THOUGH plastic money was introduced in India way back in the 1980s, users of credit and debit cards have always faced discrimination by merchants, including state-owned companies.

Even today, public sector oil marketing companies discourage consumers from paying for petrol and diesel by credit and debit cards by slapping a surcharge on such transactions. They prefer cash payments, even from drivers of multi-axle trucks, luxury buses and other large vehicles, whose bills add up to more than Rs10,000.

Most jewelers, vendors of electronics products and white and brown goods also levy a surcharge, disincentivising the use of credit and debit card. And of course, hundreds of thousands of small grocers across the country deal only in cash.

The result: India is one of the most cash-intensive economies in the world. The cash-to-GDP ratio in India is about 12pc, whereas in most of the developed world it is less than 2.5pc. Even in emerging economies such as Brazil, South Africa and Mexico, it ranges between 3.5pc and 5pc.

All that is, however, about to change. Indian finance minister Arun Jaitley, in his budget earlier this year, had said one way to curb the flow of black money was to discourage transactions in cash. “I propose to soon introduce several measures that will incentivise credit or debit card transactions and disincentivise cash transactions,” Jaitley had promised.

The finance ministry is keen to make it mandatory to settle all transactions worth more than Rs100,000 through electronic mode. The proposals were made after extensive consultations with other government agencies and public and private banks

Last week, the first of the measures were unveiled by the government. The finance ministry put up a draft paper, setting the course for the transition to a cashless economy. The objective is also to reduce tax avoidance, build a transactions history of individuals and importantly curbing counterfeiting of currency notes.

Citing a similar move in South Korea a few years ago, the government indicated that it could provide tax breaks and other incentives to popularise the use of plastic money.

“Tax benefits in terms of income tax rebates to be considered to consumers for paying a certain proportion of their expenditure through electronic means,” said the government’s draft proposal. It also urged state-owned oil firms and Indian Railways to do away with transaction charges on those paying by cards.

Another proposal is to provide a tax rebate to merchants if a significant amount of their transactions are done by credit or debit cards. “An appropriate tax rebate can be extended to a merchant if at least, say, 50pc value of the transactions is through electronic means,” says the draft proposal. “Alternatively, 1-2pc reduction in value-added tax could be considered on all electronic transactions by merchants.”

It also suggested rationalisation of merchant discount rates and standardistion of inter-change fees on card transactions. Many merchants, especially the smaller ones, are reluctant to accept cards because they have to pay banks for every transaction that they make.

“The existing inter-change fee on debit/credit card transactions are not uniform and need to be standardised/ rationalised to encourage both issuing and acquiring banks to establish and utilise acceptance infrastructure,” says the draft says. It suggests that the existing system could be replaced with a nominal cash handling charge on transactions greater than a specified level.

The finance ministry is also keen to make it mandatory to settle all transactions worth more than Rs100,000 through the electronic mode. The proposals were made after extensive consultations with other government agencies including the Reserve Bank of India, the National Payments Corporation of India, public and private sector banks, card service providers, mobile phone operators and government departments.

DEBIT cards have emerged as a hugely popular alternative to cash in India. Banks have issued about 565m debit cards. But credit cards have proved to be far less popular. There are just 21m credit cards in circulation.

After the government launched its flagship Pradhan Mantri Jan Dhan Yojana last year — in a bid to ensure banking services to millions of poor people especially in rural areas — more than 140m new bank accounts were opened. Most of these account-holders were also provided RuPay debit cards issued by the National Payments Cor­poration.

However, card usage has not taken off because of another factor. There are just about 1.2m point of sale (PoS) terminals in India to deal with over 585m debit and credit cards. Most of the debit cards are used by consumers at ATMs to withdraw cash, not at PoS terminals.

The government now wants state-owned banks to increase the number of terminals substantially to at least 5m in about two years. Even Brazil, with a much smaller population, has nearly 10m PoS terminals.

While most countries in the developed world have transitioned to a cashless economy, India is one of the few large economies that is still to reduce cash transactions. Being cash-heavy has a lot of disadvantages. Primarily, it encourages the black economy. Even today, it is not unusual for buyers of flats in major cities to pay part of the transaction value — adding up to even 20pc or more — in cash. Developers claim they need the cash to pay bribes to local officials for speeding up clearances.

The other major disadvantage of being a cash-driven economy is the high cost of currency operations. A study done on behalf of MasterCard earlier this year noted that the RBI and commercial banks spend about $3.5bn every year in currency operations costs. Currency notes get damaged or soiled and the government has to reissue these frequently.

A major problem in many Indian cities is the shortage of coins and smaller currencies. There are brokers who charge a 10pc commission for providing grocers and small merchants with coins and smaller denomination notes.

The government also keeps upgrading the security features to tackle counterfeiting in notes. But this means the old notes have to be withdrawn.

Despite the gradual move to plastic money, many Indian consumers still prefer cash. Most e-commerce players including Amazon and Flipkart, offer a unique ‘cash on delivery’ system, where consumers pay only after getting the goods. Cash on delivery has become extremely popular among online service providers, though many firms are now equipping their delivery men with portable PoS terminals, enabling consumers to pay by debit card.

Published in Dawn, Economic & Business, June 29th, 2015

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