Chapter 4

The Case for Card Acceptance Infrastructure to Support Less-Cash India and Meet 2500 Crore Digital Transactions Goal

India is amongst the most cash-intensive economies in the world, with a cash-to-GDP ratio of 12 percent, almost four times that of markets such as Brazil, Mexico and South Africa.

In terms of cash usage, the situation in India is similar to other emerging market economies. Cash transactions are the norm with around 96 percent transactions conducted in cash. Only 3.6 percent of households in India make cashless transactions. Despite the perception that holding large sums of cash is unsafe, consumers still prefer to hold and use cash. This is illustrated by the fact that New Delhi’s 1.1 crore inhabitants collectively spend Rs. 9.1 crore annually to obtain cash. Hyderabad, which is much smaller, spends around Rs. 3.2 crore annually to do the same. Consumers and merchants who choose cash over digital often misperceive its benefits and limitations as opposed to digital payments.

Less than 5 percent of Personal Consumption Expenditure (PCE) of Rs. 30,00,00,000 crore transacted, is by digital payments. There are over 85 crore debit cards – 22 crore added as a direct result of the Prime Minister’s Jan Dhan Yojana (PMJDY). However, the momentum of cash is strong. Debit cards usage is predominantly taking place at ATMs as compared to POS. The usage of debit cards at ATMs account for nearly 90 percent of the overall debit card transactions in terms of volume and around 95 percent in terms of value. 

The cost of cash to Indian society is significant. The RBI incurs a total of Rs. 22,000 crore in currency operations annually. This cost does not include the cost of storage, transportation, security, detection of counterfeits, etc. The cost of printing and maintaining this extensive amount of cash costs the country nearly 2 percent of its GDP.  Studies show that a moderate growth of cashless transactions by 5 percent a year will save the country more than Rs. 500 crore annually.

Annual costs incurred by RBI for currency operation
Government accrues only 1/3rd of Tax revenue because of shadow economy
Inbound tourism of 8M visitors growing at 8% annually
10% increase in digitisation results in 1% increase in GDP
5 percent growth in cashless transactions saves India more than Rs. 500 crore annually
Cash is not free. Electronic payments boost merchant revenue.

The usage of cash is also the cause of shadow economies in many countries that hurts the ability of governments to efficiently collect tax revenues. The shadow economy in India amounts to 40 percent of GDP resulting in personal income tax compliance of just 29 percent or just one-third of revenue that India should otherwise be collecting. Additionally, the rise of cyber-crime and growing concerns about the ability of governments to look through digital records adds to the unwillingness of many with criminal intent to let go of cash. 

Cash is a barrier to financial inclusion. The mechanics of cash, the difficulty in efficient delivery and modern financial products are increasingly built on digital platforms. Infrastructure obsolescence is accelerating as technology evolves rapidly. Therefore, it is important to implement solutions that are also future-proof.

Increasingly, merchants, traders and businesses are challenged to compete with international businesses that reach markets and consumers by virtue of online platforms.

As government pushes the Jan Dhan Yojana, Aadhaar and Mobile number (JAM) trinity, merchants will need to adapt the form of payment for these customers as they increasingly receive benefits and transact in digital payment forms.

Together we can build the best electronic payments system for a Less-Cash India.