An extremely small fraction of the Indian population pays income tax—only 1% paid in the 2013 fiscal—and a huge chunk of wealth goes without being formally recorded.

With the push towards a digital economy, transactions could be documented and tax evaders would find it difficult to hoard money. “As cash gets used for fewer and fewer transactions, it will become easier for authorities to crack down on tax evasion,” Mihir Sharma, a columnist for Bloomberg, said earlier this year. “The best way to eliminate black money is to get rid of the money.”

Then there’s also the cost of printing and circulating currency. India currently spends some Rs21,000 crore (pdf) annually towards managing and handling currency. Printing notes is expensive, too. The cost also inches upwards based on the denomination. For instance, to print one Rs100 note, it costs the Reserve Bank of India (RBI) Rs1.79. The cost of printing the old Rs500 and Rs1,000 notes was Rs2.5 and Rs3.17 respectively.

“Paying through digital mode should always lead to reduction in cost and this cost should be forwarded to the end consumer. (The) government’s move of incentivising people is an excellent move and will bring in more and more participation from (the) under- and unbanked population,” Naveen Surya, chairman, Payment Council of India, and managing director of ItzCash, a digital payment service provider, said in a statement on Dec. 08.

A study conducted by Moody’s Analytics for financial services firm Visa in March 2016 found that the use of electronic payment methods in India added some $6.08 billion to the economy between 2011 and 2015. McKinsey too expects (pdf) that moving to digital finance will provide India with a $700 billion opportunity that could give an 11.8% boost to the GDP by 2025.

India is expected to carry out nearly $500 billion worth of transactions digitally by 2020—nearly ten times the existing rate, according to a report by Google India and The Boston Consulting Group.


While the benefits are many, the challenges are also equally humongous.

For one, the infrastructure required for enabling 1.3 billion Indians to access digital banking isn’t robust. There are only 342.65 million internet connections (pdf) in the country, as of March 2016. So, even if we assume that each connection belongs to one user (which isn’t likely), only 26% of Indians are connected to the internet.

Then there’s the issue of insufficient PoS machines. While the government is trying to install more machines, many of these are in urban areas. India has 712.5 million debit cards and 26.38 million credit cards, but at the same time, there were only 1.4 million PoS machines, according to data as of August 2016.

“Some estimates indicate that to reach the average levels of BRIC countries, India will need 20 million PoS terminals as against the current 1.2 million,” R Gandhi, a deputy governor of the RBI said last year. ”This is a tall order.”

Other links in the digital infrastructure, such as payment gateways too, aren’t entirely equipped to handle a huge load of transactions. In fact, almost a week into demonetisation, some servers of Visa had already crashed, website Medianama reported on Nov. 14.

India’s record of cyber security isn’t great either. In October, millions of debit cards in the country were hacked into, making consumers vulnerable. The cards involved belonged to some of the biggest banks in the country such as the State Bank of India, HDFC Bank and ICICI Bank.

Cyber security experts had then told Quartz that India lacks a stringent consumer protection framework when it comes to cyber crimes, and the government needed to ensure better security.

Can Modi fix it?

In his Dec. 08 announcements, Jaitley said the government will issue Rupay Kisan Cards to 43.2 million people who own Kisan Credit Cards—a credit card for farmers. These new Rupay cards will enable the holders to make transactions at PoS machines and ATMs .

To make it easy for Indians in rural areas to access PoS machines, the new machines which were announced by Jaitley will be set up at primary co-operative societies, milk societies and agricultural input dealers, the government said. These will also “facilitate agri-related transactions through digital means,” the government statement added.

The Modi government is also planning to lower transaction costs for digital payments in the country. It has directed public sector banks to charge merchants a maximum monthly rental of Rs100 for PoS terminals and ATMs.

“Nearly 6.5 lakh machines by public sector banks have been issued to merchants who will be benefitted by the lower rentals and promote digital transactions,” the government statement said.

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