DEMONETISATION EXERCISE: THE DREAM OF A CASHLESS INDIA

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In the evening of November 8, 2016, Prime Minister of India Narendra Modi announced the sudden withdrawal and culling of high denomination banknotes of Rs. 500 and Rs. 1000 and replaced the same with the new Rs. 500 and Rs. 2000 banknotes. The move initially caused some hardships among the people, but it is expected to boost the country’s economy in the long run, by shutting out the illegal parallel economy and encouraging digital transaction through- USSD, UPI, E- wallets, BHIM in particular and AEPS.

Demonetisation means stripping off a particular currency as the status of legal tender and ceases to exist afterwards. This process is considered a financial measure in any country. It is generally required to strengthen the economy from social evils.

Prior to the announcement, the central government had taken some initial measures, in order to reduce the burden of cash crunch to some extent. Firstly, the government had urged people to create bank accounts under Jan Dhan Yojana. They were asked to deposit all the money in their Jan Dhan accounts and do their future transaction through banking methods only.

And secondly, it enforced a tax declaration scheme, where the government could keep a record and obtain information about people having a large amount of undeclared money. It was launched in April 2016 and the last date for the people to declare their source of income was in October 2016.

The depletion in cash currency due to the ongoing demonetisation exercise has pushed digital and e-transactions to the forefront. Many people are now adopting the new digital mediums for smart and safe payment such as e-banking, e-wallets, cheques, credit and debit cards and so on, which are now becoming prevalent.

A cashless economy is highly beneficial for the economy of a country in the long run. In the development perspective, the biggest advantage of going cashless is that it helps to curb corruption and red-tape and stem the flow of black money, thereby resulting in a positive increase in the economic growth of the country. Corruption and terrorism are two anti-social elements, that hurts the Indian economy and the government is going all out to stifle the illegal business of the corrupt and the terrorists.

As mentioned earlier, the Narendra Modi-led NDA government had invalidated the Rs. 500 and Rs. 1000 banknotes in the beginning of November last year. A new series, known as the ‘Mahatma Gandhi New’ Bank Series had been introduced, with the coming of the brand new Rs. 500 and Rs. 2000 banknotes. It has also been widely speculated that the remaining smaller denomination banknotes from Rs. 10 to Rs. 100 would be replaced and re-introduced in the new bank series by the Reserve Bank of India (RBI).

In a 2015 report published by the World Bank and Moody’s, India is the fourth-largest user of cash in the world. Almost 90% of the population transacts daily by using cash-only related facilities. Hence, the rate of cash to the country’s Gross Domestic Product (GDP) is one of the highest in the world, accounting for around 13% of the total cash transactions. Cash is generally defined as any legal medium of exchange that is immediately negotiable and is free of restrictions. Hence, cash is still considered as the ‘king’ among the Indian manufacturers and consumers.

Reducing Indian economy’s dependence on cash is desirable for a variety of reasons. India has one of the highest cash to gross domestic product ratios in the word, and lubricating economic activity with paper has costs. According to a 2014 study by Tufts University, ‘The Cost Of Cash In India’, cash operations cost the Reserve Bank of India (RBI) and commercial banks about Rs. 21,000 crore annually. Also, a shift away from cash will make it more difficult for tax evaders to hide their income, a substantial benefit in a country that is fiscally constrained. (Referred from RBI’s website)

Card transactions before the demonetisation exercise accounted for just 5%. The reasons for many people adopting cash instead of cards are many. Firstly, India is a majority rural populated country. As most rural dwellers are illiterate and poor, they have no idea of cashless transactions, which is considered alien to them. So for them, cash is the most convenient and easy form of medium of exchange which is free from any forms of obstacles and hassles.

The rural people have very little banking habits, since most of them do not have their own bank accounts, though the scenario is slowly changing after demonetisation. Most farmers and producers are engaged in small business transactions, which can be easily handled by paper currency only. A cash transaction is immediate and does not involve any intermediary, and provides individuals and families with liquidity.

Another advantage of using cash by these people is that, it gets transacted manually and do not require any power, unlike in the case of credit and debit cards and e-wallets. Around the world, many cashless economies have low corruption and less tax-evading cases. The Scandinavian countries of Sweden, Norway and Finland are on their way to achieve a unique objective of embracing cashless transactions, without the use of paper currency by 2020. Almost every country is inching towards the virtual world of cashless economy, by making significant and efficient progress. India, right now, is catching up with this global mantra.

With the announcement of the withdrawal of the high denomination banknotes of Rs. 500 and Rs. 1000 on November 8, 2016 and the subsequent introduction of the new Rs. 500 and Rs. 2000 notes, the Indian economy has now started to move towards a less cash-based economy. Over the next few months, the problems of people not getting money from the ATMs and facing difficulties in exchanging the old notes for the new notes, threatened to prove a dampener for the mammoth exercise.

On December 31, 2016, the day when people had the last chance to return back the invalidated notes to the banks and post offices, about Rs. 13.4 lakh crore had returned back from the banking system. Many tax evaders, who were forced to declare their assets were the biggest beneficiaries. Those who were caught stealthily hoarding both old and new banknotes faced wrath and stern action from the Income Tax officials.

Many renowned economists supported demonetisation by implying that a limited devaluation would help the business class as well as the earning class. However, a very steep devaluation would harm the latter since they would be hit by high inflation if the fall in the rupee was too steep. Already in a world of economic and political instability, the exercise was billed as the world’s largest and the boldest move, any country has taken to tackle black money issues.

India has done the demonetisation exercise earlier back in 1976, under Morarji Desai’s Janata Party government. At that time, the high denomination banknotes of Rs. 1000, Rs. 5000 and Rs. 10,000 were ceased to be legal tender and in place, the government introduced only the new version of Rs. 1000 notes. While much of India is still debating the merits and demerits of demonetisation, currently Australia is planning to take the highest valued currency off circulation. Before that, the Latin economies of Bolivia and Venezuela had undertaken the similar exercise in December 2016.

Indians reliance on paper currency can be gauged from the following facts – the Indian economy is primarily cash driven and less than 5% of all payments happen electronically. This is largely due to the lack of access to the formal banking system for a large part of the population and as well as cash being the only means available for many. The country’s economy is dominated by the informal sector, which relies heavily on cash-based transactions. Even those who are aware and use electronic payments use cash, due to the safety and security of the medium.

A disproportionate number of the population is still outside the banking net and not in a position to reduce its dependence on cash. According to a 2015 report by PricewaterhouseCoopers, India’s unbanked population was at 233 million. Even for people with access to banking facilities, the scope of using a debit or credit card is limited because there are only about 1.46 million Points of Sales (PoS) which accept payments through cards. Majority of the people use their credit and debit cards mainly to withdraw cash from ATMs. (Referred from VISAKA website, Ministry of HRD, Govt. of India)

 The main reason for the under-utilisation of the debit and credit cards is the lack of adequate and uniform infrastructure in installing PoS machines across the country. The majority of these machines are mainly concentrated in urban areas and larger towns. Also, there is a lack of penetration of PoS machines as well. Additionally, there are network connectivity issues, which discourage consumers from using PoS terminals to make digital payments. Even if the are machines are installed, low-value transactions are discouraged by the merchants and shopkeepers themselves.

The biggest advantage of going cashless is that it helps to curb corruption and red-tape and stem the flow of black money, thereby resulting in a positive increase in the economic growth of the country. In a developing country like India, where cash dominates everything in transacting major payments, there is a dearth of cashless transactions due to the wide technology gap in both rural and urban areas and also the lack of awareness among the people.

Secondly, there will be no manual accounting for managing the physical money, as electronic transactions are efficient and seamless. Also, the cost of minting coins and paper money, which is extremely expensive, due to a high surge in demand, will dramatically decrease with the increased use of cashless transactions.

Lastly, when people are encouraged to go cashless, there is lesser cash available in the market and there won’t be a means to invest in other activities to use the idle cash, for illegal activities, such as stashing money abroad and collecting hawalas or illegal sources of remittances.

WAYS OF CASHLESS TRANSACTIONS IN INDIA:-

There are a number of ways of transacting your payments in a cashless way. They have been mentioned below as follows:-

  • Aadhaar Enabled Payment System (AEPS) – It allows bank-to-bank transaction at PoS (MicroATM) with the help of a Banking Correspondent. Transactions can be done without remembering any PIN as well.
  • E-Wallets – These are mobile-first electronic pre-paid payment system, which can be used in purchasing items online or offline at a store with a smartphone. Money has to be added to the e-Wallet through your bank account or by debit/credit cards. These include popular e-wallet services such as PayTM, MobiKwik, BHIM App and so on.
  • Unified Payment Interface (UPI) – It is another fast way of sending money quickly and safely to the other concerned persons. For using UPI, you need to Download any bank’s app or 3rd party app, choose your unique ID (Mobile No.) as Virtual Payment Address (VPA) for sending the money, giving account details for first time and setting M-PIN for validating transactions.
  • Using Debit and Credit cards – Both debit and credit cards are an easy way to buy goods and services, withdraw cash from ATMs and transacting online payments. These cards are issued by banks. For getting a new card, you need to have a bank account of a particular bank.
  • Unstructured Supplementary Service Data (USSD) – This is for those people who do not own a smartphone is a useful facility for transacting money online in a quicker and seamless way. Firstly, you have to register your mobile number to a bank account, then dial *99# from the mobile phone, fill the first three letters of your bank, then enter the sender’s mobile number and the amount you wish to pay to that concerned person, along with the last four digits of your bank account number. The money is instantly sent in a faster and a seamless way to the other person.

Though India has a fiercely competitive telecommunications market, possesses a well-developed financial system, and is a widely acknowledged technology exporter, there is need for a significant upgrade of the banking system as well as in the telecom infrastructure that would provide the backbone for digital transactions. This can include such as simplifying and reduce taxes on consumer goods; cut regulations, widen the tax base and promoting incentives and financial benefits for the use of cashless transactions on a daily basis, all of which has been announced by the government recently.

However, the backbone of cashless transactions is electricity. In a country where cyber- attacks are frequent and many prominent Indian websites, including the government-run ones have been hacked day by day, it is necessary to safeguard and protect the consumer’s interests of using cards and e-wallets particularly.

In a recent case, around three million debit card details belonging to multiple Indian banks were hacked in October last year. The breach is said to have originated in the form of a malware introduced in systems of Hitachi Payment Services, which enabled fraudsters and hackers to access extremely sensitive data and information allowing them to steal funds.

Cyber-attacks have become increasingly difficult to curb nowadays due to technological advancements and the focus needs to also be on drafting a strong legislation to guarantee digital privacy and data security. The individuals have the democratic right and need to emphasis more control over their data and information.

Mobile banking, too, has seen an upward trend in the past few months. According to RBI, on a year-on-year basis, the amount transacted through mobile phones in December 2015 rose more than four-fold to Rs. 49,029 crore, from Rs. 11,323 crore a year before. (Referred from RBI website)

Many in the banking sector believe that mobile and even digital banking can bridge the gap between cash and cashless payments. With digital penetration increasing, the gap between cash and plastic will start decreasing soon. Also, the new payments and small finance banks can play a crucial role in decreasing the digital divide among the rural and urban masses.

The demonetisation exercise, touted as the world’s largest note ban exercise undertaken by any country, may have caused a few hardship among the population, but it is expected that the short-term pain will ease out gradually and help in achieving a double-digit economic growth in the coming days. Many youngsters and celebrities have now taken up the initiative to create awareness, educate and persuade the masses to start embracing cashless based transactions.

Nandan Nilekani, in an interview to the Livemint newspaper, termed this as “a defining point in India moving to cashless”. Shortage of cash has significantly increased the use of digital modes of payment, but the actual shift will only be visible after the cash crunch eases. It is possible that a section of people which has used electronic mode of payment for the first time due to the cash crunch will continue to transact through this medium, but there are still a number of hurdles in making India a cashless economy. Hopefully, the issues should be addressed and we should be soon in leaps and bounds. (Referred to a Livemint e-news article)

 The central government is burning the midnight oil to achieve the vision of a ‘Cashless India’ within few years. It has started working with various high level people and businessmen for suggestions and to reduce the dependence on cash. Opening bank accounts for the unbanked, especially the poor and the downtrodden under the and adoption of direct benefit transfer will help in increasing transparency and eliminating red tapism.

The RBI has also started issuing licences to open new-age small finance banks and payments banks which are expected to give a push to financial inclusion and bring innovative banking solutions. It will also aim to reduce the pressure on banks on dealing with deposits and transactions. Bharti Airtel has launched its first Payment Bank in India and other telecom players are planning to open their own banks soon.

The government needs to clearly spell out the technical standards and the regulatory measures required to ensure the protection of privacy of its citizens, even from itself. It has to ensure that no Hitachi-like fiascos should occur in the future and should cobble up the digital infrastructure as per the world standards to ensure a hassle-free cashless transaction for an individual. It is widely speculated that the existing Cyber Law policy would be amended by the central government to include these guidelines for improving security.

The scope of demonetisation is extremely bright. The Modi government will have to find ways to incentivise cashless transactions and discourage cash payments. Implementation of the goods and services tax, slated to be in place by July 1 this year, should encourage businesses to go cashless sooner immediately. It should also use this opportunity to revamp the tax administration, in order to attract business investments from outside the country and embracing cashless transactions as well.

The entire population has now accepted demonetisation as reiterated by the Prime Minister. Now, it is up to us whether we want to take the ‘Digital Revolution’ movement forward or not. The entire world is now watching the world’s largest democracy undergo a major change. Hence, the note ban exercise will definitely reduce its unusually high dependence on cash in the coming years and will bring in the much needed transparency and efficiency in the banking and economic system.

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