India Banks Large Bills, But Is a Long Way from a Cashless Economy

by Ben Jackson 0

India’s prime minister banned the country’s largest bills this week, The New York Times reported, but the transition to a cashless society is going to be tough, according to an article in the Business Standard. The move was to curb corruption, according to the Times:

The ban is intended both to curb the flow of counterfeit money and to take aim at terrorist organizations that rely on unaccounted-for cash. It is also expected to help the government clean up a system that has relied on cash to pay bribes and to avoid taxes.

But the announcement, made on national television in both Hindi and English, led to an immediate upheaval in the country. Abolishing the current version of the 500 and 1,000 rupee notes, worth about $8 and $15, will effectively remove 80 percent of the currency in circulation.

Read The New York Times story here:

But the move does not mean that India will soon abolish all cash, because the infrastructure doesn’t exist, and Indians prefer cash in many cases.

So, the recent government order banning currency notes of Rs 500 and Rs 1,000 should not really scare anyone, right? No. Cash is still king for a large number of Indians simply because it is widely accepted and convenient.

Naveen Surya, managing director of digital payments company ItzCash and chairman of Payments Council of India (PCI) says, “The challenge is that no other alternative comes close to cash. That is why digital payments account for only 10 per cent as against 90 per cent of cash transactions. No questions are asked for a cash payment up to Rs 50,000. But, for a credit payment more than Rs 10,000 consumers are asked for identity proof and so on. Either other modes should be made as easy to use as cash or questions should be asked while using cash too.’’ The government’s proposal, a few months ago, to disallow cash payments for transactions above Rs 3 lakh, too, was a move in this direction.

Read the Business Standard story here:

These articles show that the cash question is a complicated one. Fundamentally, though, we need to ask what benefit is there in reducing the number of payments types. It will be interesting to see whether or not the corruption goals are actually achieved, but black market transactions are about a type of value exchange, not the medium of exchange. It seems like a poor reason to force people into a panic and then long lines at the bank.

Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group