Cashless economy — a tall order

Financial literacy, digital integration and strong security infrastructure are a must

In economics, money illusion refers to the tendency of people to think of currency in nominal rather than real terms. In India, what we witness now may well give it a new meaning.

We don’t just love, but worship currency, with 90 per cent of all transactions in cash.

By itself this is not a problem, but we have a large parallel economy that also thrives on it.

With cash and black money so intertwined, it is difficult to objectively evaluate demonetisation.

Critics point out that black money does not reside in currency and that the move would hardly dent its existing stock. True, but it could also be argued that illegal income almost always originates in cash before changing into other asset forms. Thus, a cash-intensive economy provides fertile ground for the parallel economy to thrive.

Conversely, reducing the use of cash would reduce avenues for the future circulation or conversion of black money. In this sense, the move could be viewed as a supply-side response to the problem.

A kicker to tax income

Conventional wisdom tells us that black money is the offshoot of high tax rates, controls and corruption. Our maximum tax rates are comparable with most countries and much of the economy has been de-regulated. Yet our tax-GDP ratio is one of the lowest, with only about 5.5 per cent of the people who earn paying tax and only 15.5 per cent of the net national income being reported to the tax authorities, according to the Economic Survey of the Government.

Even after allowing for the exempt agricultural income, there is clearly a sizeable part of the economy engaged in valid businesses that is unwilling to pay full taxes. It is a moot point whether reducing taxes would induce compliance, but this is akin to the argument of raising salaries of public servants to prevent graft. We may never be able to lower taxes enough to ensure probity at all times. One may call it an unintended consequence of demonetisation, but the massive surge in tax collections of large municipalities such as Mumbai (up by nearly 300 per cent) and other metros as also the jump in collections at electricity boards, reveal two interesting aspects — attitudes to taxes as also the effect of cash irrelevance.

Cash intensity impacts not just taxation, but aids other forms of subversions too — for instance, in several unorganised sectors that employ contract labour, cash payments enable businesses to stay under the radar and avoid statutory obligations like Provident Fund, insurance, etc. The larger issue then is not about the use of cash, but of reducing the relevance of currency, dispelling the illusion. If demonetisation can render currency less relevant than what it is today, the battle against tax evasion and corruption could be easier.

Cash still rules

But the biggest challenge to the program is the pervasive use of cash in India by the legal economy (one of the highest in the world) in spite of efforts to promote other modes of transaction. The difficulty in going digital is exemplified by the data on debit card usage — over 85 per cent (in volume) and 94 per cent (in value) of all debit card usage is at ATMs for drawing cash. The explosive growth in debit cards (over 600 million) is a consequence of the financial inclusion drive that led to the opening of over 170 million bank accounts. Though the move put plastic into the hands of millions, effectively it only shifted cash withdrawals from banks to ATMs, which was not quite the intent. So much so that the RBI calls its payments vision one of a less-cash economy rather than a cashless one.

Clearly, when cash is a matter of preference, a digital system cannot be forced without causing pain and disruption. However, to make significant inroads, many other challenges need to be surmounted — high level of financial illiteracy, deep digital divides and security issues, to name only a few.

Evaluated solely in terms of immediate or visible gains, demonetisation may have few supporters. But if seen as a tactical move to bring about attitudinal changes — to money, taxes and Government — then we need to give it time to unfold.

The writer is an independent consultant

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