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            In a bid to promote cashless transactions, the government on Friday said businesses with annual turnover of over Rs 50 crore can offer low-cost digital modes of payments and no charges or Merchant Discount Rate will be imposed on them or their customers. Presenting the Union Budget for 2019-20, Finance Minister Nirmala Sitharaman also said two per cent tax deducted at source will be levied on cash withdrawals exceeding Rs 1 crore in a year from a bank account to discourage the practice of making business payments in cash. The Finance Minister said the Reserve Bank of India and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment. Lately, digital transactions using mobile payment firms are on the rise. For instance, Unified Payments Interface transactions have grown to 754 million in June 2019. IMPS and NETC transactions stood at around 171 million and 26 million, respectively.


The Centre is making a big push for online and card-based transactions in the country to achieve its target of becoming a largely cashless economy


Cashless economy

It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.


Benefits of cashless economy:

  • Increased efficiency in welfare programmes as money is wired directly into the accounts of recipients.
  • Efficiency gains as transaction costs across the economy should also come down.
  • Reducing use of cash would also strangulate the grey economy, prevent money laundering and even increase tax compliance, which will ultimately benefit the customers at large.
  • Usage of cashless mechanisms would also ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them.


Benefits for individuals:

  • No need for queues outside ATMs.
  • No cashout during long holidays.
  • No waiting for a deposited cheque to be credited.
  • No risk of carrying currency notes in the wallet.


Why Shift towards a Cashless Economy?

  • India is one of the highest cash to gross domestic product ratios in the world, 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 Rs21,000 crore annually.
  • 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 constrai
  • Nandan Nilekani, termed demonetisation as “a defining point in India moving to cashless”


Factors that determine transition to a cashless economy

  • A meaningful transition will depend on a number of things such as awareness, technological developments and government intervention.
  • Mobile wallets have seen notable traction, and it is possible that a large number of Indians will move straight from cash to mobile wallets.
  • The availability and quality of telecom network will play an important role.
  • Banks and related service providers will have to constantly invest in technology in order to improve security and ease of transaction.
  • The government will have to find ways to incentivize cashless transactions and discourage cash payments.
  • Government should revamp the tax administration, as more than taxes, small businesses fear tax inspectors.
  • India’s current economic moment constitutes a crucial inflection point; if handled correctly, there is a real chance that the unbanked will adopt digital p
  • A sharp increase in the use of mobile phones with internet connectivity will help drive the move to digital payments.
  • Till the time the penetration for online payments doesn’t reach local stores, the transition will never be truly effective.
  • Financial security over the digital payment channels is imperative for pushing the cashless economy idea


Hurdles in making India a cashless economy

  • A large part of the population is still outside the banking net and not in a position to reduce its dependence on cash.
  • Even for people with access to banking, the ability to use their debit or credit card is limited.
  • It will not be easy for the informal sector to become cashless.
  • There is a general preference for cash transactions in India.
  • Merchants prefer not to keep records in order to avoid paying taxes and buyers find cash payments more convenient.
  • People face difficulties in making electronic payments even in metro cities because of poor network
  • Low literacy rates in rural areas along with lack of internet access or even basic utilities in many places


Government and RBI Efforts

  • Government on its part is working at various levels to reduce the dependence on cash.
  • Opening bank accounts for the unbanked under Pradhan Mantri Jan-Dhan Yojana.
  • Adoption of direct benefit transfer.
  • The Unified Payments Interface by National Payments Corporation of India makes digital transactions as simple as sending a text message.
  • From nothing to 754 million monthly transactions in less than three years, UPI has taken off.
  • Implementation of the goods and services tax, for example, should encourage businesses to go cashless.
  • The RBI and finance ministry have made Financial Literacy Centres (FLCs) a cornerstone of the PMJDY.
  • These centres provide tailored financial education programmes to introduce adults to banking products and setting financial goals.
  • Major social-media effort to promote cashless transactions, which include e-banking, debit and credit cards, card-swipe or point-of-sales (PoS) machines and digital wallets.
  • RBI has also issued 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.


Way Forward

  • Targeted financial education programmes can improve financial skills and credit management.
  • A nationwide financial literacy campaign accompanied by a medium-term strategy to improve access to, and awareness of, electronic payments.


India is ripe for a transition to digital payments. While a cashless economy is not here, the move towards a less-cash economy has begun. Recent expansion in digital wallet usage and the introduction of specialized payments banks are good moves in this direction. But, a lot needs to be done before cash is eased out of the Indian economy.


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