Cashless Economy – Boon and Bane ?

What is a Cashless Economy ?

In a cashless economy most of the transaction will be done by digital means like e banking, debit and credit cards, PoS (point of sales) machines, digital wallets etc. In simpler words no liquid money or paper currency will be used by the people in a given country. In a cashless economy the third party will be in possession of your money. He will allow you to transact that money whenever it is needed. If it is not needed then the third party can use that money. Third party can be a government or any other public or private sector bank.

Positive Impact on Society

We are seeing the impact of cashless economy on the society when it comes to crime rates. According to Union defense minister after demonetization the crime rates in Mumbai has dropped to half. Not just Mumbai but Delhi is seeing a substantial decline in crimes related to financial motive. Bank robbery, burglary, extortion etc are declining because of demonetization.

Attack on Parallel Economy

This is one of the most important reasons why a cashless society is must. People who hoard money under their bed (also known as black money), people who launder money bypassing banking channels, terrorist who need money to finance their terror etc will run out of business now. Size of Parallel economy will reduce substantially.

Financial Inclusion

Digital economy will help to enhance our current banking system. There will be increased access to credit for people who did not fall in any banking network. Financial inclusion will automatically reduce poverty.

Increase the Tax Net

All the transactions that are done can be monitored and traced back to a given individual. If officials from tax department smell something fishy then they can trace the money transaction back to the individual. Hence it will be really difficult for someone to evade tax. Increasing tax net is very important for any government.

Boost in Consumption

There would be no incentive for people keeping money in the bank. So they would love to spend on things that they like. It will help to boost consumption that is really good for any economy. More jobs will be created and income level of people will rise.

Security and Convenience

Last but not the least is security and convenience. You don’t have to carry a wallet with money in it. You just use your mobile phone or credit card for transaction. It is very hassle free and already going on in urban areas of the country.

Security – Cyber Attack, Fraud and Power Outages

Cashless economy can be a nightmare when it comes to security. All your transactions will be done digitally. You will be prone to cyber attacks like hacking. Hackers can hack your sensitive information like password, credit card number etc and leave your account with no money. Even your personal computer is compromised. You can save yourself from fraud but it is very difficult to save from a cyber attack. Finally if there is a power outage especially in India which is very regular then entire system will be affected for long time.

Have to Trust Government or Third party

As I said earlier there is no money in your hand. All the money is digital so either they are in control of banks or government or any other third party. You have to trust government or bank blindly because everything is under their possession. This is could be scary because if tomorrow something happens you will be left with no hard cash.

Reduced Liquidity means Bad for Certain Sectors

There are certain sectors which depend upon high level of transaction. Sectors like Real Estate, jewelry, retail industry, restaurants and eating joints, cement and other SME will be affected badly because of cashless society. It means a lot people who are employed by these sectors are also going to be affected.

Really Bad for Poor

This is the real point and will be debating this in great details in following paragraph. Here I just want to say cashless economy is really going to hurt poor.

Money is probably the most significant invention in the history of economics which has now by and large fully replaced the barter system of trade across the world. However, nowadays, many developed societies in the world have now moved a step further by moving on to the cashless economy. In the developing countries like India, the cashless system has started making the inroads but it is far less in use than that of the developed counterparts.

During the pre-demonetization, the cash to GDP ratio in the country was between 12-13% of the GDP which fell to 7.3% during the demonetization. It was less than that of US where cash GDP ratio is at 7.8%. Though Reserve Bank of India (RBI) has started replenishing the cash into the economy but many experts believe that cash-GDP will not raise to the pre-demonetization level as government is giving a push to the cashless economy.

As India moves towards a cashless economy, following advantages are expected to accrue :

  • The electronic payment will help the entrepreneur to increase their customer base and breach the geographical limitations.
  • It is not necessary to be physically present to conduct cashless transaction. There is also no limitation on timing of transaction as it can be done at any time and from anywhere.
  • Carrying high amount of cash is always a security hazard. For other modes like credit/ debit cards, in the event of loss or robbery, one can block the card. It may also reduce pick pocketing and highway robbery.
  • Increasing share of cashless will improve government revenue as online transaction lead a trail of events which can be traced to find out tax evasion if any.
  • Since the cashless transactions are more visible, it will help in curbing the clack money.
  • If subsidy or wages for the welfare schemes like MNREGA are paid online through bank transfer instead of cash, it would also help in plugging the leakages and help in ensuring that subsidies are better targeted.
  • As the people increasingly started using cashless transactions, it will help in increasing the tax base. It will be easy for the public as well to explain the tax authorities their past expenditure.
  • Being cashless also inculcates budget discipline.
  • It will also be easy to ward off the borrowers if you are cashless.
  • Cashless transactions do away with the need of change. One can pay in exact amount even in fraction of rupee or paisa through card payment or online transaction.
  • Problem of counterfeit currency will also be reduced in online transactions.
  • One can also trace the funding of terror activities as online transactions leave a trail.
  • There is high cost of printing currency notes. Switching to cashless transactions will decrease this cost.

However, being cashless has its share of disadvantages too :

  • The biggest fear is the risk of identity theft. One can also become a victim of phishing trap.
  • In case of loss or theft of card, getting another card is time consuming process.
  • Since mobile phone had become an important element of cashless economy, loss of phone may become a double whammy as many financial details can be retrieved from it.
  • If we take into account the proportion of non-tech-savvy population, the practical implementation of cashless economy will take enormous efforts.

Despite its drawbacks, the cashless system is indeed an improvement over the traditional cash based system. However, none of the advanced economy has fully replaced the cash as it is practically not possible but reducing the amount of cash and increasing the cashless transactions will definitely improve the transparency in business transactions and therefore is good for the country and economy.