Why Digital'?

By Vijay Kumar

THE case for digital payments can be made on the basis of four key factors, that make paperless payment instruments and systems more desirable -

First, cash is expensive. While there are several perceived benefits of transacting in cash (such as instantaneous settlement, relative anonymity, and the notion of security associated with holding physical value), there are several latent and implicit costs associated with cash.

Second, technology has been advancing at a rapid pace to deliver robust, secure and convenient payments solutions. This enables rapid delivery of payment services to large sections of the population. Third, digital payments allow for services to be delivered at lower costs, accord greater scal ability and greater ease of access. This in turn, helps in fostering economic growth and financial inclusion.

Lastly, recent Government initiatives have created a catalytic environment for the greater proliferation and growth of digital payments.

High Cost of Cash

India is a cash heavy economy, with almost 78% of all consumer payments being effected in cash.

India's preference for cash as a payment instrument is further reflected by India's significant cash to GDP ratio of (12.04%), which is substantially higher than comparable countries. India's dependency on cash imposes an estimated cost of approximately INR 21,000 Crores on account of various aspects of currency operations including cost of printing new currency, costs of currency chest, costs of maintaining supply to ATM networks, and interests accrued.This estimate does not reflect other external costs imposed by the use of cash, including the costs imposed by counterfeit currency and black money.Some estimates indicated that the net cost of cash (including cost of currency operations, as well as other costs borne by households, businesses and banks in handling cash)as 1.7% of India's real GDP in 2014-15. Similarly, estimates indicated that foregone tax revenues from the shadow economy constituting 19% of India's GDP, account for 3.2% of India's GDP.

Transitioning to digital payments is estimated to bring about a significant reduction in costs incurred on account of inefficiencies associated with cash and other paper based payments. For instance, by certain estimates, transitioning to an electronic platform for government payments itself could save approximately INR 100,000 Crores annually, with the cost of the transition being estimated at INR 60,000 to INR 70,000 Crores. Similarly, a recent report estimates that for a total investment of about INR 60,000 crores over 5 years towards creating a digital payments ecosystem, India could reduce its cost of cash from the present levels of 1.7% to 1.3% of GDP.

The benefits of using digital payments are neither understood by all equally, nor are they communicated efficiently. A sample survey conducted in 2014 acrossurban and rural neighbourhoods in Delhi and Meerut, shows that despite being keenly aware of the costs associated with transacting in cash, most consumers see three main benefits of cash, viz. freedom of negotiations, faster settlements,and ensuring exact payments.

From the Report of the Watal Committee on Digital Payments