Can India Become a Cashless Economy

Indians woke up to an unusual economic googly of sorts in early November.


Indians woke up to an unusual economic googly of sorts in early November. Prime Minister Narendra Modi’s sudden decision to scrap the largest existing currency notes of Rs 1000 and Rs 500 led to a debilitating financial scurry. Serpentine queues built up outside banks and ATMs. But the new notes quickly ran out in financial institutions and ATMs, which also had not been calibrated for the new Rs 2,000 notes, leading to widespread chaos.

With people frenetically trying to exchange their old notes, the use of plastic money in the form of debit and credit cards has found newfound popularity. In a country where 80 percent of transactions are conducted in cash, the government has pitched demonetization as an attempt to uncover black money, as well as to transition the country to a modern cashless economy.

According to the “Digital Payments 2020: The Making of a $500 Billion Ecosystem in India” report by Boston Consulting Group and Google India released earlier this year, the digital payments industry in India will rise 10-fold to $500 billion by 2020. The report estimated that by 2020, non-cash transactions (including checks, demand drafts, net banking, credit, debit cards, UPI and mobile wallets) in the consumer payment segment will double to 40 percent of all transactions.

“Digitisation of cash will accelerate over the next five years,” the report says, “with noncash transactions overtaking cash by 2023.”

Rajan Anandan, vice president at Google for India and Southeast Asia, says: “Spurred by the smartphone penetration and supported by progressive regulatory authority, the digital payment industry is at an inflection point and is set to grow 10 times by 2020. It is telling that half of India’s internet users will use digital payments and that the top 100 million users will drive 70 percent of the GMV (gross merchandise value) — a clear indicator of the growing importance of the digital consumer.”

According to Reserve Bank of India (RBI) data, there were nearly 26 million credit cards in India at the end of August 2016. As individuals carry multiple cards, the proportion of Indians with credit cards is puny for a nation of 1.34 billion. By contrast, there are nearly 422 million credit card accounts in the United States; just 22 percent of Americans don’t own a credit card. According to RBI data, 712 million debit cards are in circulation in India. 90 percent of all card transactions are done by debit cards, which also accounts for 85 percent of the monetary value of all card transactions. 

Vijay Raghunathan: “Demonetization is the perfect scenario for India to take the leap in digital payments.”

Vijay Raghunathan, MD, Stellr India, a prepaid payments solution provider in India says: “Demonetization is the perfect scenario for India to take the leap in digital payments. Today 30-40 percent of large retail outlet transactions in India take place in cash. As we move towards smaller spends, such as grocery, the cash transactions increase. Further ahead the unorganized retail sector of course works mostly on cash. With this move, I see digital payments going up by almost 50 per cent at least in bigger metros.”

The Google-BCG study foundthat convenience is the most important factor driving the cashless growth. However, the report points out several challenges facing a digital ecosystem. It found, for instance, that Indians are “habituated” to using cash and 55 percent find digital payments too complex. Indeed, according to the report, 68 percent of even online transactions are presently done in cash. The limited acceptance of digital payments and the speed of transactions during rush hours are other important concerns inhibiting its growth.

Infrastructure has to grow for the penetration to expand, according to experts. The number of point-of-sale (POS) terminals, a computerized replacement for cash registers, is weak. RBI data shows that at the end of August, there were 1.46 million POS across country, mostly in urban areas.

Despite the infrastructural limitations, the Indian government has been trying to convince people that a cashless economy can be a rural reality too by pushing the Akodara success story. Akodara, a small village in Gujarat, is the first ever CCTV monitored and WiFi enabled village.

The village of just 1,200 people was adopted by ICICI Bank and helped by the local administration to showcase as the bank’s  vision of a digital India. Almost all adults in the village has a bank account with ICICI Bank, which they can access through the the local branch, ATM or via their smart phones. Residents make even the smallest grocery purchases in local shops using their mobile phones and everything from mandi to small kitchen purchases, like biscuits and milk, are digitized. The villagers have their aadhar cards linked to their accounts and receive all government benefits directly into their accounts.

While the model village is a fascinating example of the possibility of a digital India, replicating it in thousands of Indian villages seems like a very ambitious and distant dream. Especially because the rising burden on plastic money in the current demonetization scenario has led to major dislocation even in bigger Indian metros. Economists say that it will be long before a cashless economy is a reality in India.

Raghunathan remains hopeful: “Digital payments are the way to move ahead especially for a growing economy like India as they help the economy. Digital payments turn out to be much cheaper.”

He explains: “The government has to print notes, stock up in banks and in ATMs. One has to be careful of cash so retail stores have to invest in security. There are pilferage issues with retail units too so the entire transaction turns out to be five to six times more expensive.”

Many economists argue that demonetization should have been done systematically and in phases. Cash alternate epayment solutions, such as Mobikwik, Paytm and Freecharge, etc., are available in India and have witnessed a surge in growth ever since the demonetization announcement. But serious limitations constrain India’s ability to transform swiftly to a cashless society, such as Denmark and Sweden. Even for online purchases in India, cash remains the most popular mode of payment, which many online stores have temporarily suspended since demonetization. The vast majority of the Indian population is not digitally savvy and Internet service is still erratic in most parts of the country.

A March 2016 Reserve Bank of India report Concept Paper on Card Acceptance Infrastructure said that although the digital transaction in India have risen over the past few years, the infrastructure of ATMs and POS has not been able to complement the demand. The report highlighted that the usage of debit cards at ATMs to draw cash was the most popular form of card transactions and accounted for 88 percent of the total volume of digital transactions. The transactions at POS terminals accounted for just 12 percent of the volume. In August, Rs 440 billion in transactions were conducted at point of sale and Rs 2.2 trillon — almost five times as much — was conducted at ATMs to draw cash.

The RBI report also revealed that the average number of card transaction per person is amongst the lowest in the world — 6.7, compared to 249 in Australia and 247 in Canada.

 Even as millions of Indians reeling under the pressure of queuing up for their own money and getting frustrated by the bank’s inefficiency to deal with the situation, the reality of going digital is a distant dream.


Imtiaz Alam, a Delhi based professional who runs Zimisha communications recently received Rs 20,000 from bank in Rs 10 coins, weighing in at 15 kgs. Recalls Alam: “I went to the bank to withdraw money via check. Since the bank was low on cash, they had put the limit to only Rs 2,000 so that everyone got some money. When I pleaded for money, the bank officials suggested that I take the money in coins and I happily accepted the offer.”

It is hard to imagine a cashless economy with the sight of a man carrying a 15 kg sack of coins.


Terminal Penetration per 1000 cards


Barriers to Adoption of Digital Cash

Source: Boston Consulting Group, Google India, Digital Payments: The Making of a $500 Billion Ecosystem in India

Use of Digital Payments in percent

Source: Boston Consulting Group, Google India, Digital Payments: The Making of a $500 Billion Ecosystem in India 

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