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Will Cash Lose Its Crown To Digi-Money? - Outside View by PersonalFN

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Will Cash Lose Its Crown To Digi-Money?
Jan 2, 2017

Until recently, the Government refused to accept that there were significant gaps in the planning and execution of demonetisation. But, it is coming to terms with grassroots reality. A few days ago, the Union Minister for Micro, Small, and Medium Enterprises admitted that the demonetisation exercise has been detrimental for businesses and people. And, he is not the only one to acknowledge the problem.

Before demonetisation shook up India, high-value currency notes formed a little over 86% of country's total currency in circulation. So, it's no surprise we are now facing a severe cash crunch. As per RBI, there were approximately 2,203 crore pieces of Rs 500 and Rs 1,000 notes put together in circulation as on March 31, 2016. Replacing these was not an easy task. To fill the lacuna, the Government promoted the use of digital money. Many economists have been highlighting India's unpreparedness to promote digital payments. So be it the lack of I.T. infrastructure or adequate legal framework to protect the users' rights and fix the responsibilities, India scores way below some developed countries. Even the Finance Minister had to recently acknowledge that, the digital payment solutions can run only in parallel to cash, and the former can't replace the latter.

However, it would be erroneous to think it's the infrastructure and regulatory framework that still allow cash to reign as king. Global experience suggests that using cash is a tendency and even supreme technological infrastructure can't promote digital payments beyond a point.

Bitcoins, debit and credit cards have failed to discourage people to stop using cash across the globe, including those living in technologically advanced nations such as France, U.S., and Germany. For small, routine purchases, people prefer using cash. What's more, some countries have seen their citizens using cash even for big-ticket transactions.

What are the primary factors behind the prevalence of cash?

  • Ease of transacting
  • At some places, vendors don't accept cards, so one has to use cash for buying goods and services
  • It's been observed that older people, senior citizens prefer cash over other options

Although, these are the most commonly found factors why digital payments run only parallel to cash; the list doesn't end here.

In the Indian context, can you imagine a person swiping a debit card at a vegetable selling thela in a busy locality? One may use a digital wallet to make payments, but a seller who accepts money through these wallets needs to shell out money to transfer these receipts into his/her bank account. However, there are no such fees for depositing cash in one's account.

Now imagine this situation. You go to a grocery store and at the payment counter, your card gets rejected for unknown/ technical reasons. Apparently, there was a problem with the vendor's card swiping machine. You try making a payment using your digital wallet, but that shop being located in the basement, has a network connectivity issue. Had you cash in your wallet at that point, you would have made the payment and walked out the store without any awkward or embarrassing incident.

And let's not forget. To be able to use, digital wallets, one must have either a debit card or net banking facility, without which you can't load money into your wallet. Many people, especially in the rural regions, are not adequately literate or informed to use digital wallets.

In the recent past, we have experienced instances where data security of debit cards was compromised. Before Indian masses use digital payment options more frequently, the Government will have to address these challenges.

Is cash an evil?

Often, the circulation of money in any system is linked to corruption and money laundering. But it is also true that loopholes in tax laws, laxity of tax authorities, and low moral values of the society are the biggest culprits for generation of black money and corruption. Therefore, any economy fighting black money and corruption need to address the root causes.

India has just burned its bridges behind it. Now there is no option but to ride out the demonetisation phase with hope of escaping alive.

Some facts:

  • Toll plazas still accept cash
  • Political parties accept cash donations
  • The level of digitalisation in Government departments is miserable
  • Majority of Indians are practically 'ill-literate' to handle digital payments
  • More than 90% of Indians still don't pay taxes

So, it seems cash will remain king in India's economics, trade and commerce for long time. After all, inflation lifts the election budgets, as long as a political party cannot win without cash.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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