Vishal Pathak, Content Writer | Wednesday, 18 September 2024, 11:43 IST
In 2016, Prime Minister Narendra Modi expressed concern over the 90% of tran- sactions in the nation being made in cash, and decided to hold an enormous demone- tization effort. It turns out, however, that you can't just take one cog out of a system and expect it to work as before. This case and current events only prove that India still needs its paper rupee.
Part of the problem with the 2016 demonetization falling through was a too short notice given to everyone. Few, however, actually anticipated such devas- tating consequences – it was a surprise even to the Reserve Bank of India (RBI), which manages the Indian rupee. There were currency shortages that led to all kinds of economic problems, from stalled transport and agriculture industries to crashing stock markets and reductions in the country’s GDP, not to mention many people instantly plunged into poverty because of their inability to get paid in cash or access their money.
The ambitious goal to curb cash usage in India fell short. Moreover, in a surprising turn of events, a 2018 report by the RBI revealed that nearly all the demonetized banknotes found their way back into the banking system, which made analysts conclude that the demonetization effort hadn’t bring much result. This significant statistics has only underscored the enduring role of cash in the Indian economy, particularly for a vast segment of the local population that remains unbanked or underbanked.
Now, the Indian government continues to strive for economic growth and to strengthen its position on the global economic stage. PM Modi has highlighted economic growth as one of his biggest achievements in election rallies, and has "guaranteed" making the economy the third largest in the world from fifth now. This goal is surely ambitious, but is it possible to achieve it in a country where cash is still very popular?
How much, exactly, India loves cash?
It’s enough to take a look at certain facts to see how dear the paper rupee is for Indians. This is partly due to the country's cultural heritage, in which cash traditionally played a large role, and partly due to the still lagging infrastructure, with lack of ATMs and frequent power outages. Then again, there’s also financial and digital illiteracy, which are lower than anywhere in developing nations, contributing to the general reluctance to go online. For these reasons, a part of the population here remains unbanked, and the share of account owners with inactive accounts stays very high – at 35%, meaning that a larger than expected portion of the nation still heavily relies on cash. Meanwhile, another part of India's population is still putting their trust on cash when it comes to the precautionary and store-of-value motives, which finally removes the possibility of visualizing India's immediate future as a completely cashless one.
But is this as bad as it seems? Not quite – modern India is a consumption-driven economy, which is only setting off for a transformation into the production type of economy. This is a typical situation for developing countries: consumption stimulates production, and one of the most important tasks of the government of such an economy is to maintain constant demand within the country and ensure its growth. Cash, in this case, holds the spending up by supplementing and enhancing deals every day and everywhere, write analysts in the Indian CMS’ Consumption Report 2024: "For an economy to flourish, it is imperative that the payments ecosystem allows all modes of transactions. Cash payments are an indispensable complement to mobile, electronic, and other forms of digital payments."
With this in mind, the prospects of Modi’s ambitious goal seem to be quite real, given that cash can help facilitate transactions in rural areas with limited digital infrastructure, eliminate barriers to participation in the economy for people who may be unfamiliar with or lack trust in digital transactions, and support microentrepreneurs and small businesses to ensure the continued circulation of inclusive economic activity across the country. All that remains is for the Indian government to trust cash and officially recognize that the nation has its own unique way of development, and to take a modern and proactive approach to their management.
Using paper money as a springboard for boosting economy
Details of the “cash-inclusive” approach may vary, but its essence is clear: to provide the population with a reliable and secure means of payment. As a rule, this involves a whole infrastructure consisting of banknote printers and handlers supported by flocks of engineers, designers, security specialists and others. Some states delegate this function to independent security printers, while others have state printing works that collaborate with materials and equipment suppliers to share industry innovations, provide a steady supply of banknotes and ensure their safety and security. The amplitude of capabilities possessed by printers in conjunction with their suppliers provides the government with ample opportunity to ensure efficient and secure cash circulation.
To guarantee this trust, combat counterfeiting and provide people with an efficient means of payment, modern banknotes are equipped with a variety of sophisticated security features. These features, like watermarks, security threads, microprinting and many others, are difficult and expensive to replicate, making it harder for criminals to produce fake money. The Indian authorities also understand this, as the case of the 2000 rupee note introduced by the RBI after the government's demonetization exercise shows. While working on the new bill, the government took care to make it as secure as possible, and integrated various new technologies into it, from color changing ink and windowed security threads to see-through registration devices and micro letters.
Some of these solutions are aimed directly at combating crime, like, for example, staining inks used as part of Intelligent Banknote Neutralisation Systems. The problem is that ATM and Cash-in-Transit attacks are still an issue in many countries, India included, revealing the need for protection and traceability systems to retrieve stolen banknotes. The inks, like ones offered by a Swiss developer and supplier of security ink technologies SICPA, provide as an extra layer of defense against thieves by automatically spraying when cash-handling equipment is harmed. The ink produces very visible marks on the banknotes, thus assisting authorities and law enforcement agencies in their work and providing enhanced security for whoever wants to use an ATM.
Other solutions are designed for the protection and comfort of immediate users - like the anti-pathogen technology Bioguard by Oberthur Fiduciaire that protects users from viruses, fungi and bacteria. The technology has proven its worth in the midst of the COVID-19 pandemic - laboratory tests have shown that the viral concentration is reduced by at least 100 times compared to untreated surfaces, while consecutive tests proved its anti-microbial and anti-fungal properties as well. The coating, which does do not produce irritation on contact with the skin and lasts for a banknote’s lifetime, is applied as a varnish or introduced directly in the fabrication process of the banknotes to ensure that nothing prevents people from accepting them, be it hygiene preferences or health measures like Nipah virus infection, flaring in Kozhikode district, Kerala in autumn 2023.
So, it is possible to grow the economy without radical changes to established payment systems. This is particularly relevant for India, which is exploiting patriotic programs like Make in India: recognizing the unique national features will positively contribute to the overall welfare of the nation, the more so cash continues to be an all-familiar and convenient means of payment and store of value for most Indians. All this only underscores that the government may benefit from accepting cash and making it comfortable, reliable and safe rather than declining it.
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