Transacting in cash costs 1.7% of GDP: Visa

Transacting in cash imposes 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 in India is equivalent to 1.7% of GDP. To put that figure in perspective - the central government's capital

expenditure in 2016-17 was marginally lower at 1.6% of GDP. In fact, India is a relative outlier even in the developing country space with fewer transactions carried online. According to the study, only 10 digital transactions per capita are carried out in India as compared to 163 in the case of 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 in an economy by shifting to alternate digital payments platforms are immense. Visa estimates that if India were to reduce its cost of cash from 1.7% of GDP to 1.3%, the potential savings could be to the tune of Rs 70,000 over the next five years. 

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

But transitioning towards a cashless economy isn’t that straightforward. Part of the problem is infrastructure and the lack of incentives. While the former is being addressed, recent steps of the government seem to suggest this, 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" said T R Ramachandran, group country manager, India and South Asia. "In the absence of a large intervention by the government, this is a tall task," he added. 

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 rose from 39% in 2004 to 76% by 2014. 

To reduce the cost of cash to around 1.3%, 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 also 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," said 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 from 1.3 million currently to 4 million over the next five years and bring 41 million into the financial system. This could provide the infrastructure push towards lowering the cost of cash in India.