In this article, Bappaditya Mukhopadhyay, Professor of Economics and Finance at the Great Lakes Institute of Management, contends that switching from a predominantly cash-based to cashless economy needs a positive, exogenous shock and the recent currency ban could be the perfect opportunity for that. To give India’s cashless economy the push it needs, the government could allow mobile and other digital payment platforms to accept deposits in demonetised notes.
uncertainty over the recent demonetisation of higher-value currency notes looms
large, one is left wondering whether we are missing the chance to give the
cashless payment system the thrust it deserves. By now there are two prominent
strands of public discourse. One, what will be the effect of the move on black
money and corruption in the short- and long-run; and two, could it have been
managed better? What could be done now?
transactions and corruption are negatively correlated
While I will not delve directly into what black
money is, how it is generated or how can it be curbed, I will start with the
premise that cashless transactions and corruption are negatively correlated.
The evidence is there. Schneider (2011
the size of the shadow economy in Europe and established that it has a strong
negative correlation with the size of cashless transactions. More recently, Bhattacharya
and Singh (2015)
use a panel of 54 countries
over the period 2005-2013 and find a strong causality between high-value
currency notes and corruption. This is why I think the current exercise must
fully exploit the scope to go cashless.
is a predominantly cash-based economy
Various estimates have put the share of cashless
transactions in all monetary transactions at less than 5%, in terms of volume (Internet
And Mobile Association of India, 2013
). As I
have argued in an earlier
from a predominantly cash to cashless economy would require developing a
network of a critical mass of entities that deal in cashless transactions.
Simply put, individuals will find it more attractive to switch to cashless
instruments if more sellers accept such payments. Creating this critical
network often needs a positive, exogenous shock; this is the perfect
opportunity to do that. Many citizens on both sides of the market are realising
the usefulness of cashless payments. Such transactions have gone up manifold in
the last few days.1 However, some proactive steps by the government could give the network the push
Mobile payments have primarily driven India’s cashless economy
India’s growth in cashless
payments has been primarily driven by mobile payments. During the period April
2011-June 2016, mobile
transactions went up by almost 60 times and volume of transactions by almost
The share of mobile transactions in all cashless
transactions grew from 2% to 19% (adjusting for WPI (Wholesale Price Inflation),
the increase was from 1% to 60%). The numbers clearly state that there is a
general increase in awareness and usage of mobile payments. Hence, during the
current crisis, the government’s decision to
keep the ‘M’ out of the JAM (Jan Dhan,
, and Mobile)3
is somewhat baffling.
What could be done differently in the demonetisation?
Apart from banks that are currently
authorised to accept deposits, exchange currency, and process withdrawals, the
government could allow mobile and other digital payment platforms to accept deposits
in demonetised notes. This could have been accompanied by stricter KYC (Know
Your Customer) norms and lower caps on deposits vis-à-vis banks. Through KYC
documents, ‘mobile wallets’ could be traced to unique identities. Allowing
mobile payments to be a part of the system would be a win-win situation for
all. This, in one stroke, would solve two major problems. One, there would be
more counters to accept deposits that instantaneously become part of the
payment system. Surely, this would ease the pressure on banks. Two, the need to
withdraw cash would reduce significantly, removing the pressure on ATMs. To
make the system work efficiently, a drive to encourage more and more
individuals to sign up for mobile accounts could be undertaken. The primary
need for cash for most individuals is to make small payments for daily
consumption needs. With enough members on both sides of the market, the network
could grow tremendously. The biggest gain from this would be a significant
cashless society in the future, which would help check corruption
Of course, whether the mobile and
other payment entities are prepared for this, is a valid concern. But again
this is because we have always thought - and are still continuing to think - about
how to solve the cash crunch problem and not the payments crunch problem. Given
that India has had some experience and success experimenting with micro-ATMs, graduating
to accepting deposits through retail outlets is a problem far less challenging
than the one we are currently facing.
- Paytm claims, “Over 850,000 merchants & 30mn users have used our services in last 3 days to purchase their daily needs, including groceries, household stuff, transport, petrol among others.”
- See ‘Reserve Bank of India (RBI) Database On Indian Economy’: http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home.
- JAM is an abbreviation for Jan Dhan, Aadhaar, and Mobile. Pradhan Mantri Jan dhan Yojana (PMJDY) is the Indian government’s flagship financial inclusion scheme. It envisages universal access to banking facilities with at least one basic banking account for every household; financial literacy, access to credit insurance and pension facility. Aadhaar or Unique Identification number (UID) is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity – 10 fingerprints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.
K and S Singh (2015), ‘Does
easy availability of cash effect corruption? Evidence from panel of countries’,
Munich Personal RePEc Archive (MPRA) paper number 65934, IIML Working Paper
- Mukhopadhyay, B (2015), ‘Cash
to cashless’, Ideas for India, 30 November 2015.
Council of India (2013), ‘Road to Less Cash’,
Internet And Mobile Association of India (IAMAI).
- Schneider, F (2011), ‘The
Shadow Economy in Europe, 2011’, A.T. Kearney, Inc.
- Schneider, F (2013), ‘The
Shadow Economy in Europe, 2013’, A.T. Kearney, Inc.