Ajit Balakrishnan on understanding the anti-cash chorus.
IMAGE: In India, the anti-cash chorus is led by the private equity industry and entrepreneurs in the so-called FinTech industry which has set its sights on dis-aggregating the banking industry. Photograph: Amit Dave/Reuters.
Suddenly the word “cash” has taken a place alongside words like “casteism”, “poverty” and “illiteracy” as a symbol of all that is wrong with the Indian society and which must be eradicated forthwith if we as a country have to progress and provide a better life to our fellow citizens. Cash is seen as the root cause of many evils in India: tax evasion, money laundering, terrorism funding…the list is long.
However, when you hear words like “paper money fuels corruption, terrorism, tax evasion and illegal immigration” and wonder which Reserve Bank of India or finance ministry official said that, you need to go no further than flip through a recent book, The Curse of Cash, by Kenneth Rogoff, a former chief economist of the International Monetary Fund and a professor of public policy at Harvard University.
And when you hear something like “(we) increasingly suspect that…high value notes are being used to facilitate crimes such as money laundering, drug dealing, and tax evasion”, it is again not any Indian public policy official, it is a statement by the European Central Bank in May this year. So, the anti-cash chorus is not just in India -- economists in some western countries, particularly the United States, are chanting the same.
When I hear this chorus, in spite of being the original true believer in the virtue of all things digital I find myself scratching my head and wondering what is going on. So, I decided to dig a little deeper.
First of all, we “backward” Indians don’t appear to be the only ones who use cash to pay for things we buy. According to a February 2016 report from the Deutsche Bundesbank (the German equivalent of the Reserve Bank of India), Germans pay in cash for things they buy 80 per cent of the time, Austrians 80 per cent, Australians 60 per cent and, hold your breath, Americans 45 per cent of the time. What then is the current chorus against cash transactions attributable to?
Now read this additional excerpt from Kenneth Rogoff’s The Curse of Cash: "…Cash also lies at the core of the illegal immigration problem in the US. If American employers couldn’t so easily pay illegal workers off the books in cash, the lure of jobs would abate, and the flow of illegal immigrants would shrink drastically. Needless to say, phasing out most cash would be a far more humane and sensible way of discouraging illegal immigration than constructing a giant wall”.
As you can see, an important underlying reason for the anti-cash push in the United States is what some people think of as “the illegal immigration problem.”
In India, the anti-cash chorus is led by the private equity industry and entrepreneurs in the so-called FinTech industry which has set its sights on dis-aggregating the banking industry.
These FinTech startups are being funded to attack individual pieces of the value chain that banks do today: payment processing, consumer lending, deposit taking and so on.
They hope that the push against the use of cash in consumer payments will bring them success. If these FinTech startups have their way, the mammoth, vertically integrated banks that we currently have, like the State Bank of India, HDFC Bank and others will go the way Bombay’s cotton textile mills collapsed in the 1970s.
What is missing in all this is an objective analysis of why we Indians (and Germans and others) use cash so often in paying for things, that is to say, for “transactions”.
Many studies across the world indicate that cash is overwhelmingly used for transactions of small value -- in Europe and the United States, for items less than $10. So, one reason why cash is so overwhelmingly used in India for payments is possibly that a very large proportion of consumer purchases in India are small value, perhaps Rs 50 and below.
A second area where some sanity needs to prevail is in understanding why such a high proportion of India’s savings are not deposited in banks but “under our pillows”. Here again, the answer might well be that the per head savings for the vast majority of Indians is so low that it is just not worth their while putting it in a bank.
Indeed, there are indications that in the future, keeping your savings under your pillow may be more worthwhile than keeping it in a bank simply because banks in many countries in the world either pay you so little interest (about 0.04 per cent in the United States -- and no, that is no typo!) on your deposit or, as in many countries in Europe, charge you a fee if you deposit money with them: in Germany 0.4 per cent for deposits over euro 100,000.
The real reason why Indians don’t deposit their money in banks and continue to use cash for transactions may be because the Indian banking system lives in a make-believe world.
If you are a small businessman banks don’t lend you money, so you borrow from the friendly money lender; if you have some spare cash it's far smarter to lend it to the same money lender who will give you an interest rate much higher than banks.
If you are buying your rice and dal for the day and you don’t have ready cash to pay that day, your friendly neighbourhood shop will give you your rice and dal for the day and let you pay tomorrow. And, most of all, a deep-set belief that using cash prevents you from overspending.