Monday, January 2, 2017

Cashless Economy

C P Krishnan

THE stated objective of the government of India (GOI) for demonetisation was to fight against the black money, fake currency, terrorism and corruption.  Both the prepared text of the Prime Minister Narendra Modi and the statement of the finance ministry of government of India confirm this. Then why cashless economy is now given a thrust?
The GOI and Reserve Bank of India (RBI) knew fully well that there was not a single piece of new 500 rupee note on November 8, 2016, the day the demonetisation was announced.  This has been revealed through the Right to Information sought by an activist and published widely by many newspapers.

When Rs 15.44 lakh crores of specified bank notes of Rs 500 and Rs 1000 rupees were removed from circulation, the authorities could pump in only one third of its value that too in six to seven weeks’ time. The people were deliberately made to stand in long queues for hours together before bank branches and ATMs.  More than 100 people and 15 bank and postal employees died in this process. Almost entire value of the money equivalent to the demonetised currency notes has reached the banking system. No black money as predicted by the rulers has been withheld. Out of it, hardly Rs 1.5 crores was found to be fake currency. No proof of stoppage of money supply to terrorists has been provided. The fact that during several raids, crores of new Rs 2000 currency notes were found, clearly shows that corruption continues unabated. Even after 50 days, the situation has not improved.  The cash crunch continues.  Even if all the four printing presses are fully engaged to print new 500 rupee notes, it may take at least another six months to replenish the cash equivalent to the value demonetised.
That is the reason why the GOI has shifted the goal post to “Cashless Economy”.  How far it is feasible in the present Indian context?

As has been admitted by the GOI, in its affidavit before the Supreme Court, 86 percent of the total transactions are done through cash.  What is the plan of the GOI to turn such a huge volume of transactions into cashless?  Here and there a few insignificant temporary concessions have been announced. The country which is by and large against lottery system has reintroduced the same for the electronic users. All these will have little impact to go for digital.

Leaving aside the debate why one has to go for cashless, let us see whether our country is ready to embrace the same.

Cheque payment is one of the alternate systems to cash.  But the possibility of dishonour of cheques is large and that is why its credibility is still at low ebb.  The legal system does not ensure credibility to cheque payment. No doubt cheque dishonor is an offence under Negotiable Instruments Act, 1881. But under the said act, the notice has to be sent by the payee to the drawer in writing within thirty days from the date of receiving Cheque Return Memo from the bank and demand the cheque amount to be paid to him within fifteen days from the date of receipt of such a notice by the drawer.
A)     The cheque should have been drawn by the drawer on an account maintained by him.
B)     It should have been returned unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque.
C)    Cheque must have been issued towards discharge of a debt or legal liability.
D)    If after receiving the notice, the drawer does not make payment within fifteen days from the date of receiving such a notice, then he commits an offence punishable under Section 138 of the Negotiable Instruments Act.
If the drawer makes payment of the cheque amount within fifteen days from the date of receipt of the notice, then drawer does not commit any offence.  Otherwise, the payee may proceed to file a complaint in the court of the jurisdictional magistrate within one month from the date of expiry of fifteen days prescribed in the notice.
The punishment prescribed for such an offence is fine which may extend to twice the amount of the cheque or imprisonment for a term which may be extended to two years or both.
As of December 2015, there are an estimated 18 lakh cheque bounce cases across the country, of which about 38,000 are pending in High Courts. Many litigants are forced to travel to different places from where the cheques were issued and not honoured.
Unless the legal system is more strengthened to give credibility to cheques equivalent to that of cash, we cannot make people to switch over to cheque payment system to a large extent.

In our country with a population of about 120 crores, there are hardly 2 crore and 60 lakh credit cards and out of around 71 crore debit cards, approximately only 14 lakhs people use them for purchase of goods.  It is very much evident from the long serpentine queues before the ATMs that more than 99 percent of the debit card users use them only for withdrawal of cash from the ATMs.
When you use a credit or debit card for purchase of goods and services, there is a possibility of double debit. It is not easy to get back that excess amount debited. Due to poor server capacity, cards are also at times declined.  Outsourcing the jobs in project offices of several banks also poses considerable risk and delay in resolving genuine issues.

Cyber security in our country and for that matter all over the world needs to be strengthened. The track record shows that the loss due to this type of white collar crime has been astronomically a huge sum of money. A report says that in a single month in 2015, cyber criminals targeted over 100 banks globally and made off with one billion US dollars. Recently in the third week of October 2016, data theft of 32 lakh debit cards has come to limelight. The issue of data theft has hit the media reports only after six weeks of its first detection.
The security breach happened through a malware in the systems of Hitachi Payments Services, which serves Yes Bank. Hitachi provides payment services through ATM services, point of sale services (POS), emerging payments services and banking channel products like cash recycling ATMs and auto passbook entry machines. State Bank of India alone replaced six lakh cards. Other banks like Bank of Baroda, IDBI Bank, Central Bank and Andhra Bank have also replaced their debit cards which are affected as a pre-emptive measure.
This is one example how cyber security is very poor in our country.  Unless it is strengthened and fool proof method is put in place, how can GOI ask all the people to switch over to cashless economy?
Cost involved in using cards is also high as banks charge around 1.5 percent of the card transactions as its service charges besides some rent. This charge is directly or indirectly passed on to the consumers. The printing cost of one 2000 rupee note is Rs 3.55.  Its cost does not change whatever be the number of times the note is circulated till it is worn out and becomes soiled.  But in the case of digital transaction, for every transaction of Rs 2000, it entails an expenditure of Rs 30.  The very first transaction itself is 8.5 times costlier than cash transaction.  One can imagine how many times it will be costlier considering subsequent transactions equivalent to the number of times of circulation of one Rs 2000 currency till it is soiled.

Even after taking into account that those who can put their signature as literate, the literacy level in India is hardly 64 percent. With such a huge illiterate population, going for digital will really pose serious difficulties.  About 26 crores people have so far registered in Mahatma Gandhi National Rural Employment Guarantee Scheme. These people’s annual income will be in the order of Rs15000.  When this is the case, what is the need for them to go for digital and how can the GOI force them?
They compare other countries for going for digital system.  What is the factual situation?
People cite Sweden as an example.  That is a small country with a population of around 1 crore with 100 percent internet connectivity. In our country, according to TRAI (Telecom Regulatory Authority of India), as of June 2016, there were 35 crore internet subscribers. There are many users who have multiple internet connections and multiple mobile phones and hence it means literally more than two thirds of Indians do not have any access to use internet. There are 22 crore smart phone users but most of them are reluctant to use internet on their mobile devices. A mobile device with banking data has to be protected in the same way as one would safeguard a signed cheque leaf.
Further the cost of internet in Sweden is also very less compared to that of India.  Apart from that, with the tax money, the Swedish citizens receive lifelong health care (State funeral), pension, free education, free legal representation etc.  When nothing of that sort is available in our country what will be the motive for the people to go for digital despite a high cost?
In developed nations like Germany, cash is used for 80 percent by volume; Japan uses cash for 82 percent of transactions by value and over 90 percent by volume.  Japan has cash-equivalent to 20 percent of GDP in circulation whereas in India as on November 8 the same was only 13 percent.  Japanese prefer cash, since banks offer very low (or negative) interest and charge highly for digital transactions. 
Banking system is the foundation for the digital financial transaction.  The faith of the people in new generation private banks has been very much eroded as many such banks have compromised the customer data through its outsourcing agents.This fact has been confirmed as RBI has blacklisted such outsourced agents.  Now the faith in the public sector banks (PSBs) is also getting eroded as artificial restriction has been placed on the clients since November 8 with regard to cash withdrawal of Rs 2000 per day in ATMs and Rs 24,000 per week in banks.  People are unable to comprehend how their own money could not be withdrawn for their dire need and how a government can deny them small denomination notes which are essential for their day to day life.  This has created a sort of fear and panic in the minds of the people. As a first step, there is a basic need to remove this fear to rebuild the confidence of the people in the banking system which is an essential pre-requisite to go for digital transactions.
There are several steps to be taken like improving literacy level, ensuring hassle free high speed internet connectivity at very reduced cost, free transaction charge, cheap smart mobile phones, strengthening server capacity and cyber security, ensuring privacy etc,  if at all the GOI is particular to switch over to digital India. Thus in the present circumstances it is very clear that going for a cashless economy is absolutely not feasible in the near future.
Knowing full well that there was no sufficient cash to replenish the amount proposed to be withdrawn, they announced demonetisation.  Now knowing fully well that cashless economy is not feasible in the near future in the absence of the steps listed above, they bat for cashless economy. Why? The whole idea is to divert the attention of the whole lot of people from the failure of the present government in resolving real issues of the people like price rise, unemployment, lack of food security, education, health, potable water, energy, road etc.

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