Cash is costly, digital payments could mean big ‘savings’

It is common knowledge that ‘cash’ rules the roost in the Indian economy, but putting a number to the cash dominance issue has never been attempted till now.

Now, a new report from global payments company, Visa, has done just that.

It has estimated the net cost of cash in the Indian economy at 1.7 per cent of real gross domestic product in 2014-15. The report offers to policy-makers a perspective of “how costly cash is” and the “savings” that could be harnessed by accelerating growth of digital payments in India.

If the calculations in the report titled ‘Accelerating the growth of digital payments in India: A five-year outlook,’ is an indicator, then by 2025 the total savings could be as much as $70 billion (₹4.7-lakh crore) if the adoption of digital payments is accelerated.

“The idea of this report is to be a dialogue opener. It’s not a panacea. It certainly shows how large the problem is and also how large the opportunity is. At 1.7 per cent of GDP, this is a problem that is worth debating at the senior-most policy levels of this nation,” TR Ramachandran, Group Country Manager, India and South Asia, Visa, told BusinessLine .

The report, released in the presence of NITI Aayog CEO Amitabh Kant, also suggests a three-pronged strategy for India to accelerate growth of digital payments. These are: expand acceptance, energise innovation, and bolster financial participation.

Focussing on the three pillars could help India accelerate its shift to a less-cash society, it says.

Besides, putting an estimate on the net cost of cash, the report also quantifies the size of the ‘shadow economy’ and estimates that foregone tax revenues from the ‘shadow’ economy account for 3.2 per cent of GDP.

Today, less than 5 per cent of India’s ₹75-lakh crore consumption expenditure is made using digital payments. The measures, outlined in the report, together with a series of other policy levers, could result in increasing digital consumption expenditure to around 36 per cent in the next five years.

“If the government is serious about less cash and cashless, then charity needs to begin at home. They need to digitise government-to-government, citizen-to-government, government-to-business payments,” Ramachandran said.

To expand acceptance infrastructure, the report calls for establishing an India Acceptance Development Fund to incentivise banks to expand acceptance in under-penetrated merchant segments and geographies.

It also suggests incentivising the use of digital payments by providing a tax rebate of ₹2,000 per capita per annum, and for incentivising merchants, it suggests acceptance of digital payments by providing them a 50 per cent tax rebate on 50 per cent of turnover.

The report also makes a case for lowering the existing countervailing duties and levies on POS machines to 5 per cent and promoting domestic manufacturing.

For energising innovation, it has, among other things, suggested adoption of open loop payment systems for mass transit.

In fact, the RBI had, in its monetary policy review on Tuesday, announced steps towards setting up an acceptance development fund by end of this year.

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