Love of cash hinders India’s move to digital economy

India’s dependency on cash may slow the country’s transition to digital payments despite large numbers of internet and mobile phone users.

For many citizens living in rural areas, cash is still the bedrock of daily existence because of a lack of facilities.

Sudhir Shinde, a farmer from Satara district in India’s western state of Maharashtra says he withdraws more money from his bank than required as the money vending machine in his village has not been operational for months.

“If I need money urgently, I must make a 32 kilometre (20 mile) trip to Satara town, which is not always possible,” said the 37-year-old sugarcane farmer Shinde, while buying fertilisers for his winter-sown crops.

“I always keep money in hand assuming family emergencies like hospitalization or any other such urgent requirements”.

Indian Prime Minister Narendra Modi backed a shock ruling in November 2016 to outlaw 86 percent of cash in circulation to target undeclared “black money” and fight corruption.

The demonetization got rid of old 500 and 1,000 rupee banknotes and Modi said that would boost the country’s digital economy, unearth unaccounted wealth and reduce the use of cash.

But 99.3 percent of the junked currency is back in the banking system, suggesting that only a miniscule portion was unaccounted illicit money or fake currency notes, and India’s addiction to cash is now, perhaps stronger than ever.

One of the key objectives of the note ban was to discourage the use of cash, but India continues to see a surge in currency in circulation even as economic growth has slowed to a six-year low.

Central bank data shows that since the controversial demonetization gambit, currency in circulation has grown, rising 17 percent to 21.1 trillion rupees ($295.7 billion) as of the end of March 2019.

The ratio of currency in circulation to GDP has risen to 11.23 percent as of March 2019 up from 8.69 percent at the end of March 2017.

To be sure, digital transactions have grown, rising 19.5 percent in value in 2018/19 and 22.2 percent in 2017/18, the Reserve Bank of India said in a report.

On whether India’s efforts to move to electronic payments has been slow, the central bank noted what it said in a statement last week.

To promote digital payment, the RBI has established “state of the art payment systems that are efficient, convenient, safe, secure and affordable” that has resulted in a rapid growth in retail digital payment systems.

Meanwhile, it will promote the use of e-payments for parking, fuel and toll collection, and has ordered banks not to charge bank customers for online transactions in the National Electronic Funds Transfer (NEFT) system from January 2020.

Anecdotal evidence, however, suggests people in Asia’s third-largest economy prefer cash for various reasons, including to avoid paying higher taxes after a national sales tax was implemented in mid-2017 and higher charges from retailers.

Smaller stores who don’t enjoy high volume sales often charge customers extra, to make up for what they must pay the service partners for electronic transactions.

Higher operating costs have also led to a slowdown in opening of new ATMs, which has led to cash hoarding.