The reason why people prefer cash is that it’s the fastest way to transact, assures exact payments and doesn’t require dependence on internet or other related infrastructure, still the government is encouraging more use of digital transactions. According to the Finance Minister Arun Jaitley, “the cost of transacting in cash is very high and that is why the government is encouraging digital transactions.” India has one in all the best ratios of currency in broad money measure (M1). The ratio of money held in notes and coins as compared to the amount held in deposit and savings account, i.e. Currency to Deposit Ratio, is 51% in India, higher than economies like Egypt, South Africa and Mexico.
Out of the total burden of currency costs, 86% of it is borne by the banking system. Banks earn restricted fees from cash operations but end up finding itself incurring expenses for cash handling and processing costs, insurance cost, payments for cash in transit companies, and losses on interest for standing amount in branch and ATM. These costs are just fraction of the costs that the economy faces as a whole.
Consumers face high costs in procuring cash from ATMs and bank branches while employers using cash also pay high costs to access it and stock up extra currency for exigencies. For individuals, cash usage also imposes a regressive tax with the highest impact on the unbanked. The unbanked pay fourfold a lot of in fees to access their cash than those with bank accounts.
Meanwhile, businesses also pay for using cash. The costs associated with using cash for a business include lost interest income from bank, requirement of special front office staff to process cash payments while there is multiple other handling, insurance and safety costs attached too.
Other than the direct costs to consumers and businesses, there are certain indirect costs as well. Easy accessibility of cash ends up in corruption, that successively hurts India’s attractiveness for investors and businesses.
The government has worked on a proposal to incentivize digital transactions by providing cash backs to businesses and price benefits to consumers. As per the proposal worked out by the Revenue Department, consumers paying through the digital mode would be offered a discount over the maximum retail price (MRP). For example, get Rs. 50 cash back on initial dealing of over Rs. 150 and Rs. 100 cash back on second dealing of over Rs. one hundred fifty by paying via Bharat QR for DTH bills, get Rs. 51 as cash back on joining the BHIM app and sending Re. 1 to any BHIM app user as the first transaction. Businesses, on the other hand, could get cash back based on the quantum of turnover through the digital mode. All these together act as opportunity costs for using more of cash.
Though, transacting through cash is more easy and convenient but, as discussed above, it has a significant cost associated with it, which is borne by all the parties involved in transactions, i.e. banks, customers and businesses. Thus, everyone should be encouraged to use more of digital modes of payments and less of cash and transform India ‘digitally’.