Pacific Business Review International

Volume 10 Issue 9, March 2018

Cashless Economy – Challenges and Opportunities in India

Dr. Budheshwar Prasad Singhraul Abstract

Assistant Professor A cashless transaction in India is an effort to move towards a cashless
Department Of Commerce economy by minimising the use of physical cash. The main objective
Guru Ghasidas Vishwavidyalya, of the study is to present the current status of India in usage of digital
Bilaspur, Chhattisgarh, India currency in comparison to other developed countries and find the
challenges and opportunities which are associated with the cashless
Yogita Satish Garwal transaction in India. The data of different countries which are related to
Research Scholar usage of digital currencies has been gathered. Data is gathered by using
Department Of Commerce secondary data collection method and then graphical representation is
Guru Ghasidas Vishwavidyalya, being used. The findings of the study revealed that the introduction of
Bilaspur, Chhattisgarh, India cashless economy in India can be seen as a step in the right direction of
economy growth and development. It has been conducted to unravel
the challenges and opportunities of cashless economy by promoting
electronic money instruments, developing electronic financial
infrastructures and spreading digital transaction habits among people.
Demonetisation announcement (2016) is a revolutionary move
towards the cashless economy in India. The study recommends that
more people should start using digital payment methods which will
serve a cashless economy or less cash economy.
Keywords: Cashless Economy, Digital Currency, Global Economy,
GDP (Gross Domestic Product), Economic Freedom, Internet

Introduction
Transformation into a cashless economy is an international issue and
many of the countries already almost become cashless economy. A
cashless economy is where financial transactions are not being done in
the terms of currency notes, coins or physical cash money. It was in
trend by barter age of cashless transaction and other methods of
exchange like food crops or other goods (Humphrey, D.B, 2014).
However, the new concepts of cashless transactions in cashless
economy are made with the help of digital currencies where legal
tender (money) is exchanged and recorded only in the electronic digital
form. So many challenges and opportunities are associated with the
effects of digital transactions.
Indian population where 98 per cent of total economic transactions by
volume is being done through cash (Economic times, Nov. 23, 2016),
much of the cash transactions being done in the country are small
exchange for goods or services. The penetration of Pos terminals is not
enough. Millions of people still do not have a bank account, internet
network and connection is not proper, lack of knowledge to use online

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 Pacific Business Review International

payment methods. These are some of the challenges are Quantity theory of money (QTM) states that money supply
there in the country especially in small towns, rural areas and and price level in an economy are in direct proportion to one
untapped markets in urban India, need to be resolved and another. When there is a change in the supply of money,
people make assure that to adopt digitalisation in their there is a proportional change in the price level and vice-
payment system. It is a big task in front of the government of versa (Irving Fisher, 1911). Whenever money supply rose
India and their policy maker to transform their society into a abnormally in the past in an economy, inflationary situation
cashless economy or less cash economy with the India’s fast developed there. May not be the relationship a proportional
growing population. one, but excessive increase in money supply leads to
inflation (Nikita Dutta).
The introduction of cashless transaction has made the
government of India to move towards cashless economy. The Theory’s Calculations is expressed as:
India was the world's fastest growing major economy in the
MV=PT (the Fisher Equation)
last quarter of 2014 (G20 an International Forum). India also
topped the World Bank's growth outlook for 2015-16 for the Each variable denotes the following:
first time with the economy rate having grown 7.6% in 2015-
M = Money supply
16 and also expected to grow 8.0%+ in 2016-17. It is seen
that growth of the Indian economy in the future is positive. V = Velocity of Circulation (the number of times money
changes hands)
India has already introduced some of the option of payment
methods such as Ola money and PayTM accounts to pay P = Average Price Level
rents via internet banking, Indian government has taken a
T = Volume of Transaction of Goods and Services
decision of demonetisation (2016) by discontinuation of all
500 and 1000 banknotes, as it would no longer be recognised In the 1950s, Milton Fried man came out with a thesis that
as legal tender. This move has been executed with the aim to “inflation is always and everywhere a monetary
curb the circulation of “black money” in the country and phenomenon”. These words are enough to establish the
associated problems. India is going towards cashless essence of quantity theory of money inflation is largely
economy very fast but it may be a long process for years to caused by the excessive growth of money supply and by
become complete cashless economy or less cash economy. nothing else.
Conceptual Framework: Increase of cashless economy or cashless transaction is
generate less cash or no cash demand in the market and
The main concept of the cashless economy is that to make
create scope of develop for QTM theory and it may be a
people use digital payment methods for their transaction of
grateful participation to develop a healthy economy for long
money for goods and services fully, without elimination of
run.
physical cash from economic market completely. Limited
cash in circulation support to control growth of inflation
rate.
Figure-1

Source: Economic Survey Calculation (2016-17) projected calculation for 2016-17

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Volume 10 Issue 9, March 2018

Review of Literature:
The demise of cash and the emergence of a cashless society Digitalisation of traditional payment methods is a
pose a lot of benefits for the society (Humphrey et.at., 1996). revolutionary development of banking industries, Internet
According to CBN (2011), an effective and modern payment services and mobile industries. Digital payment methods
system is positively correlated with economic growth. In the provide more economic freedom to people. It may give an
growth of Global economy, digital currency has a key role opportunity to establish new technologies and develop-
for transaction of money for businessmen, consumers and ments worldwide, resulting growth of the country’s GDP
governments around the world. Almost 25 percent of and economy. New developments of industries provide
worldwide consumer spending was through some form of more employments, increase in per capita income, improve
payment card, up from 16 percent in 2003. The report says, people quality life etc.
Digital currency delivered an additional $1.1 trillion to the
Digital currencies can provide economic freedom to
global economy cumulatively in the six years from 2003
business transaction of their users anywhere in the world.
through 2008. On average, that represents a 0.5 percent
Economic freedom is which allows people in different
increase in total annual gross domestic product (GDP).
countries to trade with each other. They can start and expand
During the same period, real Global GDP grew by an
their business globally by transfer or accept payments with
average of 3.4 percent (Moody’s, 2008).
safe and secure transaction in just a few hours around the
Country’s economic health can be measured by the world. It reduces corruption and bribery too. In the last two
evaluation of country’s economic growth and development. decades, the average growth of Economic freedom globally
Economic growth is usually indicated by an increase in the is only 3 percent (from 57% to 60% approximately – Figure-
country’s gross domestic product (GDP) which is the total 2) (Index of Economic Freedom 2017) but increase of digital
value of any goods and services produced in the country currency can develop more economic freedom in the world
mostly it is associated with the new technologies and which can serve new technologies and innovations, growth
development. In other way economic development is in GDPs, more opportunities of employments, reduce
usually indicated by an increase in citizens’ quality of life corruption and terrorism and raise peace and happiness all
which covers literacy rate, life expectancy and poverty etc. over the world.
(Duggeri Ashley)
Figure-2

Source: 2017 Index of Economic Freedom

Macro and Bandiera (2004) argued that increased usage of transactions in India is equivalent to 1.7 per cent of the gross
cashless banking instruments strengths monetary policy domestic product (GDP). To put that figure in perspective,
effectiveness and that the current level of e-usage does not the central government's capital expenditure in 2016-17 was
pose a threat to the stability of the financial system. Hord marginally lower at 1.6 per cent of GDP (Ishan Bakshi, Oct.
(2005) emphasizes the fact that electronic payments lower 6, 2016). It will save a huge amount of money that is
costs for business. The more payment that is processed spending annually in printing and maintaining currency.
electronically, the less money is spent on paper and postage. Currently less than 1% of all consumption expenditure is
According to a new study by Visa, the cost of cash incurred through cashless instruments (Bappaditya

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 Pacific Business Review International

Mukhopadhyay and Sambit Rath, 2011). Electronic settlements popular among the residents of some of the most
Payments as argued by (Cobb, 2005) have a significant technologically advanced nations of the world. Digital
number of economic benefits apart from their convenience payments methods became well established in countries
and safety. The process creates greater transparency and across the world by 2010’s. There are some of the countries
accountability leading to greater efficiency and better (Table-1) have adopted different mode of digital payment
economic performance (Al Sheikh, 2005). that encouraged the public to opt for cashless transaction
options.
During the 1990’s, the growing popularity of electronic
banking made the use of non-cash transactions and
Table-1 Mode of Digital Payment and use in Percentage of different Countries
Name of Mode of Digital Payment Digital Transaction as
Country per 2015, Worldatlas
Sweden Internet Banking, Mobile Banking, Credit & 59%
Debit Cards and E-Krona in near future
Norway Electronic-Banking -
Denmark Payment Cards, Mobile Banking and E-Krone -
in near future
Belgium Debit Cards and Sixdots a Mobile app 93%
France Mobile Banking, Contact-less Cards and M- 92%
POS
United Paym a Mobile Payment System 89%
Kingdom
Somaliland Mobile Banking -
Kenya M-PESA and M-Shwari (Mobile Payment app) -
Canada Payment Cards and Online Wallet 90%
South Korea Credit & Debit Cards 29%
Singapore iBanking, Mobile wallet and Contactless cards 61%
Netherlands E.dentifier Cards Readers, iDeal and Debit 60%
Cards
USA e-Banking, Mobile Banking and Card Payments 45%
Australia Internet Banking, NAB a Mobile Banking app 35%
and Card Payments
Germany Online banking and EC-Karte a Debit Card 33%
Spain Internet Banking, Debit and Credit Cards 16%
Brazil Boleto, TEF (Online Payments Methods) and 15%
Domestic Credit Cards
Japan Online banking, Mobile Banking and Card 14%
Payments
China Internet Banking and CUP Cards 10%
India Electronic Banking, Credit and Debit Card 2%
Payments
India is a country where 98 per cent of total economic less familiar with digital banking and the use of credit or
transactions is done through cash and has 26 per cent debit cards, making transactions using mobile phones, and
internet access and there are only 200 million users of digital using the internet to pay bills.
payments services (ICT Fact and Figure 2015). The world
Different Countries in cash transaction (Figure-3) and
Bank's Global findex shows that Indians are significantly
cashless transaction (Figure-4).

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Volume 10 Issue 9, March 2018

Figure-3

Source: CLSA Report, Compiled by: Puneet Wadhwa, November 14, 2016
Figure-4

Source: www.worldatlas.com , 2015

Research Methodology objective of this study includes:
Electronic databases and online libraries are searched for a) To find out the status of India in comparison of other
relevant literature using a comprehensive set of keywords countries in terms of cashless economy.
and graphical representation relating to cashless technology
b) To find out various challenges and opportunity
of different countries including India. Information was
associated with the implementation of the cashless
gathered from web based search engines, published
policies in India.
literatures.
c) To find out solutions to be adopted against challenges
Secondary Data: The secondary data are collected through
associated with the implementation of the cashless
government records, Articles, Journals, Survey reports,
policies in India.
Research Data and Websites information.
Limitation of the Study
Objectives of the Study
This study is limited in terms of providing model scope to
The main objective of the study is to examine that the
show the relationship between cashless policies and
importance of cashless policies in the economy of a country
different variables of finance
and how it affects to their economic growth. Specifically the

58 www.pbr.co.in
 Pacific Business Review International

Scope of the study manpower to provide prompt services in time. A bank

account is a primary requirement for digitalisation. Hence
Work on the cashless economy is scarce, so scope of study is
Banks have a core responsibility to improve and develop
more. Researchers further need to understand the
them self -first. There are some challenges in the process of
mechanism of cashless policies effecting cashless payments
cashless economy in India.
and their effect on the Indian economy.
a) Internet plays vital role between banks and customers to
Analysis of the Study
receive and deliver information, this forms of banking is
Challenges of Cashless Economy describes as Internet banking (Reserve Bank of India,
2001). The figures showing in Figure-5 the percentage
In the process of digitalisations of an economy of the
of Internet users of India in comparison of other develop
country, it is very important to assure that the availability of
countries.
proper sources to setup require technology and sufficient
Figure-5

Source: Internet Live Stats (www.InternetLiveStats.com)

Financial literacy is another big challenge in India to adopt 74.04%. (Indiafact, March 17, 2013 as per India Census
digital currency system. Financial literacy basically has 2011). Out of that, Male literacy rate is 82.14% and Female
based on the use of technology to effectively use the power literacy rate is 65.46% according to Census 2011 and
of medium like computer, mobile and internet to enable Internet users number of Male is 71% and Female is 29%
people to have skills, knowledge or information about respectively can see in Figure-6.
financial instruments. In India, the total literacy rate is
Figure-6

Source: Indiafact, March 17, 2013 as per India Census 2011

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Volume 10 Issue 9, March 2018

b) Though bank accounts have been opened through 99% of households in both rural and urban India have at
Pradhan Mantri Jan-Dhan Yojna (PMJDY), most of least one member with bank account. In one of every
them are not in operation. There were 256 million five Indian households is a chief wage earner (CWE).
accounts, roughly one for every household. Opening CWE is a breadwinner who does not save money in a
accounts only does not empower citizens to make bank (MRSI 1998). We can see the Figure-7 and it is
digital financial transactions. A recent investigation clear that still huge population are there in the country
found that 23% of PMJDY accounts lie empty; 10 who are not operating their transaction through banks
million accounts held only Rs. 1 and only 33% of all even having accounts in the bank.
were ready to use their Rupay cards (September, 2016).
Figure-7

Source: ICE 360 Degree Survey Dec 15, 2016

c) India has a wide network of small retailers in all over Opportunities of Cashless Economy
countries area and most of they do not have enough
The main advantage of cashless transactions is that a proper
resources to invest in electronic payment infrastructure
record of all economic transactions is possible to keep. It is
to receive and make payments digitally.
remedy to remove black market or underground economies
d) The perception of consumers on use of credit and debit that often prove damaging national economies. Since, cash
cards and belief that cash helps you negotiate better. is the primary mode of transactions in money laundering and
terrorism financing, a cashless economy discourages such
e) There is also vested interest in not moving towards
activities. Central government also get benefit from such
cashless economy and most card and cash users fear that
cashless transactions as it allows central control of money
they will be charged more if they use cards. Further,
supply and it is easier to monitor income tax paid by an
non-users of credit cards are not aware of the benefits of
individual. Cashless transactions are helpful in the context
credit cards due to lack of awareness of new
of negative global inflation and quantitative easing. Going
technologies and financial literacy.
cashless is also reducing the levels of corruption prevalent in
f) Indian banks are making it difficult for digital wallets the country.
issued by private sector companies to be used on the
Some more benefits of cashless economy are as follows:
respective bank websites. It could be restrictions on
using bank accounts to refill digital wallets or a lack of a) Real estate prices will reduce because of curbs on black
access to payments gateways. Regulators will have to money as most of black money is invested in Real
take a tough stand against such rent-seeking behaviour estate.
by the banks.

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 Pacific Business Review International

Figure-8

Source: Knight Frank and Survey Calculation

b) There is a process of issuance of currency where d) There is greater efficiency in welfare programmes as
government bear costs against designing, developing, money is wired directly into the accounts of recipients
printing, storing, transporting and placing etc. All this with great transparency.
can be avoided by digitalisation of cash transactions. In
e) There are efficiency gains as transaction costs will also
Financial year 2015, RBI spent Rs. 27 billion for
come down by using methods of digital payments.
currency issuance and management.
f) In India, 1 in 7 notes is supposed to be fake, which has a
c) It pave way for universal availability of banking
huge negative impact on economy. By going cashless
services to all as no physical infrastructure is needed
transaction, accountability of notes and coins in
other than digital. People can make their payments and
circulation will be possible.
receive globally.
Figure-9

Source: Ministry of Home Affairs and RBI (Updated by November 9, 2016, Mayank Jain)

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Volume 10 Issue 9, March 2018

g) Soiled or tobacco stained notes full of germs are a norm March 2017, from https://cointelegraph.com/news
in India. There are many such incidents in our life where /danish-central-bank-to-digitalize-national-
we knowingly or unknowing give and take germs in the currency
form of rupee notes. This can be avoided.
http://www.hindustantimes.com/analysis/india-is-far-
h) In the recent trends of digitalisation will reduce costs of away-from-being-a-cashless-economy-here-s-
operating ATM’s. why/story-ybFui5M53JPFyD1MGvHigJ.html
i) Impact of digital transactions increase in GDP by http://hh.diva-portal.org/smash/get/diva2:1079619/ FULL
emerging markets resulting growth of country TEXT01.pdf
economy.
https://usa.visa.com/dam/VCOM/download/corporate/med
Findings and Suggestions ia/moodys-economy-white-paper-feb-2013.pdf
The findings of the study show that India in terms of using http://www.hindustantimes.com/analysis/india-is-far-away
digital payment methods is still very poor in comparison to -from-being-a-cashless-economy-here-s-why/story
other developed countries in the world. As many countries -ybFui5M53JPFyD1MGvHigJ.html
are already turned up with their electronic payment system,
http://hh.diva-portal.org/smash/get/diva2:1079619
India is in its initial stage and most of the population are
/FULLTEXT01.pdf
dependent on cash based transaction because of
unavailability of proper internet connectivity, lack of https://www.researchgate.net/publication/2311989_Strateg
awareness and knowledge of financial transaction, charges ic_Challenges_for_Internet_Banking_in_Japan_an
on card payments and un operational bank accounts. d_Singapore_-_Anything_to_learn_from_the_US
India needs to come up with the new policies of digital http://www.hindustantimes.com/analysis/india-is-far-away
transactions. It is recommended that government should -from-being-a-cashless-economy-here-s-why/story
promote their agencies and private sector service providers -ybFui5M53JPFyD1MGvHigJ.html
to spread financial literacy at a great extend especially in
https://www.researchgate.net/publication/2311989_Strateg
rural areas. Government should provide extra benefits on
ic_Challenges_for_Internet_Banking_in_Japan_an
digital transaction payments and offer extra incentives or
d_Singapore_-_Anything_to_learn_from_the_US
interest rate on cash saving in bank accounts. At the same
time reduction in charges of digital transaction or exemption Jun, M. & Cai, S. (2001). The key determinants of Internet
completely on digital banking should be offered for few banking service quality: a content analysis.
initial years which can be more helpful for speeding up the International Journal Of Bank Marketing, 19(7),
process of digitalisation of payments in India. 276-291.http://dx.doi.org/10.1108/026523201104
09825
Conclusions:
Khosla, S. (2017). India is far away from being a cashless
The objective of this study is to find the challenges and
economy. Here’s why. http://www.hindustantimes.
opportunities of cashless economy. Cashless economy can
com/. Retrieved 14 March 2017, from http://www.
be achieved by adoption of proper methods of digital
hindustantimes.com/analysis/india-is-far-away-
payments. It only requires full proved new financial
from-being-a-cashless-economy-here-s-why/story-
policies, centralised administrative control, regular
ybFui5M53JPFyD1MGvHigJ.html
monitory attention on the bankers, government agencies and
other private service. Safe and secured services like Sharma, G. (2016). Study of internet banking scenario in
immediate certification of payments , clear statement of India. International Of Emerging Research In
their accounts, no hidden charges, full control on money, Management And Technology, 5(5), 43-48.
shorten process of transaction by fulfil of mandatory Retrieved from https://www.ermt.net/docs/papers
information . As an overall review, most of the major /Volume_5/5_May2016/V5N5-138.pdf
developed countries in the world are moving in a very
Suresh Chandra, D. (2015). The Electronic Banking
excellent way of cashless economy. A history of delayed in
Revolution in India. The Journal Of Internet
development in India is too long. Now the time, India should
Banking And Commerce, 20(2). http://dx.doi.org
progress in full steam ahead and create a new legacy. This is
/10.4172/1204-5357.1000110
time to embrace the cashless economy like other developed
countries and we must make the most of it. Sweden's Central Bank Considers Digital Currency -
eMarketer. (2017). Emarketer.com. Retrieved 14
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