After my last article (A Cashless Future, 23 November) in these columns, many readers had reacted with an understandable sense of outrage. While some thought that it would be insane to talk of a cashless country where more than half the population still defecate in the open and about a quarter of the population are illiterate, others pointed out that in a cashless economy, there is a cost for every digital transaction which will place an avoidable burden upon the poor. Yet others suggested that the country has to grow and evolve before we can think of a cashless future. This, in my opinion, will require an eternity.
The post-demonetisation nightmares that the people are still passing through and the prevailing confusion, being aided and abetted by the RBI’s relentless directives, have led to helplessness and frustration. Going by the daily reports of raids and unearthing of huge loads of cash, including old and new notes all over the country, the hoarders of black money are probably exploring ingenuous ways of changing the colour of their money with the Jugaad mindset. The anger and discomfort over these developments may justifiably blur our objective reasoning.
What is relevant and important for a cashless economy is not the penetration of toilets or literacy, but the penetration of mobiles and financial inclusion. Increasing digitisation of transactions is also essential for the success of GST which will have to be introduced by 15 September 2017. This could have been a very important, even if unstated, objective behind the demonetisation move, as it is for improving the direct tax collections.
As regards the transaction cost of digital payments, every transaction carries an economic cost, including cash. According to a Bloomberg report, merely transporting cash to and from the villages in India had cost about $ 335 million last year, equivalent to about Rs 2200 crore. This is a poorly targeted indirect subsidy benefiting the rich and poor, the rich obviously more than the poor. Once digital transactions become the norm, the economics of scale is sure to bring down the cost of such transactions, and if it still remains unreasonable, a similar amount of subsidy can be distributed through the Jan-Dhan accounts to compensate only the poor. This will reduce the inherent inequity of the present system.
For digital transactions, all one needs are a mobile phone (preferably a smartphone with internet connection) and a bank account. As regards mobile penetration, going by the latest data released by the Telecom Regulatory Authority of India on 30 September 2016, there were 105 crore mobile subscribers in India (60 crore urban and 45 crore rural). Of the estimated population of 133.6 crore in 2016, roughly 67 per cent, or about 90 crore are rural, thus the distribution remains skewed between urban and rural subscribers, though it is reasonable to assume that most households have access to a mobile phone. With overall tele-density ~ the number of mobile connections per 100 population ~ of 84, the basic infrastructure is already in place. Of course the tele-density points to wide variation across the states, from 56 in Bihar to 119 in Tamil Nadu, but it is
only a matter of time before this unevenness gets diminished gradually.
Internet connectivity is of course a different story. With only 46 crore internet connections, more than 70 per cent in urban areas in June 2016, most of the rural population still remains unconnected. There are also various infrastructure bottlenecks, such as availability and reliability of connections, besides electricity in many rural outposts. With internet connectivity, Mobile Wallets and United Payments Interface (UPI) can enable seamless digital payments across the banks. But apart from the internet, they also require a smartphone, which may not be affordable to many Indians as yet, even with their prices nose-diving sharply. The number of internet connections grew by 30 per cent last year and the growth rate is likely to be sustained. Indeed, internet penetration can be increased from the current 35 per cent to 70 per cent within only 4-5 years, assuming there is a concomitant expansion of the attendant infrastructure.
However, technology has already addressed this problem and with the Unstructured Supplementary Service Data (USSD), even a basic mobile handset (feature phone) without internet connection can facilitate cashless payment, through the IFSC Code of the Bank and the Aadhaar number. One can transfer money up to Rs 5000 using only the recipient’s IFSC code, mobile number and Aadhaar number ~ 83 per cent of India’s population is now covered by Aadhaar.
The last element is the financial inclusion ~ and it is indeed difficult to estimate. Taking the Census 2011 figure of 4.45 for the average household size in India, there are about 30 crore households to be covered for full financial inclusion, which can be ensured if each of these households has at least one bank account amongst its members.
As per the latest RBI data furnished in March 2015, the total number of savings bank accounts with the scheduled commercial banks was 11.7 crore (19.6 per cent growth over the previous year). These included multiple accounts in the name of a single individual, the precise number of which is indeterminate. Making allowance for even 25 per cent redundancy on this count, we have about 8.8 crore unique individual accounts. This will still include multiple members of the same households having separate accounts. The growth rate of 19.6 per cent would yield 9 crore separate household accounts by December 2016.
Under the Pradhan Mantri Jan Dhan Yojna launched in August 2014, as of December 2016, there were 25.98 crore Jan Dhan accounts, more than half of which have been opened since March 2015, and hence excluded from the 9 crore accounts computed above. Add to this nearly 3 crore “No Frill Accounts” with the Regional Rural Banks, when these accounts were converted to “Basic Savings Deposit Accounts” in August 2012 by the RBI. Many of these may be inoperative, but from these statistics, it is likely that at least 20 crore of the estimated 30 crore households have already been covered by the banking network. Opening an account has also become much simpler, with the Aadhaar Card and a photograph being the only requirements.
Thus a substantial part of the infrastructure essential for going cashless is already in place, and India can leapfrog into a digital economy without major disruptions. It is no longer an impossible dream if we only dare to dream, despite 90 per cent of our informal economy today being based on cash. In fact, it is this informal sector that is the target of demonetisation and naturally this is the sector that has been hit the hardest. If India is to become cashless, this sector has to be brought into the formal stream. This is also essential to expand our absurdly narrow direct taxpayer base.
Of the 52 crore strong workforce, 29 crore are engaged in the primary sector outside the tax net (using 2011 census percentages). The rest of the 23 crore employed in the secondary and tertiary sectors constitute our potential direct taxpayers’ base. Of this 23 crore, only 5 crore file tax returns, 1.5 crore pay taxes and only about 20 lakh people pay taxes at the highest slab rate of 30 per cent, with annual income exceeding Rs 10 lakh. Consequently 85 per cent of the net national income goes outside the tax net and our tax-to-GDP ratio remains among the lowest even among the emerging economies. Add to this the substantial evasion in indirect taxes ~ excise, service tax and sales tax (VAT) ~ the evasion unearthed by the Government in the last two years amounted to Rs 50,000 crore and the undetected evasion is anybody’s guess.
The evasion is enabled by the use of cash ~ the anonymous, fluid unit of transaction that leaves no trail and cannot be tracked. With such endemic evasion of indirect taxes, GST which subsumes most indirect taxes does not stand an iota of chance to succeed, unless the informal sector is included in the tax net. Besides, GST being a technology-driven tax, the primary prerequisite is a substantial digitisation of most transactions.
Life will not be the same in India ever again. Not all of the Rs 15 lakh crore withdrawn from the monetary system
is ever going to be returned, and the withdrawal ceilings
are also not going to be removed anytime soon. The Government is pushing the envelope hard to prod the informal
sector into cashlessness, to enable the authorities check tax evasion. Demonetisation is basically a political decision with economic ramifications. It is not about curbing
black money but eliminating the source of black money which is cash.
(The writer is a commentator and the views expressed are personal.)
