Vol. XLI No. 04 January 22, 2017

Failing on Black Money, Foolish Attempt to Go Cashless

Prabir Purkayastha

HAVING failed miserably on the black money front, the Modi government has been extolling the virtues of a cashless economy. What it seems to have forgotten is that cashless transactions require a digital  infrastructure, which we simply do not have. Without an infrastructure that makes mass scale digital transactions possible, coercive measures such as demonetisation or a penalty on cash transactions, will only boomerang. Lest we forget, forcible nasbandi during the emergency has meant that even after 40 years, male sterilisations in India are less than two percent of total sterilisations. Notebandi may do to the digital economy what nasbandi did for vasectomy, making it much more difficult to introduce digital transactions in the future.

What is a cashless or a digital transaction? Any transaction has two parties. If it is a cash transaction, no party has to know the other; all they need is to recognise the cash as legitimate money to complete the transaction. For a cashless transaction, both sides have to provide some additional information. The buyer has to provide a source from which the digital money will be sourced, and the seller a destination which will receive this money. The communications infrastructure has to ensure that a connection is established between the two sides. The digital infrastructure that rides on top of the communications infrastructure, has to ensure that the transaction is negotiated and completed within a reasonable time. If it takes too long or the transaction fails, instead of cashless transaction being seen as a convenience, it will be seen as a pain. Poorer the infrastructure, more the chances of failures, and consequently alienation from cashless transactions.

The problem with digital transactions is not just about poor infrastructure. It is also with peoples' inability to understand and use the cashless modes of transactions. All of the existing modes of digital transactions demand some literacy. We need to be able to at least use mobile phones, enter various numbers based on prompts, and be able to navigate the new, digital world. In a country that has 26 percent adult illiteracy, we will exclude these people from our new, cashless economy.

The Modi government has been talking about using Aadhaar number and biometric based identification (finger prints and retina scans) for digital transactions and tying it to peoples' bank accounts. All we need as consumers, or so the argument goes, is our Aadhaar number, tied to our bank accounts and our finger prints verified by the Aadhaar system. The consumer or buyer does not need to have smart phones or even a mobile. The seller needs a biometric device – a finger print reader and a connection to the internet via a mobile or a computer. A buyer comes, supplies his fingerprint, and the system will take care of the rest.

In theory, it sounds simple; till we examine how many points of failure are there in any such system.

As we now know, biometric based identifications are seeing failures to the extent of 30 percent in the public distribution system (PDS) in Rajasthan and Gujarat. People may be unhappy for not receiving rations. But can we imagine the anger if we lock people out of their hard-earned money from their bank accounts? Because the biometric identification of Aadhaar failed?

There have been serious criticisms of the security and privacy violations in the Aadhaar system. Leaving them aside, one problem for which no answer has been forthcoming, has been: how do we rectify problems within the Aadhaar system?  The Aadhaar sytem is completely opaque to the people. If our finger prints do not match, how do we correct the Aadhaar database? What happens if my finger prints are stolen? And yes, it is easy to steal fingerprints. How do I withdraw my finger prints from the Aadhaar system, the same way I can repudiate or block my credit or debit card?


There is now grudging admission that the biometric system is not foolproof. If there are such a large number of people in the database, the finger print recognition is not easy. Further, working people may lose their finger prints. Manual work can wear out the prints, and the number of manual workers, who do not have recognisable finger prints, is quite significant. Aadhaar accepts that there can be up to two percent failures in identification. To base a digital system that starts with a two percent failure rate may work in certain areas, but certainly not when it is proposed to be used in lieu of cash. If the failure rate of identification is around 30 percent – as we are seeing in the PDS – are we going to lock 30 percent of the people out of their bank accounts? And without any redress?

The Watal Committee on Digital Payments has reported that Aadhaar based verification for money transactions has a failure rate of as high as 60 percent. If 60 percent of failures take place in Aadhaar based bank transactions, how is it even possible to talk about Aadhaar as a basis for a cashless economy?

Why is there such a high failure rate in completing Aadhaar based transactions? This is not just due to problems with finger prints as a means of identification. It is also to do with how ready is our infrastructure for a digital economy.

For the bulk of digital transactions, we need internet connectivity. This is the backbone of the digital payment systems. The non-internet based mobile transactions are a small fraction of the total number of transactions.

India claims to have a billion telephone connections. This hides the actual numbers of users, as a number of people have multiple phones and SIM cards. The real numbers are probably around 700 million users. Only about 300 million of mobile users have smart phones and the ability to connect to the internet for digital transactions.  Most of them are in urban areas, as rural connectivity is very poor. While 53 percent of the urban areas had mobile broadband coverage, it is a measly 9 percent for rural areas.

Connectivity is only one aspect of digital transactions. The other aspect is the robustness of the infrastructure. A poor infrastructure means that either people are not able to connect to their banks, and credit card companies. Even if they are able to connect, the connection may break during a transaction. Just having mobile phones and data packages are not enough.

All these are reflected in the International Telecommunications Unit (ITU) Information and Communications Technology (ICT) Development Index. Out of 175 countries, India ranks a poor 138. It ranks even lower than a number of countries whose per capita income is lower than India's. 



Apart from not having a robust telecom infrastructure for digital transactions, India's digital infrastructure is also weak. Recently, 32 lakh credit and debit cards were compromised due to a security breach. This breach involved credit cards of all the big banks – State Bank of India, ICICI etc. Not only was the security breached but it continued for almost three months, before the banks became aware of the breach.

The problem is that not only is the security infrastructure for digital transactions weak, there is very little redress for the consumer. You can have your credit card used in China while you are very much in India. By the way, this is what happened during the breach above. The only action you can take is to block the card. But who pays for the faulty security – is it the bank or the consumer? The banks, who should be responsible for compensating their customers for such security breaches, hide behind a lack of clarity in India's legal and regulatory system for digital payments.

While the Watal Committee is supposed to provide guidelines for India's digital payment systems, its initial draft report seems to argue for creating a weak regulatory oversight and in favour of markets providing the right incentives. The problem is that markets cannot control fraud, only laws and regulations can.

If we sum up the telecom and the digital payment infrastructure, we will get a measure of how ready we are for a cashless or a digital economy. Fletcher School at Tufts University has created a Digital Evolution Index for countries, which takes into account various factors. The index looks at the supply side, e.g., telecom access, transactions infrastructure, as well as other factors, such as consumer behaviour, internet savviness, innovations, and government effectiveness, laws and regulations. Out of the 50 countries examined, again India ranks a lowly 42.

All these can be summed up in the way Indians use, or used cash. The overwhelming number of India's transactions – 97 percent according to World Bank – are in cash. Only about 35 percent of Indians above the age of 15 have used a bank account and less than 10 percent had ever done any kind of non-cash transaction. Credit or debit cards using Point of Sales (PoS) machines are a meagre 3 percent of all transactions.

India has much fewer number of PoS machines than required for a cashless economy. Rural areas have even fewer. For example, there are 693 PoS machines in India for a million people, against the number of 4,000 such machines in China, that is China has almost six times the number of PoS machines as compared to India for every million people.

More than 90 percent of Indian merchants do not have access to digital payments. PoS machines also require digital connectivity to process payments. So we are back to how robust is our digital infrastructure, particularly in rural areas.

If India wants to go cashless, it requires a robust telecom and digital infrastructure. Putting restrictions on cash in order to force people to use digital transactions is a classic case of cart before the horse.