Introduction

The rise of digital transactions has significantly impacted traditional cash-based economies. Governments worldwide are actively promoting cashless transactions as a means to curb corruption, enhance security, and improve efficiency. However, there are challenges and concerns that need to be addressed to effectively transition from a cash-based to a digital economy. This article explores why governments should discourage cash transactions and provides strategies for promoting cashless transactions, focusing on the case of India.

Why Governments Should Encourage Cashless Transactions

A government's primary objective is to serve its citizens and ensure a transparent and corruption-free system. Cash transactions are inherently susceptible to corruption and can generate black money, undermining the integrity of the economic system. Therefore, promoting cashless transactions is essential for fostering a more transparent and efficient economy. Digital payments offer several advantages, including reduced corruption, fraud, and money laundering, among others.

Why Governments Would Encourage Cash Transactions?

It might seem counterintuitive, but in certain situations, a government might consider encouraging cash transactions. For instance, if the digital payment infrastructure is not robust, or if there are high transaction costs, cash might be a more viable option. Additionally, cash transactions can be more convenient for small merchants who may not have the necessary infrastructure to process digital payments. However, these reasons are generally temporary and should be addressed to promote a cashless society.

India's Experience with Cashless Transactions

Background u2013The Government of India has made significant strides in promoting cashless transactions through various initiatives, including demonetization, Aadhaar-linked bank accounts, and pushing for cashless transactions. However, despite these efforts, India is still far from being a fully cashless economy.

Challenges Faced by India's Cashless Economy

1. Costly Card Payments u2013 Merchants, especially small ones, face high transaction fees for digital payments. According to RBI's payment clearing data for December 2016 to February 2017, card payments are more expensive than cash payments. In small shops and in small cities, merchants often offer discounts for cash payments and sometimes do not own card-swiping machines.

2. Limited UPI Adoption u2013 While the government has launched initiatives like the BHIM app to promote cashless transactions, adoption has been limited. Banks have shown interest, but private entities have been relatively inactive. The lack of competition and incentives has resulted in limited advertising and features.

3. Mobile Wallets u2013 Although mobile wallets like Paytm have seen significant growth, their contribution to the overall transaction value remains limited compared to other payment methods.

Proposed Solutions

To address these challenges and promote cashless transactions, the government should consider the following steps:

1. Clear Policy Structure

Implement a clear fee structure for UPI transactions. This fee should be reasonable to attract private sector investment and ensure the sustainability of the digital payment ecosystem. By setting a fee per transaction, private investors can identify the market size and get attracted to promote and invest in cashless transactions.

2. Direct Merchants Not to Route Card Transaction Charges to Customers

Direct merchants not to pass on the transaction costs to customers. One way to achieve this is by establishing an online Aadhaar-linked complaint registry system. This system would allow users to submit complaints against shopkeepers. Shopkeepers with more than five to ten complaints per month should be issued a warning, and provisions can be made to levy fines on regular defaulters.

3. Cross-Platform Availability and Awareness Campaign

Maintain cross-platform availability of BHIM and other UPI apps. Launch a directed awareness and advertisement campaign to highlight the benefits of cashless transactions. This approach will help consumers understand the advantages of digital payments and encourage wider adoption.

In conclusion, while the transition to a cashless society is challenging, it is essential for governments to promote digital transactions to curb corruption, enhance security, and improve efficiency. By addressing the challenges and implementing effective policies, governments can facilitate a smoother transition to a cashless economy.