Moving to a cashless economy

An Indian diplomat’s wife taking a short course to learn French in Brussels remembers how she was unable to pay her tuition fee in cash. The teacher went around the classroom collecting the fee with a portable credit card machine. Students promptly swiped their cards and paid up. The only one to have turned up with the required €120 in cash, she was told off by the teacher: “If I start collecting cash from every student, where will I keep it?”

There were petrol cards to buy fuel and cards for all forms of public transport in the Belgian capital. Even the smallest delis accepted cards for the smallest of transactions. “People hardly carried more than €20-30 on them. You could pretty much do everything without cash,” she recalls.

That is probably the kind of culture finance minister Arun Jaitley had in mind when he spoke of moving to a cashless economy in an attempt to clamp down on black money. “One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians have or can have a RuPay debit card, I, therefore, propose to introduce soon several measures that will incentivize credit or debit card transactions, and disincentivize cash transactions,” Jaitley said, while presenting Union Budget 2015 on Saturday. The government has already issued over 110 million RuPay cards. A RuPay card is a debit or credit card launched by the National Payments Corporation of India. Most major public sector banks are issuing these cards. But moving to a cashless economy may prove to be a tardy and arduous process. Even though consumers in the metros are increasingly using credit and debit cards for commercial transactions, things outside the metros leave much to be desired. Whether it is the corner shop or a consumer electronics showroom, an apparel store or a hospital, transactions in small town India are still in cash. Why, someone recently paid ₹ 32,000 in cash for a cataract surgery in Bareilly, a city in Uttar Pradesh, known as actor Priyanka Chopra’s hometown. The eye clinic did not accept cards. In the same town, a consumer was turned away at a jewellery shop when she tried to purchase a ₹ 60,000 gold chain by card. She was politely told to withdraw the money from an ATM.NextMAds

In the metros, too, cash transactions are hugely popular in malls. In a study of retail stores in malls, management consulting firm A.T. Kearney discovered that only 10% of the sale by value happened via cards; 90% took place in cash. Even the e-commerce sector encourages cash on delivery (COD) instead of online payments for goods sold, to expand its consumer base. Although COD may be declining gradually, it still makes up 60% of the total transaction of e-commerce firms. Online retail is expected to reach $6 billion this year, a 70% increase over the 2014 sales of $3.5 billion, according to Gartner Inc. E-commerce currently represents less than 4% of the total retail market, according to the Gartner report published in October. To understand the extent and the scale of cash transactions in the country, take a look at the luxury sector. India’s $6 billion luxury sector (A.T. Kearney estimates), growing at 18-20% a year, is driven by cash. Most consumers buying luxury brands at luxury malls or outside make cash payments. “You don’t need an expert to tell you that. Just spend some time at any luxury store and see people come up with wads of money to buy the products,” said a retail practice leader at a consulting firm. He vouches for having seen consumers pay up big sums in notes for a personal care luxury brand and a famous leather accessories brand.

Most jewellery is also purchased in cash. “Gold and diamonds are what you call liquid cash. Consumers buy these products in cash unlike, say, a luxury television brand,” said Devita Saraf, chief executive officer, Vu Technologies—maker of super premium televisions.

A Delhi-based luxury expert, who works closely with retailers in the sector, agreed that luxury brands business happens in cash. Will it affect the luxury market if cash sales are discouraged? It will, the person said, declining to be named. But the luxury sector is resilient and the luxury consumer is very demanding. “Luxury retailers will come up with ideas to get around the issue,” the person added.fourthMAds

It is truly an uphill task for Jaitley to curb black money and move to card transactions. Retail industry experts claim it is not just luxury products and services which are bought and sold in black, a chunk of the consumption in the country is part of the black economy. “Conceptually, black economy needs to be tackled and you cannot find fault with the measure in principle. But a severe clampdown will affect growth. However, moving to a cashless economy is inevitable,” he said.

The writer is marketing and media editor, Mint.