existence of a parallel economy.
If we look deeply, the whole gambit of the expenditures involved in a cash-based economy is actually being funded by the citizens of India through the direct and the indirect taxes they pay to the government.
According to a recent report of the Nandan Nilekani task force, it is estimated that the cost of cash to an economy is 5-7% of gross domestic product (GDP), which, for India (at current level of GDP), amounts to more than Rs. 5 trillion
This can be reduced considerably through the use of existing electronic payments.
With the abundance of technological solutions available, it is prudent that in public interest, the government and RBI devise means to move to a less-cash economy.
This will not only be less expensive for the country but will also increase the traceability and accountability of payments, thereby, reducing the problems of bribery, corruption, and black money.
The government, thus, should not only promote systems and procedures that facilitate the migration away from cash, but also bring in explicit awareness among its people, highlighting the advantages to the country and its people, in such a migration. This migration will save considerable revenue of the government that can be channelized into other developmental programmes.
Although the government is trying to scale up Aadhaar-enabled e-payments in at least 50 selected districts within six months, one needs to ensure there are avenues available to such beneficiaries to use their bank balances digitally, thereby, minimizing the need of complete cash withdrawal (at bank branches or business correspondent outlets) once the benefits and subsidy money reaches the bank accounts.
Ashish Das is professor, IIT Bombay
