Demonetisation has the ball rolling for a cashless society

While the stated purpose of demonetisation was to attack the hoard of unaccounted money in the system, another equally important aim was to move from predominantly a cash-based society to a cashless one or if not, a “less cash” one.
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Dec 02, 2016, 04.37 PM | Source: Moneycontrol.com

Demonetisation has the ball rolling for a cashless society

While the stated purpose of demonetisation was to attack the hoard of unaccounted money in the system, another equally important aim was to move from predominantly a cash-based society to a cashless one or if not, a “less cash” one.

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Demonetisation has the ball rolling for a cashless society

While the stated purpose of demonetisation was to attack the hoard of unaccounted money in the system, another equally important aim was to move from predominantly a cash-based society to a cashless one or if not, a “less cash” one.

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Shishir Asthana
Moneycontrol Research

In a month from now, the first phase of demonetisation exercise will be completed. Older higher denomination notes will be out of the market, to be replaced by newer ones. But this may not necessarily mean that life goes on as before. We might have to start getting used to a life with fewer currency notes in circulation.

While the stated purpose of demonetisation was to attack the hoard of unaccounted money in the system, another equally important aim was to move from predominantly a cash-based society to a cashless one or if not, a “less cash” one.

The government does not want us to revert to our old habit of using cash. That is because a cashless society is more transparent, and every transaction leaves a trail that can easily be traced to the source. This is expected to boost the government’s kitty by way of better tax compliance.

In order to enable the transition from a cash to cashless society, Reserve Bank of India had already begun the spadework a few months ago. In June, it had released a vision document titled 'Payment and Settlement Systems in India: Vision – 2018’ laying the roadmap.

Among other things, the report clearly mentions that the RBI’s efforts will be to ensure a “continued decrease in the share of paper-based clearing instruments and a consistent growth in individual segments of retail electronic payment systems.”

The central bank is aware of the fact that in order to make people use cashless services it needs to provide the infrastructure for transactions to take place. Safety and security features, which have prevented people from using electronic mode of transactions needs to be in place.

Over the last few years, notes RBI, all segments of electronic payments, particularly retail electronic payments have shown healthy growth both in volume and value of usage. RTGS and NEFT volumes increased almost threefold between 2013 and 2016.

Despite the increased use of electronic transaction, cash as a percentage of GDP has been hovering around the 12-13 percent mark. As per a SBI report the current size of digital commerce is around Rs 1.2 lakh crore. This number needs to increase substantially if government intends to bring down cash in circulation.

Reports say that government intends to bring down cash in circulation by a third to get the cash to GDP ratio at around 8. While the intentions are noble, cutting down cash in circulation by such a high number can impact growth.

The scenario might not seem as dismal if compared to global peers. According to a study carried out by Visa digital transaction per capita in India stands at 10 as compared to 163 in Brazil. In developed countries the number is much higher. Shock treatment given by demonetisation will help increase India’s usage of electronic medium for transaction.

The government might, however, need to incentivize cashless transactions to see early results. It should not see this as an out-of-pocket expense as the savings from the lower use of cash can be used for promoting cashless transactions. In the study conducted by Visa the cost of cash transaction in India is equivalent to 1.7 percent of the GDP.


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Demonetisation has the ball rolling for a cashless society

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