Indias Journey towards Cashless Economy-

A Study
K. Sai Pavan Kumar

Introduction:
After the currency exchange announcement of November 8, 2016, branded as
demonetisation, the economic analysis came out thick and fast. Over the following
two weeks, as the currency exchange evolved into a scheme intended to push India
towards being a cashless economy. India has traditionally been a cash-based
economy with limited penetration of formal banking and financial services. The
financial sector in India is witnessing a transformation: new banks are coming up in
the country and the dream of a fully banked society is now nearing reality. Currently,
the worlds 12th largest1 consumer market, India is set a course to transform into
Faceless, Paperless, Cashless economy. The paper is going to discuss the cashless
economy. As a part of that Digital India program started

Cashless economy
A cashless economy is one in which all the transactions are done using cards or digital
means. The circulation of physical currency is minimal. India uses too much cash for
transactions. Belgium is the top ranked country in which 93% of total payments are in
noncash method only and next are France and Canada with 92% and 90%.where as
India stood at 22%.

Why cashless economy??

India's Cash to GDP ratio1(An indicator of the amount of cash used in the economy) is
around 12 to 13 percent, much higher than major economies including the US, the UK
and Euro and it also stood top in the BRICS nations. According to a 2014 study by
Tufts University, The Cost Of Cash In India, cash operations cost the Reserve Bank of
India (RBI) and commercial banks about Rs21,000 crore annually. India uses too
much cash for transactions. The ratio of cash to gross domestic product is one of the
highest in the world12.42% in 2014, compared with 9.47% in China or 4% in
Brazil.

History towards digitalisation

In 1983, a research paper by David Chaum introduced the idea of digital cash. In
1990, he founded DigiCash, an electronic cash company, in Amsterdam to
commercialize the ideas in his research. It filed for bankruptcy in 1998. In 1999,
Chaum left the company.

A glimpse on digital banking

1 Cash to gdp ratio means currency in circulation in total gdp.

1980 00s

The most digitalisation of banking reforms was taken place. The liberalization effect
to the banking industry and leads to use of computers in the banking sector in India
has increased many folds after the economic liberalization of 1991 as the country's
banking sector has been exposed to the world's market. Indian banks were finding it
difficult to compete with the international banks in terms of customer service, without
the use of information technology.
RBI set up a number of the committee on a mechanism to coordinate banking
technology mostly the recommendations are BANKNET, Electronic Fund Transfer,
Payment Systems, Cheque clearing and Securities settlement etc.

Financial inclusion
For moving to cashless economy there are some areas to be developed in India those
areas we can study under four they are

E-KYC
Payment Gateways.
E-Wallets
Unified Payment Interface

In India having a bank account is not a given. In

fact, 233 million people were considered unbanked in
2015 most of these people have never walked into a
financial institution before and if they do have an account it's balance is likely zero.
The RBI used tripod model financial education to people and increasing financial
stability of nation by achieving financial inclusion.

Financial education, financial inclusion and financial stability:

With the formation of new government, Prime Minister Narendra Modi in his
first Republic Day speech announced the Pradhan Mantri Jan Dhan Yojna 2. With the
focus to provide banking to all, this initiative gained momentum and as a result, a
major shift in this program is that households are being targeted instead of only
villages as targeted earlier. Moreover, both rural and urban areas are being covered
this time as against only rural areas targeted earlier.

In order to increase the ease of access, On April 11, 2016, a Unified

Payment Interface (UPI)3 has been built by National Payment Corporation of India

2 Pradhan Mantri Jan Dhan Yojna for opening zero balanced accounts.(PMJDY)
 (NPCI)4 that connects all the banks and all the telephone network operators in the
country. The platform helps a customer or any bank to access his/ her account with
any type of mobile handset.

RBI eased thee norms of know your customer and introduced E-KYC
mandatory for opening bank account and one just needs the Aadhaar number as it
serves as the only data to confirm all the details of an individual with biometric
fingerprints. Even without proof of identity and address one can open a small account
by photograph and signature by balance up to 50000, and withdrawal of 10,000
rupees per month and total credit of 1 lakh rupees for financial year.

E-wallets are used for digital money the RBI given licence for pre-paid
instruments such as Airtel money,axis bank line, citrus pay, freecharge, paytm,
finopay tech etc. The government is also promoting mobile wallets. which allows
users to instantly send money, pay bills, recharge mobiles, book movie tickets, send
physical and e-gifts both online and offline. Recently, the RBI had issued certain
guidelines that allow the users to increase their limit to Rs 1,00,000 based on a certain
KYC verification.

An urge towards digitalisation after demonetisation:

After demonetisation, the money physical availability of cash has been
reduced this leads to the need towards cashless economy though the means of
transactions were before after the currency ban the awareness has been increased
gradually it shows a tremendous increase and government initiations also taken place
they are as follows

They increased the POS machines in railways and also state bank
installed more than 10,000; and also all government transactions are made through
digital payment methods only and also gave tax-free incentives 5 on manufacturing
companies of POS devices.

3 Unified Payment Interface (UPI)

4 National Payment Corporation of India (NPCI)

5 Nill excise duty on POS devices and all goods for manufacturing of POS devices. Notification no. 35/2016 -
central excise
 The government also increased creating awareness and access through
Digishala program6, CSCs 7 and also increased the usage of Rupay kisan cards 8
through NABARD; and also offered 0.75% discount on petroleum and 5 rupees
discount on every booking of LPG gas booking on every online payment.

No service tax on digital transactions up to 2000 per transaction; and also 10%
discount on toll gates.

Income tax benefit under the scheme of presumptive income for small and
medium taxpayers whose turnover is up to 2crores, the present, 8% of their turnover
which is counted as presumptive income is reduced to 6% in respect of turnover
which is by non-cash means.

60%
100% 100%
digit
cash digital
Particulars al
turno turnov
turno
ver er
ver
2 2 2
Total turnover
crore crore crore
2 0.80
Cash turnover NIL
crore crore
1.2 2
Digital turnover NIL
crore crore
Profit on cash turnover @ 16 6.40
NIL
8% lakhs lakhs
Profit on digital turnover 7.20 12
NIL
@6% Lakh Lakh
13.6
16 12
Total profit 0
lakh lakh
lakh
1.5 1.5 1.5
Deductions u/s 80C
lakh lakh lakh
12.1
14.50 10.50
Taxable income 0
lakh lakh
lakh
6 DigiShala Educational TV Channel for Digital Payments on DD Free Dish

7 CSC are Common Service Centres

8 Rupay Kisan Cards to 4.32 crore Kisan Credit Card holders to enable them to
make digital transactions at POS machines/Micro ATMs/ATMs.
 2678 1936 14420
Tax payable
00 40 0
7416 12360
Tax savings Nil
0 0

Chief ministers panel to steer Indias cashless push

Levy a banking cash transaction tax on cash transactions of Rs 50,000.

Tax incentive and subsidies to boost digital transactions.
Promote Aadhaar Enabled Payment System (AEPS) by incentivising and not
charging MDR.
Aadhaar Pay, Biometric (FP & Iris) sensors should be provided at 50 per cent
subsidy to all merchant points.
Digital Economy Budget 2017
1. 125 lakh people have adopted the BHIM app so far. The Government will launch
two new schemes to promote the usage of BHIM; these are, Referral Bonus
Scheme for individuals and a Cashback Scheme for merchants
2. Steps would be taken to promote and possibly mandate petrol pumps, fertilizer
depots, municipalities, Block offices, road transport offices, universities, colleges,
hospitals and other institutions to have facilities for digital payments, including
BHIM App
3. Aadhar Pay, a merchant version of Aadhar Enabled Payment System, will be
launched shortly
4. A Mission will be set up with a target of 2,500 crore digital transactions for 2017-
18 through UPI, USSD, Aadhar Pay, IMPS and debit cards.
5. A proposal to mandate all Government receipts through digital means, beyond a
prescribed limit, is under consideration.
6. Banks have targeted to introduce additional 10 lakh new POS terminals by
March 2017. They will be encouraged to introduce 20 lakh Aadhar based POS
by September 2017.
7. Proposed to create a Payments Regulatory Board in the Reserve Bank of India by
replacing the existing Board for Regulation and Supervision of Payment and
Settlement Systems.

Modes of digital payments:

The different kinds of platforms used for making cashless transactions are as
follows
Banking cards Bank prepaid cards
USSD Point of sale
AEPS Internet banking
UPI Mobile banking
Mobile wallets Micro ATMs
 Banking cards are such as credit cards debit cards these cards offer two way
authentication for secure payment PIN and OTP. If we see the past card transactions
the usage at ATM centers i.e. physical withdraw of money is decreasing and the
increase in payment transactions at POS and online payment gateways.

Volume in millions, value in billions

Usage at
Ju A Se O N D
ATMs

0. 0. 0. 0. 0. 0.
Volume9

2. 3. 2. 3. 1. 1.
Value10
Usage At
PoS 24 25 24 29 26 29
volume

voume 79 83 77 88 97 11

Unstructured Supplementary Service Data channel USSD though it is

introduced earlier it was popularised after demonetisation. It is an innovative payment
service *99# we can transact by using basic feature mobile phone.

Aadhar Enabled Payment System AEPS is a bank led model which allows
online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through
the Business Correspondent (BC)/Bank Mitra of any bank using the Aadhaar
authentication.

Unified Payments Interface (UPI) is a system that powers multiple bank

accounts into a single mobile application (of any participating bank), merging several
banking features, seamless fund routing & merchant payments into one hood.

D J
e a
c n
- -
No 1 1
6 7
1

7 6
UP
0. . .
0 6

9 Value Rupees in Billion

10 Volume rupees in Million

 1 3
0 8
3 1

7 7
US
1 6
8 0
73 . .
4 2

National Electronic Clearing House NACH is used for making bulk

transactions towards the distribution of subsidies, dividends, interest, salaries,
pensions, and for bulk transactions towards the collection of payments pertaining to
telephone, electricity and water bills, loans, investments in mutual funds and
insurance premiums

Over the same period, non-cash paymentsNEFT, IMPS, PPI, CTS, mobile
banking, the point of sale (PoS) terminals and National Automated Clearing House
(NACH)rose to 40%. This suggests that cash transactions have been reducing since
demonitisation.

Volume in millions
A S O N D J
u e c o e a
Volume g p t v c n
1 1 1 1 1 1
1 2 3 2 6 6
8 0 3
NEFT 3 6 4
. . .
5 1 2 . . .
5 5 1 0 3 2
1 1
8 7 8 8 3 1
1 8 2
CTS* 7 0 8
. . .
6 9 . . .
2 4
04 value rupees
1 in
0 billions
5
value A3 Se
3 4 O 3 J
u p c 5 6
3 5 2 No De a
IMPS* g t 6 2 2
. . . n
. . .
NEFT 88 99, 0 9 2 8 4 1
,9 3
88 9 ,
88 11
71 10. 1 5 1 1 11
65 5
29 6 0 3
5 9 5
43 7 9 4 5
NACH* 2 8 8
.. . . . 5
13 2 3 5 . . .
.
33 9 9 0 5 7 7
1
2 2 2 5 5 8 8
CTS* 5 5, 6
,3 1 4 ,
PPI # 73 9
54 7
68 76
. . .
6 7 3 . . .
9 4 4 0 8 3
7 7 7 7 7 6
Mobile 1 2 8
2 0 4
. . .
Banking 7 6 0 . . .
6 3 8 3 2 9
 9 9
2 7 1
4 4
8
. .
6 6. 1 .
6 57 4 4
2 3 4
6 4 32 43 9
8 3
IMPS*
28
1
. .
4 9. 5 .
9 12 7 2
6 7 5
8 6 60 62 4
1 8
NACH*
59
1
. .
7 0. 4 .
8 36 4 4
5 6 2
6 0
PPI # 56
1
. .
4 .2 2 13. 21. .
6 8 2 0
1 1
, , 1
0 1 12 13 2
Mobile 3 3 0
banking 8 1, 5
6
. 04 .
9 2. 7 .
7 57 8 7

Mobile wallets:

The demobilisation shows a positive effect on mobile wallets The paytm

platform saw an overwhelming response of 435% increase in overall traffic over the
days, and the company experienced a 1000 percent growth in transaction value of
offline payments as well as every company Freecharge, Mobikwik, Oxigen,
mRuppee, Airtel Money, Jio Money, SBI Buddy, itz Cash, Citrus Pay, Vodafone M-
Pesa, Axis Bank Lime, ICICI Pockets, SpeedPay

m- N D
wall Au Se Oc o e
ets Jul v c
1 2
Vol 3 1
8 3
um . .
e
59. 70. 75. 99. 0 1
9 1
3 7
Val 3 4
. .
ue
27. 30. 31. 33. 0 4
5 8

 Retail Electronic Clearings have increased 40% gradually this shows

the increase in cash less transactions
Retail J A S N D
Electronic u u e O o e
Clearing l g p ct v c
3 3 3
3 0 3 3 1 4
6 7 1 4 2 1
. . 5. 6. . 8.
7 5 0 4 7 5
volume 5 6 3 6 3 4
9 9 9
, , 1 1 , 1
0 7 0, 0, 7 2,
4 2 7 6 4 6
0 6 7 3 8 0
. . 0. 4. . 8.
8 5 1 9 2 0
value 2 9 3 7 5 1
Assessment:

Level A Level B Level C Level D Level E

e-wallets, bio metric

non-electonic debit BHIM,UPI,
such as DD's card,credit payments,
physical cash aadhar
bank challana card etc based
payments card

Conclusion:

Though it will take time for moving towards a complete cashless economy, efforts
should be made to convert urban areas as cashless areas. As 70% of Indias GDP
comes from urban areas if the government can convert that into cashless it will be a
huge gain. Therefore different trajectories need to be planned for migration to cashless
for those having a bank account and for those not having. The regulators also need to
keep a sharp eye on any potential restrictive practices that banks may indulge in to
maintain their current dominance over the lucrative payments business.