Tuesday, 6 December 2016

Cashless Transactions: Perils

Modi government had failed completely to provide replacement new cash consequent to demonetization of Rs. 500 & Rs.1000 notes on Nov 8, 2016. Instead of accepting the blunder and plunder, Modi relentlessly campaigning for cashless transactions as solution to cash shortage with an eye on increasing government tax revenues is a cruel joke on gullible Indians. Cash in circulation shrinkage is a hidden agenda item. These have devastating effect on overall economy and impacts employment growth.

Cashless transactions exposes innocent citizens to its perils of cheating and hacking apart from hidden costs ultimately payable them apart from privacy rights violation. The sudden push to cashless economy via demonetization is an arm twisting tactic in contrast to promoting technology for comfort & convenience. Anything by force is despicable in a civilized and democratic society.

The perils of cashless transactions are many:

  • Data security breaches.
  • Chips embedded on the cards reduces fraud on swipe machines, but it's not clear how much.
  • Chips embedded on the cards don't help prevent online frauds.
  • PoS machines are expensive and unaffordable for small traders.
  • Every transaction will be loaded with 0.75%-2% charges payable either by merchant or customer.
  • Going cashless means all your purchases are traceable and your privacy is up for grabs. 
  • When governments have information they may attempt to use it in ways that are not fully vetted by due process.
  • Since electronic payments can be traced, but constant government monitoring could turn everyone into a potential suspect, creating distrust between government and citizens.
  • There are a number of cultural rites that we use cash for today, small donations, tips, religious contributions, and gifts. It's a lot more meaningful to give cash than a piece of plastic.
  • It will be a fallacy to equate the ability of ordinary Indians to use a mobile phone with their willingness to replace their purse or wallet with their phone.
  • Technology adoption is a complex process. Government orders or currency shortage can't force people to adopt to a new technology. Adoption of any new technology needs necessary infrastructure, awareness among citizens and their willingness to accept the change. 
  • A favorable regulatory environment is also a prerequisite.

India is utterly unprepared at this point of time for switch to cashless economy: 
  • Out of 139 countries ranked in the Network Readiness Index (NRI), India stood at 91. On two counts - availability of infrastructure and level of skills among people - India ranked even lower (114 and 101 respectively). In terms of individual use of information technology, India's rank was 120 out of 139 countries.
  • China got an overall rank of 59. Singapore topped the global ranking. 
  • One third of the Indian population is still illiterate and a third of our youth are not enrolled in secondary education. Technology penetration is pathetic - only 15% households have access to the Internet and mobile broadband just reaches a few.

People take to new technologies when they see clear benefits, trust the providers, find it convenient and can afford it. The mobile wallet is a long way from fulfilling these basic criteria. As things stand now, cashless transactions is going to be an urban phenomenon.  Rural population adopting cashless transactions is decades away.

My View:
Informal economy including agriculture provides employment to about 90% population and is 55% of GDP that are mostly either unskilled or semi skilled without any meaningful qualification. This sector is 100% dependent on cash for all its transactions. Majority of the people are with earning far below Rs.250,000 per annum which is income tax free limit. It is important  to note that income tax (direct tax) is one among many other taxes (indirect taxes) collected by government. All sections of people pay all indirect taxes. Informal section pays very less income tax. Modi government attempting to shrink cash in circulation and weaken informal economy seemingly appear "in larger interest of the nation" but organised sector is not in a position to provide such a large number of jobs to unskilled or semi skilled people with relocation issues. Cashless transactions is an attempt to collect taxes from this section is futile. Collecting small tax from large number of people is an uphill task and at the end expenses far outstrip the income apart from promoting corruption. For Indian informal sector, cash economy benefits far outweigh meager cashless economy benefits. 

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