Home / Opinion / Make using cash expensive

Event one: I’m buying something from an Apple store for a favourite nephew. I’ve just used my credit card to make the payment. I’m asked to show an identity proof, which is then photocopied and the paper kept. Why, I ask. The card companies want us to do this so that stolen cards are not used. At the other check-out station, a man slaps a thick wad of cash on the counter. He has just bought something that costs almost 1 lakh. The cash is counted. A receipt is issued and the man walks out. Why did you not take his identification, I ask. Mild titter of mirth—not needed, ma’am; many people pay cash. Unfair, isn’t it? I’m paying by card; so it is obviously tax paid money. That guy is paying by cash. We know who carries so much cash, right? Nods all around. And then we all move on. That is how it is in India. Cash gets the fast lane.

Event two: Another day, another store. This time it is a garment. My one kurta needs a card that I pull out. But in the next bay is a nice looking lady, who could have been in a TV debate hotly protesting corruption in high places, who thumps out 25,000 in soiled notes to pay for the five bags of things bought. Cash is queen.

Event three: I had bought some small trinket online. It broke and the company guy came to collect it. I get talking to him. After more than 20 years as a journalist, everything is a story. People buy online? Yes, lots of them. Small stuff, like I got—3,000-4,000? No, ma’am. They buy expensive jewellery. Flips over the receipt book and shows me an entry of 1.6 lakh. This is half advance; rest when I deliver the piece. Payment by cheque? No. Snort of derision. It is all cash. Cash is gold.

Weaning people off cash is tough in an environment of endemic corruption. This government looks to be serious about curbing corruption. The Draft Proposals for Facilitating Electronic Transactions, which are on the Ministry of Finance website (http://mintne.ws/1Iw96Yk ), are a step in that direction.

The proposals begin with a well articulated set of objectives.

E-transactions have been defined. There is a goal set. And then there is the actual proposal list. The government wants to encourage people to shift out of cash to electronic money so that transactions are smooth and safe, and a credit history build-up takes place which will make for better credit access (example: the newspaper vendor has no formal asset other than the informal right to vend papers in a certain area. He finds formal loans impossible. If he had a credit history, he may have a better shot at getting a loan than today). It will also reduce tax avoidance and counterfeit money.

The goal of the proposed policy is to use incentives to nudge people into swapping cash for e-money. As a ‘positive’ nudge, it looks at reducing costs of going electronic and giving benefits. As a ‘negative’ nudge, the proposals look at increasing the cost of using cash.

The positive nudges include the dropping of the ‘convenience’ fee on electronic payments by government departments and the addition of a small incentive to people paying online. While the government cannot force the private sector, the use of such fees on, say, airline bookings and movie ticket websites also needs to come down. I’m not sure why a movie ticketing site should charge 10% fee just because I am booking online. The merchants will get a positive nudge if, for example, at least half the value of their transactions are non-cash; they will get a tax rebate or a reduction in the rate of the value-added tax.

Another proposal is about giving a tax rebate to individuals if at least a part of her annual expenditure is non-cash. I’m not sure how that will be counted. The cash transactions are not counted anyway—they are off the tax filing radar. A loop hole that the government can fix is to monitor who pays the credit card bills. Today, you can use your card and have somebody who wants to illegally pay you, put in a cheque with the credit card number into a drop box. Track where the money to pay credit card bills came from—your own account or somebody else’s.

On the negative nudge side, the proposals seek to impose a cash handling charge for amounts larger than a certain sum and a mandatory settling of transactions electronically higher than, say, 1 lakh. Both these are good in spirit but will face a huge push back. The jewellery industry association is already up in arms against the budget proposal of asking for Permanent Account Number (PAN) for all purchases over 1 lakh. Why? Because how will the poor and the farmers buy gold since they have no PAN cards. However, the poor and the farmers now do have an Aadhaar card—why not use that for identification. And when the poor-farmer card is pulled out, you know that change is near!

The volume of cash in the country is very visible. The proposals are the right way ahead. May the government have the political will needed to push this through. Make it costly to use cash.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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