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Cashless Economy: Pros and Cons  

  Aug 06, 2020

Cashless Economy: Pros and Cons  

What are the prerequisites of cashless economy?

  1. Access to financial services
  2. Macroeconomic (EODB, like large informal economy in India), cultural factors (awareness, digital literacy)
  3. Scale and competition in digital payments and FinTech
  4. Technology and infrastructure

Cashless or less cash economy

Arguments in ‘Curse of cash’ book by Keeneth rogoff in favour of less cash economy:

The world is drowning in cash and it’s making us poorer and less safe. In The Curse of Cash, acclaimed economist Kenneth Rogoff explores the past, present, and future of currency, from ancient China to today’s cryptocurrencies, showing why, contrary to conventional economic wisdom, paper money surprisingly lies at the heart of some of the world’s most difficult problems. Cash is becoming increasingly marginalized in the legal economy, and most of it is used to finance tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global underground economy.

What are the benefits of a cashless economy?

  1. Cost Reduction: cashless system brings down the cost associated with printing, storing and transporting of cash.
  2. Risk Reduction: The risk of money getting stolen or lost is minimal. 
  3. Convenient: The ease of conducting financial transactions is probably the biggest motivator to go digital. With the advent of digital modes, one can avoid queue for ATMs, transact 24*7 and save time. 
  4. Tracking spends: Spending done via mobile or computer applications can be easily tracked with a simple click. This allows users to keep track of all their spending and manage their budget effectively.
  5. Increase in tax base, fall in corruption: Traders, small businesses, shopkeepers, and consumers regularly use cash as a means to avoid paying service tax, sales tax. This would be difficult in digital economy
  6. Going digital formalises economy, which provides government tax, and data which makes regulation easy
  7. Containment of parallel economy which thrives on cash
  8. Financial Inclusion, example Jan dhan brought millions in to formal credit market and banking services
  9. Technological disruptive innovation in Fintech which less cash economy will unleash, will make India ready for future growth based on KITE economy

What are challenges to implement cashless or less cash economy in India?

  1. Large informal economy
  2. Cash based economy in rural India
  3. Lack of reliable digital infrastructure, broadband connectivity and reliable 24*7 electricity in many parts of country
  4. Footprints of formal banking in terms of bank branches is still low
  5. Low POS 
  6. Lack of scale and competition in digital payments in rural areas
  7. Lack of financial and digital literacy

What are the steps taken by government to overcome these challenges?

  1. Bharatnet for broadband footprint across whole India
  2. Regulatory sandbox by RBI to promote competition in FinTech
  3. Digital literacy Initiative DIKSHA
  4. UPI, Bharat QR code
  5. Demonetization
  6. Disincentivization of cash
  7. Formalization of economy through GST will also spur less cash economy
  8. Promotion to domestic manufacture of POS, reduction in import duty on POS
  9. JAM trinity as solution for cashless transactions