The Indian economy has been moving towards a cashless model for some time now, with the government and financial institutions promoting the use of digital payment methods such as debit and credit cards, mobile payment apps, and electronic fund transfer systems. The government has also taken steps to encourage the adoption of these methods by providing incentives and making it easier for individuals and businesses to access them. In this video we will discuss Can e-rupee replace physical cash or at least cannibalize its market share, how the cashless Indian Economy is moving, and what are the trends of Cashless mode in India.
The shift from Cash to Cashless:
Difference between E-Rupee, UPI, and Mobile Wallets:
- Since the late 20th century, India has been slowly but steadily moving towards a cashless economy with ATMs, MICR, debit cards, and credit cards.
- Today, you have mobile wallets, recharge vouchers, UPI, NFC payments, QR codes, etc. Come to think of it, India has performed well on the digital adoption front.
- The cashless economy has become the talk of the town since the emergence of CBDC (Central Bank Digital Currency) talk by RBI Governor
Can Digital Rupee Replace Cash?
- UPI & Mobile wallets, ATM transactions have a bank as the intermediary for conducting transactions, however, banks do not have the knowledge to whom the cash is being paid, which brings the benefit of anonymity
- E-Rupee also comes with the benefit of anonymity, along with a reduction in the cost of printing rupees.
- The CBDC will be an exact digital copy of the physical currency, with the anonymity of physical cash. So, when the digital currency is transferred to a consumer's wallet, the transaction will be captured by the bank, as it happens with physical cash. But subsequently, all wallet-to-wallet transactions will remain anonymous, with no record in the core banking system of a bank, just the way it is with physical cash. The RBI plans to remove all records of digital transactions between wallets.
- UPI platforms and other wallets - from PhonePe to Google Pay and Paytm - are enabling platforms for digital money transactions. E-rupee is a currency in digital form and transactions in it will not require any intermediaries. Transaction between two parties, individuals or businesses, leads to money being transferred from one wallet to another without banks getting involved. There will be no difference between paper and digital currencies, and the income tax rules of physical cash will also apply to E-Rupee, RBI governor Shaktikanta Das said recently
1. Share % of Digital and CIC:
- To look at the trend of digital and cash transactions in the total payment system, we defined digital transactions as the transactions in IMPS, UPI, PPI, and cash transactions as CIC.
- The trends are revealing, as the share of CIC has been declining from 88% in FY16 to 20% in FY22 and is estimated to go down further to 11.15% in FY27. Consequently, the digital transactions share is continuously increasing from 11.26% in FY16 to 80.4% in FY22 and is expected to touch 88% in FY27.
- Simply, during the Era of Demonetization currency in circulation was around 88% while digital transactions were around 12%.
- The Govt & Digital Agencies expect that by FY 2027 this trend is going to visit vice versa.
2. Channel-Wise Share % in Value of Transactions
- During 2016, there were no UPI transactions. And Paper Currency dominated with a 46.1% share in the overall transaction value.
- But within 5-6 years, the tables have turned and now UPI holds a share of 16.1% of the overall transaction value in FY22, whereas the contribution of Paper Currency has drastically gone down to 12.7% in the same period.
3. The trend in UPI Transactions (Rs. Billion):
- UPI transactions that were non-existent in the era of demonization have already reached 16% of overall transactions. They are expected to witness a humongous rise going forward.
4. Currency Circulation (%YoY):
- The Currency Circulation % YoY has also gone down significantly in the last few years.
5. Weekly Increase in CIC on Diwali Week:
Benefits of a Cashless Economy:
- During the Diwali week currency circulation was Rs. 438 Billion in 2020 & Rs. 440 Billion in 2021.
- The number became negative & stood at Rs. -76 Billion in 2022.
- With the increase in digital transactions, this is the first time after 2002 that currency in circulation during the Diwali week shows a decline during the Diwali week, assuming that the marginal decline in 2009 was purely because of the economic slowdown.
- These numbers serve as strong proof of the paradigm shift from a cash to a cashless economy.
1) Saves Money and Time
- Companies and governments will get efficient and they can reduce costs as they no longer need the manual accounting work to be done. The costs associated with accounting and handling cash are very high.
2) Less Cash Decreased Crimes
- Businesses and individuals can also avoid other costs as well. Theft often leaves a big hole in one’s pocket. The risk of theft will continue until people carry cash and by going cashless the same can be reduced. This also leaves an impact on the government as they can then reduce the costs that the government spends on nabbing the culprits.
- In countries like the US, burglary and assault have dropped by about 10% once the government shifted the payment made for social welfare to electronic transfer. The government, however, has to take measures to curb online scams and identity theft incidents.
3) Production Costs of Coins and Paper Currency are Reduced
- Production of coins and paper currency is indeed an expensive endeavor and the life span of most paper currencies is about 6 years. So, by going electronic the cost of production gets reduced.
4) Less Cash Means More Data
- The government can use the data coming from cashless transactions to improve and analyze its policies. By using such data, officials can predict or identify the patterns of activity and use such information for urban planning for sectors like energy management, housing, and transportation.
5) More Spending Helps Improved Economic Growth
Challenges to Cashless Economy:
- When a nation is taking a step towards a cashless economy, a boost in economic growth can be expected.
- In countries like the US higher card usage has contributed to consumption of about US$296 billion globally from the year 2011 to 2015 which is a 0.1% increase in the GDP.
- Shopping online gets easy as one can use several payment options; from credit and debit cards to net banking. One can observe more spontaneous buying while making cashless payments.
1) Acceptance of infrastructure and digital inclusion:
- The lack of adequate infrastructure is a major hurdle in setting up a cashless economy. Inefficient banking systems, poor digital infrastructure, poor internet connectivity, lack of robust digital payment interface, and poor penetration of PoS terminals are some of the issues that need to be overcome.
- Increasing smartphone penetration, boosting internet connectivity, and building a secure, seamless payments infrastructure is a prerequisites to transition into a cashless economy.
2) Financial Inclusion:
- For a cashless economy to take off the primary precondition that should exist is that there should be universal financial inclusion. Every individual must have access to banking facilities and should hold a bank account with a debit/credit card and online banking facilities.
3) Digital and Financial Literacy –
- Ensuring financial and digital inclusion alone are not sufficient to transition to a cashless economy. The citizens should also be made aware of the financial and digital instruments available and how to transact using them.
4) Cyber Security:
- Digital infrastructure is highly vulnerable to cyber-attacks, cyber frauds, phishing, and identity theft.
- Off late cyber-attacks have become more sophisticated and organized and pose a clear and present danger.
- Hence establishing secure and resilient payment interfaces is a prerequisite for going cashless.
- This includes enhanced defenses against attacks, data protection, addressing privacy concerns, robust surveillance to pre-empt attacks, and institutionalized cybersecurity architecture.
5) Changing habits and attitude:
- Indian economy functions primarily on cash due to a lack of penetration of e-payment modes, digital illiteracy of e-payment and cashless transaction methods, and thirdly habit of handling cash as a convenience.
- In this scenario, the ideal thing to do is to make people incrementally adopt e-payments and spread awareness to initiate behavioral change in habits and attitudes.
6) Urban-Rural Divide:
What Should Individuals Do:
- While urban centres mostly enjoy high-speed internet connectivity, semi-urban and rural areas are deprived of a stable net connection. Therefore, even though India has more than 20 Cr. smartphones, it is still some time away for rural India to seamlessly transact through mobile phones.
- Even concerning the presence of ATMs, PoS terminals, and bank branches there exists a significant urban-rural divide, and bridging this gap is a must to enable a cashless economy.
One of the main drivers behind the shift towards a cashless economy in India is the government's efforts to curb black money and reduce corruption. By using digital payment methods, it is easier to track and trace financial transactions, making it more difficult for individuals to engage in illicit activities such as tax evasion and money laundering. The COVID-19 pandemic has also accelerated the move towards a cashless economy in India, as people have become more reliant on digital payment methods due to concerns about the transmission of the virus through cash. Overall, the shift towards a cashless economy in India has the potential to bring numerous benefits, including increased financial inclusion, reduced transaction costs, and improved efficiency and transparency. However, it is important to ensure that the transition is carefully managed and that measures are put in place to protect the interests of consumers and small businesses.