Why moving towards cashless economy is not easy for India

A recent report indicates that cash transactions are on the rise again. With increased availability of cash in ATMs and banks, we are resorting back to our time trusted mode of transacting.

But why are we so reluctant to adopt digital modes even though there is widespread support for Prime Minister Narendra Modi’s Re-monetisation and cashless India initiatives?

Transactions, like everything else in life are driven by motivation. We transact in our daily lives because we believe we are gaining out of it. Monetary transactions are more explicit in the sense that the gain or loss is quantified. These transactions become even more interesting when you add one more dimension to it – the medium of transaction.

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With so many mediums available to us, why do we still go for a cash transaction? What is the motivation behind it? To analyse this, I tried to list all the cash transactions I could think up of and classify them based on their possible motivations/ reasons. Here is a summary of the exercise:

Barriers to cashless India
Note: In many examples Cat#2 and #3 will have an overlap, example: buying groceries from local market.

Now over the last 3 months or so, the Government of India has tried various ways to push us towards non-cash transactions. These measures taken by the government and other parties can also be bracketed into 2 broad categories:

  1. The Carrots: Financial inclusion schemes to get more people in the mainstream, cost cuts on digital transactions using UPI, better tools such as BHIM, temporary rewards to go cashless, promise of lower tax rates etc.
  2. The Stick: Harsher laws and more tax raids to punish non-compliance. Cash transactions over 3 lakhs rupees being banned, etc.

But is this enough? Let us take a relook at the above table again. Cat #1 and #2 have low to medium barriers. These categories can be addressed by implementing carrots efficiently.

Category #3 will have slightly higher resistance. Most of these transactions also can be targeted by a combination of carrots and sticks. But cash is still convenient and many merchants pass on digital transaction charges to the consumer. Cash will persist to some extent here. Hence, Cat#3 will accept both modes of payment – cash and non-cash as long as they don’t lose business.

But how about Cat #4? This is the biggest animal and the one which was the actual target of demonetisation. There isn’t any carrot which is applicable to them and the sticks are already in place but haven’t worked so far. As long as these transactions exist, they will depend on cash and cash only.

Cash is King. Cash is Convenient. Cash is faceless. In short cash has a lot of inbuilt benefits. The biggest benefit seems to be that cash transactions are anonymous. Agreed that cash has to be stored securely and there is a risk of a loss (theft or tax raids). But these are future uncertain events. The benefits from cash are immediate and almost certain.

So it is not only about making digital transactions easier, there is enough motivation for using cash in some transactions and particularly those transactions which civil society will frown upon. With all these benefits of cash, how does one steer towards a cashless economy? Is there enough motivation for an individual who gets multiple benefits from a cash transaction to completely convert to non-cash means?

The answer is mostly no, and the government will have to think innovative ways to change the scenario.

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