Money & Finance

Going cashless but thinking cash?

  • Blog Post Date 20 November, 2016
  • Perspectives
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Bappaditya Mukhopadhyay

Great Lakes Institute of Management

In this article, Bappaditya Mukhopadhyay, Professor of Economics and Finance at the Great Lakes Institute of Management, contends that switching from a predominantly cash-based to cashless economy needs a positive, exogenous shock and the recent currency ban could be the perfect opportunity for that. To give India’s cashless economy the push it needs, the government could allow mobile and other digital payment platforms to accept deposits in demonetised notes.

As the uncertainty over the recent demonetisation of higher-value currency notes looms large, one is left wondering whether we are missing the chance to give the cashless payment system the thrust it deserves. By now there are two prominent strands of public discourse. One, what will be the effect of the move on black money and corruption in the short- and long-run; and two, could it have been managed better? What could be done now?

Cashless transactions and corruption are negatively correlated

While I will not delve directly into what black money is, how it is generated or how can it be curbed, I will start with the premise that cashless transactions and corruption are negatively correlated. The evidence is there. Schneider (2011, 2013) estimated the size of the shadow economy in Europe and established that it has a strong negative correlation with the size of cashless transactions. More recently, Bhattacharya and Singh (2015) use a panel of 54 countries over the period 2005-2013 and find a strong causality between high-value currency notes and corruption. This is why I think the current exercise must fully exploit the scope to go cashless.

India is a predominantly cash-based economy

Various estimates have put the share of cashless transactions in all monetary transactions at less than 5%, in terms of volume (Internet And Mobile Association of India, 2013). As I have argued in an earlier I4I article, switching from a predominantly cash to cashless economy would require developing a network of a critical mass of entities that deal in cashless transactions. Simply put, individuals will find it more attractive to switch to cashless instruments if more sellers accept such payments. Creating this critical network often needs a positive, exogenous shock; this is the perfect opportunity to do that. Many citizens on both sides of the market are realising the usefulness of cashless payments. Such transactions have gone up manifold in the last few days.1 However, some proactive steps by the government could give the network the push it needs.

Mobile payments have primarily driven India’s cashless economy

India’s growth in cashless payments has been primarily driven by mobile payments. During the period April 2011-June 2016, mobile transactions went up by almost 60 times and volume of transactions by almost 900 times!2 The share of mobile transactions in all cashless transactions grew from 2% to 19% (adjusting for WPI (Wholesale Price Inflation),the increase was from 1% to 60%). The numbers clearly state that there is a general increase in awareness and usage of mobile payments. Hence, during the current crisis, the government’s decision to keep the ‘M’ out of the JAM (Jan Dhan, Aadhaar, and Mobile)3 trinity is somewhat baffling.

What could be done differently in the demonetisation?

Apart from banks that are currently authorised to accept deposits, exchange currency, and process withdrawals, the government could allow mobile and other digital payment platforms to accept deposits in demonetised notes. This could have been accompanied by stricter KYC (Know Your Customer) norms and lower caps on deposits vis-à-vis banks. Through KYC documents, ‘mobile wallets’ could be traced to unique identities. Allowing mobile payments to be a part of the system would be a win-win situation for all. This, in one stroke, would solve two major problems. One, there would be more counters to accept deposits that instantaneously become part of the payment system. Surely, this would ease the pressure on banks. Two, the need to withdraw cash would reduce significantly, removing the pressure on ATMs. To make the system work efficiently, a drive to encourage more and more individuals to sign up for mobile accounts could be undertaken. The primary need for cash for most individuals is to make small payments for daily consumption needs. With enough members on both sides of the market, the network could grow tremendously. The biggest gain from this would be a significant cashless society in the future, which would help check corruption substantially.

Of course, whether the mobile and other payment entities are prepared for this, is a valid concern. But again this is because we have always thought - and are still continuing to think - about how to solve the cash crunch problem and not the payments crunch problem. Given that India has had some experience and success experimenting with micro-ATMs, graduating to accepting deposits through retail outlets is a problem far less challenging than the one we are currently facing.


  1. Paytm claims, “Over 850,000 merchants & 30mn users have used our services in last 3 days to purchase their daily needs, including groceries, household stuff, transport, petrol among others.”
  2. See ‘Reserve Bank of India (RBI) Database On Indian Economy’:
  3. JAM is an abbreviation for Jan Dhan, Aadhaar, and Mobile. Pradhan Mantri Jan dhan Yojana (PMJDY) is the Indian government’s flagship financial inclusion scheme. It envisages universal access to banking facilities with at least one basic banking account for every household; financial literacy, access to credit insurance and pension facility. Aadhaar or Unique Identification number (UID) is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity – 10 fingerprints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.  

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