January 15, 2017

Visualizing a New India 2017- Episode 3: Moving Towards A Cashless Economy

It has been a few weeks in 2017; Every New year we make certain resolutions and keep some of them. We start with new aspirations and realign our goals. Therefore, it is time that we visualize a new India, without corruption, efficient technologically, where everyone is delivered timely justice and every individual has access to school and education. FasciNative presents to you a series, titled Visualizing a New India, brainstorming new ideas and innovations for tackling long drawn problems. Here’s the third edition, consisting ideas to make the economy cashless.

‘Cashless Economy’ has become an everyday term, thanks to the Modi government’s demonetisation shock. No doubt, demonetisation is a remarkable move but a number of reforms could have been taken before reverting to such a mega move. This post consists of a number of suggestions from my side in order to move towards a cashless economy.

Setting the Incentives Right- Differential Pricing

If you go to a gas station in the US, you will see two different prices are being applied to different people- one, if you a pay in cash and second, if you pay with your credit card. If you travel by the public bus in Singapore, you will have two payment options, one, pay by their linked public transport card (EZ-Link cards), which will only cost you for your part of the journey of the bus (the cost from your boarding point to your destination) and second, pay cash in which case you will have to pay for the entire bus journey (the cost from the bus’s initial point to the bus’s destination).

Developed economies have a system of differential pricing for credit and cash. India must also adopt such a system where if you are paying by your credit card or debit card, then lower rates are applied than cash rates. Apart from introducing such a concept in public sector units, the government must reward private enterprises for introducing a differential pricing concept, by giving tax exemptions or cash-back to the company worth the difference between cash and credit price multiplied by number of credit transactions.

Setting the Incentives Right

The ease of doing a cashless transaction reduces as we move from tier I cities like Mumbai and Delhi to small villages and towns. While every shop might have a card swiping machine in metros, these machines can rarely be seen in the rural areas. It is important that the government develops such infrastructure which allows flawless payment by credit and debit card and educates the villagers about using credit and debit cards. Developing better infrastructure must be foremost to any effort made by the government.

Additionally, the cost of using plastic money that is the processing fee disincentivizes people from using plastic money. No doubt, the bank has to pay a cost to facilitate the transaction, however, it would be an amazing idea if this cost is paid from a certain fee applied on cash transactions rather than cashless ones. Let there be a processing fee applied on cash transactions which satisfies the cost of a cashless transactions. This would turn out to be a practicable solution to both the problems: the people's resistance to pay more for the same payment and the bank's cost. 

Thirdly, for a few months, till when the government has suspended processing fee on credit and debit card payments at petrol pumps, the cost is being reduced from the money paid to the petrol pumps. This is a poor plan because petrol pumps work on too less a margin to accept the loss. Therefore, even though the government has removed processing cost, at the ground level, the petrol pump owners are giving all kind of excuses to not allow the customer to pay by card. However stringent a law the government makes, its success would only depend to the conviction of the people at the ground level. Thus, it is time that we revisit the incentives.  

Finding Local Solutions

Even after developing the required infrastructure for cashless transactions, making the rural people confident about such cashless transactions would be a greater challenge. In order to tackle this problem, it would be an amazing idea to introduce legally valid local solutions in such rural areas.

New local coins with a sense of 'localism' can be introduced in place of the demonetised notes in villages or new software can be put into place at each shop and trader’s office which will have its own localised name, bound to be used in a particular village or region. Such software or coins can be used as a locally accepted currency which must be deemed valid by the RBI. The so-called local currency can be exchanged for rupee in rural banks.This would facilitate cashless transactions while sustaining people’s confidence and developing a culture of banking and using virtual money.

Why is a Cashless Economy Important?

Taking all these measures would help India move towards a cashless economy. Such a cashless economy would prove to be a great help for reducing corruption, which must be seen in context with other measures as suggested here. Moreover, this would reduce the chances of theft and help in tackling the problem of fake currency. Apart from these benefits, cashless transactions deem to be more convenient and encourage transaction as you don’t have to worry about change. Lastly, a cashless economy also inculcates a habit of saving. 

Thank You!
Abhimanyu ( )

Also Read- 
Visualizing a New India 2017- Episode 1: Speeding Up Indian Judicary
Visualizing a New India 2017- Episode 2: Minimizing Corruption