Clueless about Cashless

Atanu Rakshit on the #cashless fantasies of the chattering classes

While the debate rages on about demonetization and its effects, the jury is still out on where this will all lead us. Maybe it will have meaningful impact on black money holdings, maybe not. Maybe it will lead to serious welfare shock to sections of society who could ill afford such a shock, or maybe it won’t. Maybe corruption will reduce, or maybe not. Maybe terrorists will run out of money to buy guns and bombs — who can know for sure?

Then there is this other effect of demonetization that has got us, the chattering classes, (in the classic sense of the phrase) all excited about, which is the possibility of a cashless economy. The mere prospect makes the aspirational Indian feel oh so modern. The basic idea is that as it becomes more costly–in terms of time, effort and resources– for society to transact in cash (like it is happening now), individuals will be pushed towards an economy where transactions are made digitally – debit and credit cards, online wallets, mobile payments, digital currencies and such like. With rapid growth in internet penetration, mobile technology and digital payment systems, cash is predicted to lose its dominance in the Indian economy. Now one might take a skeptical view of such assertions, or one might believe in it (maybe with some qualifiers) since the story is not entirely implausible. Everyone is entitled to their own opinion and all that.

Convenient examples of cashless economy, though entirely spurious ones, that I have heard and read over the last few days is that of Sweden/Norway/Finland – examples of countries “which are successfully doing it”, which, in our part of the world, often translates into, “we can do it too / we definitely should too”. Why spurious? — Let’s look at the role of debit cards. Given that 1 out of 3 ATMs are not functional at a given point in time (RBI survey report); India has 12 functional ATMs per 100,000 adult populations, as opposed to approx. 40 ATMs per 100,000 adult individuals in Sweden (World Bank numbers). One can of course argue that ATM machines are not enablers of cashless economy; they are the obstacles- which is a valid argument. But the point I was trying to illustrate above was that even a relatively cashless economy provide its citizen with choices.

So what other economic transaction might someone with a card (both debit and credit) do – make online payments and point-of-sale (POS) swiping. POS terminal is that device that looks like a Nokia cell phone from the late 90s with a mini-printer inside that you often come across at a supermarket or any other store that accepts card payment. According to RBI, India had a total of 1.44 million POS terminals installed across the country as of July – a minuscule number to begin with in a country of 1.3 billion people. Of these 1.44 million POS terminals, SBI, Axis Bank, HDFC Bank, ICICI Bank and Corporation Bank account for 1.16 million – barring SBI, all the rest are predominantly urban banks. RBI releases monthly statistics in POS and ATM usages for some time now, and the latest data available is for the month of July. It shows that 85% of all debit card transaction was to withdraw cash at ATM (one might be tempted to think that maybe consumers are using their debit card for purchases only when they buy something expensive – but in terms of monetary value the number is even higher i.e. 92% of value of debit card transactions was at the ATM).

Let’s look at some more fundamental numbers that goes beyond the lack of financial infrastructure. The push for financial inclusion over the last few years has increased bank penetration to 53 percent of adult population – quite a big jump from 35 percent figure just three years back. But what remains hidden in the fine print is that 72 percent of new accounts that were opened have zero balances (World Bank report on PM Jan Dhan Yojana). Not only that, a whopping 48 percent of accounts in India are dormant (RBI guidelines define a savings as well as current account as inoperative / dormant if there are no transactions in the account for over a period of two years). Moreover, only 39 per cent of all account holders in India own a debit or ATM card to begin with.

What does all this mean? Simply that one out in two Indian does not have a bank account, and even if she does, in all likelihood her bank account is dormant. Suppose you are neither of those. Even then you are much likely to not have a debit card (and hence a credit card) than have one. Now suppose you are somewhat special and you do have a debit card. It is then extremely rare that you use your debit card for anything else other than taking out good old cash from your neighborhood ATM. If you do not fit into any of these categories, have multiple cards, e-wallets and what not with which you shop online and make digital payments etc., you are not an average Indian but a member of a very small and privileged minority, and you should not make the mistake of imputing your experience and aspirations on the rest of the population.

Does this mean that there’s no merit to a cashless economy, and we should just give up on this aspiration? I doubt whether any of us think that way. But a cashless economy is not a matter of coercive policy nudge to consumers to go cashless. That makes sense when the country has (or plans on having) the financial infrastructure. It is also more complex than just having the infrastructure. High taxes on business income, coupled with high bank commissions on card payments, discourage small and medium size businesses to switch to cashless — they would rather not pass on the bank commission for each card swipe to the consumer, and they would rather not have all their sales and revenue recorded in their linked account. Ethical and philosophical considerations of taxation aside, this is a rational response which will only respond to policies which are rational and optimal. Then there is also the matter of priority. Indian monetary and banking system has much bigger problems to solve than black money. Non-performing assets (loans which really big corporations can’t pay back or don’t pay back) are 5.9 percent of total loans in India. This makes Indian banks rank at the very bottom of the list in Asia. Return-on-assets of Indian banking sector, a measure of bank profit, is the second lowest among countries in the region. Why not clean this mess up? Because it does not have a grandiose enough narrative nor does it generate prime time chatter. While we harp on the role of illegal cash during election campaigns (a major justification provided for demonetization), we forget the Election Commission’s ridiculously puritanical stance for curbing money power. The limits on campaign spending for parliamentary seat is set at approx. 70 lakhs nowadays, in a country where an average candidate spends many multiples of that amount (upward from 20 crore according to Observer Research Foundation Report, 2012) to just stay in the race . Is it a surprise then that the ECs measures are laughably ineffective? For big campaign donors, which are usually big businesses, coming clean would certainly cost them in the short term, if only for the reason that they would have to admit to both national parties—the BJP and Congress—that they are also giving to their opponent. This often leads to owing more if one is to achieve the same level of influence, like in the case of Democrats and Republicans in the U.S. A study by E. Sridharan, Director at University of Pennsylvania’s Institute for the Advanced Study of India points out that of the 36 firms that gave funds legally to either the Congress or BJP in the last election, 24 gave funds to both. Latest filing records show that 93.8% of the income reported by Congress, and 91.3% of the BJP’s, comes from unlisted sources, simply because the rules allow them to subvert tax filings in a way that they don’t have to report donors. How? Parties are not required to account for any contribution lesser then 20,000 INR, which practically mean they are not required to account for any contributions whatsoever! 100,000 rupees can be given in five blocks of 20,000 each (or 19,999, to be fastidious) and so on. The only thing preventing this money from moving to the pockets of the voters is the physical transfer of banknotes; hence EC’s (and ours, who are rarely the recipient of such transfers) obsession with vans and suitcases stuffed with cash. A simple amendment of election campaigning and financing rules can go a huge way in solving this problem – but probably won’t make as much headline news as burning of piles of notes and the common man joining the fight for corruption.

We are a country of melodrama, fantastic mythology, grandiose narratives – this is the common thread that binds us all, for better or for worse. We thrive and revel in conflating relatively minor matters into something important and meaningful, and have a disdain for things that are not dramatic, grand or aspirational, even if critically important. Our political establishment is not immune to that (in fact they actively indulge in it), and the results are often inefficient and welfare reducing policymaking, where rational and thoughtful reform is often sacrificed at the altar of sensationalism and twitter handles.

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Atanu Rakshit Written by:

Atanu Rakshit is a professor of economics at the Graduate School of Business, Nazarbayev University, Astana. He thinks of Shillong as his second home. His research and teaching interests are in Applied Econometrics, Public Economics, and International Macro-Finance. Atanu’s current research is focused on application of non-linear time series econometrics, the impact of fiscal policy on interest rates and hierarchy in organizations.

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