The past couple of years have seen a number of initiatives to facilitate cashless transactions in the Indian economy, including the launch of the Unified Payment Interface (UPI) earlier this year.
Such moves may raise the volume of cashless transactions in India in the years to come but the latest available internationally comparable data shows why moving towards a cashless economy remains a Herculean challenge for the country.
Data pertaining to payment, clearing and settlement systems in 23 major economies, recently released by the Bank for International Settlements (BIS) shows that India lags far behind both emerging market and developed peers in the move towards a cashless economy. Non-cash payments transactions in India amounted to only 11 per inhabitant in 2015, much lower than other BRIC economies, with China reporting 17 such transactions per inhabitant in 2014.
The proportion of non-cash transactions is of course much higher in the advanced economies. The average non-cash retail transactions per inhabitant was 355 in the UK and 403 in the US.
It is not surprising then that India’s cash to GDP ratio of 11% is among the highest in the world. The BIS report showed that the only economies with a higher ratio of cash to GDP were Japan, Hong Kong and Switzerland, all of which have interest rates near zero. The fact that countries with near-zero interest rates will deal more in cash is reasonable given that low interest rates reduce the cost of holding cash. But India’s official repo rate was 6.75% in March 2016, when India’s cash to GDP ratio was 11%, almost equal to that of Eurozone, which has interest rates close to zero.
The level of non-cash transactions has risen even in India over the past few years. Debit cards seem to be the instrument of choice for Indians in making non-cash payments.
According to BIS, debit cards accounted for around 70% of the volume of non-cash transactions in India. However, in terms of value, the leader in non-cash payments transactions has been credit transfers between accounts, accounting for 89% of the value of all reported non-cash transactions in India.
While debit cards have been the main instrument aiding India’s move away from cash, an international comparison shows that we still have a long way to go in terms of the penetration of debit cards.
India can learn from other countries in the developing world, which have managed to reduce their dependence on cash even while bringing more people in the folds of the formal banking network.
Kenya has been a well-documented success story, where mobile money has spread much faster and deeper than in India. Kenyan households with access to mobile money were able to manage negative economic shocks (like job loss, death of livestock or problems with harvests) better than those without access to mobile money, according to World Bank research.