COMMENT: 3 reasons why Modi's cashless dream will remain only a dream

Shishir Asthana

Moneycontrol Research

Demonetisation was aimed at weaning people from cash and driving them towards a more digital world. The government almost came close to realizing this dream when for a frenzied two months following the cash ban a lot of us got smart and downloaded a mobile wallet. But love for cash among Indians is…well…undying.

Consider this: cash in the hands of people have now zoomed to Rs 10.64 lakh crore, a jump of 36 percent from the levels seen on December 9 last year. Over the two months to February 9, for which the latest data is available, the RBI increased notes in circulation by about 15 percent to Rs 11.73 lakh crore from Rs 9.58 lakh crore.

Granted, this new watermark is nowhere close to the pre-demonetisation days. Before November 8, currency with the public stood at Rs 17.02 lakh crore while notes in circulation were at Rs 17.54 lakh crore.

But recent reports of ATM cash withdrawals peaking once again suggest that cash can never be off the table. And with every passing day the argument for a digital transformation looks increasingly weaker.

Following are three key reasons why the government could be losing the fight against cash.

Convenience

For most Indians living in semi-urban and rural areas, a debit card is a means to withdraw cash from an ATM – not to pay monthly bills online. Usually, there is only one such plastic in a low-income family and the breadwinner gets to keep it.  Most transactions – maid, electricity, etc -- are done in cash. The biggest disadvantage of a digital tool, be it a debit card or internet transfer, or mobile wallet, is that it acts like a blank cheque in the wrong hands.

The number of transactions undertaken with cards swiped on Point of Sale devices dropped to 447.40 million in January 2017 from 531.54 million in December 2016, just one month after withdrawal limits were eased.

Lack of Infrastructure

Expecting the population to transact digitally when large parts of the country still don't have a good internet connection is nothing short of wishful thinking. Over 70 percent of the population do not have quality internet connection. Further, in order to use smart phones costly internet plans have to be purchased. Poor bank penetration is also acting as a hindrance.

Cost of Transaction

One of the biggest problems for digital transaction is the cost of transaction. Some merchants still charge 2 percent on a digital transaction despite the RBI coming down hard on them. Banks usually reimburse the merchants a day or two after the purchase has been made. Buyers end up paying in cash to avoid a surcharge on a digital payment.

Conclusion

Government intended to bring down cash in circulation by a third to get the cash to GDP ratio at around 8. While the intention seems to be noble it needs to put its infrastructure in place before expecting any improvement. Finally, change especially where money is involved, has to be pushed through incentives rather than forced down the throat. Unless it gets its house in order a cash-less society will be a pipe dream and no amount of demonetisation can force people to make the change.