Cash deals cost 1.7% of GDP: Visa

Reducing it to 1.3% would lead to savings of Rs 70,000 crore over 5 years, says Visa

Cash transactions impose a huge financial burden on an economy. The costs are particularly high in developing economies such as India, where only a minuscule proportion of transactions are carried out through digital platforms.

According to a new study by Visa, the cost of cash transactions in India is equivalent to 1.7 per cent of the gross domestic product (GDP). To put that figure in perspective, the central government's capital expenditure in 2016-17 was marginally lower at 1.6 per cent of GDP. In fact, India is a deviation even among developing countries, with fewer transactions carried online. According to the study, only 10 digital transactions per capita are carried out in India compared to 163 in Brazil. For developed countries like South Korea and Sweden, the comparable figures are significantly higher at 420 and 429, respectively.

The benefits of lowering the use of cash by shifting to alternate digital payments platforms are immense. Visa estimates that if India were to reduce its cost of cash from 1.7 per cent of GDP to 1.3 per cent, the potential savings could be to the tune of Rs 70,000 over the next five years.

Sustaining the costs at that level till 2025 would translate to savings of around Rs 4 lakh crore. This figure does not include the increase in tax revenues for the government on account of the informal economy coming under the tax ambit.

A transition towards cashless economy, however, isn't that easy. Part of the problem is infrastructure and the lack of incentives. Recent steps by the government seem to suggest the former is being addressed, the latter requires more attention.

The report argues that encouraging cashless transactions requires carefully crafted intervention by both government and banks.

"Fiscal incentives on both the consumer and merchant side have played an important part in the shift towards cashless transactions in other countries," says T R Ramachandran, Visa's group country manager, India and South Asia. "In the absence of a large intervention by the government, this is a tall task," he adds.

In the case of South Korea, largely due to the incentives given by the government to both consumers and merchants, the total flows exposed to taxes increased from 39 per cent in 2004 to 76 per cent by 2014.

To reduce the cost of cash to around 1.3 per cent of GDP, Visa estimates that the Indian government would need to provide Rs 58,000 crore by way of fiscal incentives to consumers and merchants to promote cashless transactions, in addition to lowering the import duties on point of sale terminals.

"Creating the infrastructure where citizen to government transactions and all government related transactions such as procurements are executed through digital platforms would logically be the first step," says Ramachandran.

But, this fiscal incentive by itself would not be enough. Visa estimates that another Rs 11,900 crore of investment is required by banks to expand the point of sale terminals, currently at 1.3 million, to four million over the next five years.