Burden of Cash on Indian Economy
Adhiraj Singh Shekhawat
Adhiraj Singh Shekhawat

Sep 23 2016

Burden of Cash on Indian Economy

Burden of Cash on Indian Economy

India is a cash intensive economy where retail payments are majorly driven by cash. This affinity for cash is becoming a big burden on the economy. Despite substantial increase in e-commerce activities and cashless payments in India, cash withdrawals from ATMs registered a growth rate of 55% which is more than the growth in POS transactions between 2012 and 2016i . As per the BIS Red Book, in 2015 the number of card transactions (including debit and credit cards at both ATM and POS) per inhabitant per year in India was 7.8ii , much lower in comparison to other big economies.

The traditional notion of ‘cash is free’ still prevails, which is far from the truth. As per RBI, as of 8th July 2016, more than 95% of the total currency in circulation i.e. INR 16.8 lakh crores is with the publiciii. With this huge amount of currency in circulation, the costs associated for handling the cash are tremendous.

The cost associated is not just the cost of printing the paper currency, which turns out to be INR 3,760 crores, but also the cost of maintaining ATMs along with capital expenditure, which is around INR 15,800 croresiv. Low value notes are replaced frequently because of the damage due to poor handling. Also, security features are upgraded from time to time to push out fake notes in circulation. This whole exercise of pulling out old notes and replacing them with new ones incurs a huge cost. Taking cash to bank branches and to ATMs incur high transportation as well as security costs. In some inaccessible places like hilly terrains, islands and remote localities the currency notes have to be transported by helicopter.

On the other hand, there is an opportunity cost for the citizens associated with cash withdrawals. According to a report published in 2014 by Tufts Fletcher School on cost of cash in India, INR 9.1 crores were spent annually for collecting cash in Delhiv alone. Therefore there is a very high operational and opportunity cost associated with cash.

Indians prefer cash for tax avoidance, due to poor access to financial services and issues related to digital infrastructure and connectivity, thereby triggering a vicious circle in which cash based economy thrives. The high cash circulation in markets pose serious concerns to economy such as the growth of large unorganized sectors, black money, tax evasion etc.

However, the payment landscape in India is changing now with the introduction of various new technology driven payment options like m-wallets, UPI, RuPay and the opening of 241 million bank accounts under Pradhan Mantri Jan Dhan Yojana, which has created a base for this paradigm change. Card based transactions, though still a small fraction of cash transactions, have seen more than 20% of growth in past five years.

Government programs like Direct Benefit Transfers which directly transfers money to the Aadhaar linked bank accounts of beneficiaries are promoting account usage. These initiatives have to be backed by required infrastructure to deliver these services to the remote rural locations where connectivity and power are major issues. Payments through these electronic channels give opportunity for an audit trail which would in turn help in controlling the black money market in India. Along with the increasing alternate payment options, the consumer behaviour towards acceptance of technology also needs to change. This can be done by initiating different financial literacy programs to educate people about these payment products. With all these changes in motion, India will move forward to a less-cash and efficient economy.

RBI, Payment System Indicators
BIS, Statistics on payment, clearing and settlement systems in the CPMI countries
Article ‘UPI: India’s biggest and boldest payments interface bet yet’ published on 23 Aug, 2016 on Livemint.com
Article ‘UPI: India’s biggest and boldest payments interface bet yet’ published on 23 Aug, 2016 on Livemint.com
The Cost of Cash in India by Institute for Business in Global Context, Tufts Fletcher School

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