Home / Opinion / The perils of the cashless economy narrative

The government of India is in overdrive to promote digital payments in a country that is excessively dependent on cash with one of the highest cash to gross domestic product ratios in the world. Niti Aayog has proposed an award scheme to incentivize people to use digital modes of payments. Last week, the government announced several measures—such as discounts at petrol pumps and on rail tickets, and insurance policies sold by public sector insurance companies—to boost digital transactions.

There is indeed merit in reducing the usage of cash in the economy as electronic transactions, among other things, leave a trail and make tax avoidance more difficult. However, moving towards a more cashless society is a medium-to-long term goal. The government’s present urgency to turn the ongoing currency swap into a major push to make India a cashless economy must be seen keeping this in mind.

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To be sure, the narrative of the currency exchange programme has changed significantly in the last one month. It was conceived and launched as an attack on black money and counterfeiting of currency notes, but the objective now seems to have shifted to making India a cashless economy. This newspaper supported the idea of the currency swap as part of a bouquet of policies against tax evaders. It was clear from the word go that this would only attack a part of the stock of black money that is stored in cash. But the incoming evidence suggests that many tax evaders have actually managed to launder their illicit wealth. A large number of new bank notes being recovered by the authorities in various parts of the country and a massive surge in deposits in Jan-Dhan accounts are cases in point. Clearly, the implementation of the currency exchange has left much to be desired. Effectiveness of policy also depends on implementation; ideas alone don’t lead to desired outcomes.

It now appears that the amount of currency notes that will not return to the banking system was overestimated. This perhaps explains the pivot to the cashless theme. As Praveen Chakravarty of IDFC Institute highlighted in these pages on Monday, Prime Minister Narender Modi mentioned “black money" 18 times in his initial speech on 8 November and did not talk about cashless or digital economy. However, in two speeches that he gave on 27 November, he mentioned “cashless" and/or “digital" 24 times, but black money came in only nine times. The excessive amount of time being taken to replace the currency notes and persistent queues in front of banks and ATMs may also have prompted the government to push for digital transactions.

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However, the government would be well-advised to not depict the transition to a more cashless economy as the main objective behind the currency reform. The overwhelming public support that the government got after the withdrawal of high-value notes was for the attack on black money and not for making transactions cashless. 

Reducing the role of cash in the system is a worthy goal, but it cannot be the driving force for this policy as it now appears to have become. As noted in this editorial, the move towards a more cashless system is a longer-term goal. There are practical problems on the way. A vast majority of Indians either don’t have bank accounts or the technological wherewithal to make or receive digital payments. Many of them belong to the same aspirational middle and neo-middle class that supported the move as an attack on black money and corruption. 

Furthermore, digitization alone will not justify the political and economic risk attached to the currency swap. The latest high-frequency economic indicators such as auto sales and Purchasing Managers’ Index for both services and manufacturing shows that economic activity has been affected, though the actual overall impact will only be known in the coming months. In terms of the political impact, the renewed friction between the government and the opposition has resulted in almost the entire winter session of Parliament being wasted, and it now appears that meeting the 1 April deadline for the implementation of the goods and services tax will be extremely difficult. 

Since the government has taken a big political risk, it should avoid moving the goalposts. Changing the narrative of the currency swap could affect the government’s credibility and make it more difficult to take tough decisions. It will be a long-drawn-out battle against black money and action will be required on various fronts. Not all of it will be successful.

Will changing the narrative of currency swap affect the government’s credibility? Tell us at

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