Cashless Economy: Pros and Cons

Governments across the world have stepped up their fight against cash. Cash is being increasingly viewed as a curse that mankind needs to rid itself of. The goal is to move towards a cashless economy. The closer an economy is towards this goal, the more successful it is considered to be. However, the concept of cashless economy is not understood by many. It is still the prerogative a few economists and academicians.

In these cashless times, it is imperative that everyone have an understanding of what a cashless economy is and what its pros and cons are. In this article, we will list down the pros and cons of this cashless economy.

Fewer Currency Notes in Circulation

Simply put, a cashless economy is where fewer notes exist in circulation as compared to the money supply. For instance, in a country like India, about 14% of the total money in existence is present in the form of cash, the rest is digital money. In economically advanced countries this percentage is close to 5%. The goal of a cashless economy is to move towards 0% cash. A perfect 0% will never be achieved. However, the closer the number is to 0%, the better it is. In cashless economies, only smaller bills will exist for small menial transactions. Any transactions above a certain amount will have to be done digitally.

Higher Seigniorage

One of the immediate benefits to the government would be a higher Seigniorage. Seigniorage is the profit from the printing of currency. For instance, it costs $2 to print a $10 bill, and then the Seigniorage is $8. Cashless money exists in the form of digits on a computer. Hence it does not have to be printed. As a result, the Seigniorage is high. The government saves a lot of money. This excess saving can be used to provide tax waivers to the people. Digital money is simply a more efficient way to operate an economy.

Reduced Tax Avoidance

In many developing countries, tax avoidance is a major problem that impedes development. This is because mafia and other large organizations gain hold of businesses. The money generated is laundered easily due to lower rates of law enforcement. Countries like India have borne the brunt of this problem. Only 10 million people lay taxes out of 120 billion! This is the case even though the country is developing. The sales of luxury cars and high priced properties are going through the roof, but when it comes to tax declarations, no one seems to be making any money! A culture of tax evasion is prevalent and cheating the government is considered to be a smart move. For the nation to truly benefit, more people must pay taxes. A cashless economy helps track economic transactions and hence increases the rate of tax compliance.

Better Disbursement of Welfare

Countries like India have several welfare schemes. On paper, they seem to be beneficial. However, in reality, they fail miserably. This is because money earmarked for the purpose never reaches the people. Instead, the corrupt intermediaries embezzle the money. This is possible with cash. However, this is not possible with digital money which can be directly sent to the bank account of the beneficiary. Even without embezzlement, the entire process is too expensive as it involves a massive bureaucracy to transport and disburse cash. Compare this with the digital mode, and you will see how billions of rupees can be saved by adopting the digital medium.

Problems with Cashless Economy

A Cashless economy has its own set of challenges too! They are listed below:

Awareness and Education

India suffers from illiteracy and poverty. As a result, the majority of the population in India is not aware of how to use the digital medium to transact. Even training them has limited utility. Since they are not really educated, they can easily fall prey to rumors.

High-Speed Connectivity

India also has a problem with the availability of high-speed internet connectivity. A lot of villages in India do not have uninterrupted electric supply till now. It would, therefore, be impossible to transact digitally since internet connections and wi-fi connectivity will not be present in the last mile. In the absence of this connectivity, users can never be sure about digital payments and will always have to carry cash as a second option.

Loss of Freedom

The forceful introduction of a digital transaction is seen by many as a loss of their personal freedom. It is an individual’s personal decision whether or not they want to hold their money in banks or in the form of cash. The government can incentivize one form of transactions over another. However, they cannot any form of transaction mandatory. That is a loss of financial freedom and will get opposition from the masses.

Extending Credit to the Unworthy

The last problem with providing credit cards to farmers and poor in India is that they may not deserve the credit. This could lead to reckless spending followed by mounting NPA’s. In the end, the taxpayer will have to pick up the bill. Credit must only be provided to those who deserve it and there must be no government meddling in these affairs.

To sum it up, a cashless economy is still a distant dream in a country like India. Although the merits far outnumber the problems, the lack of infrastructure makes it impossible.


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