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India sets out on a long war on cash

India has always been a cash economy. The reasons are easy to see. India is still under-banked (only 53 percent of households have accounts, and many are dormant). The delay in enforcement of contracts encourages payment in cash. The low penetration of internet and low literacy discourage electronic transactions.

The central role played by cash in everything from bribery, to terrorism and money laundering is recognized by the Financial Action Task Force in several of its documents. (­­­­ see eg. Money Laundering Through The Physical Transportation Of Cash 2005). The absolute anonymity, portability, liquidity and near-universal acceptance of cash makes it the ideal vehicle for corrupt transactions especially petty corruption and facilitation payments.

India has been aware of the problem for a long time. The Prevention of Money Laundering Act 2002, read with relevant rules, makes it mandatory for all banks to keep detailed record of all cash transactions above ten lakhs (Rs 10,00,000 or about $14,500) and below ten lakhs but are related and done within a month, and all suspicious transactions.

Another way to address the problem through universalization of banking and financial services that discourage cash usage. Thus under the “Jan Dhan Yojana” or “financial inclusion” scheme almost 75 million bank accounts have been opened. Many of these accounts are linked with what is known as AADAHAR (12 digit biometric identity number).

New services like “RuPay” were created.Recently the Reserve Bank of India has come up with Payment and Settlement Systems in India: Vision-2018” — a set of strategic initiatives aimed at increasing “technology-based innovative payment products” and reduce “paper based transactions” under the rubric of its “less cash economy” initiative.

Unfortunately such structural measures will do almost nothing to alleviate the immediate problem, namely the possession of large cash reserves by individuals and entities, that are not accounted for.

The Task Force on Black Money 2012 considered and rejected punitive legislation prohibiting large cash deposits in private hand because of lack of political consensus. A more immediate solution can be stopping the circulation of high denomination notes — Rs 500 (about $7.50) and Rs 1,000 (about $15).

Such a suggestion has been made by a committee of Supreme Court considering Indian black money legislation. It is questionable if there is any support for it politically. On the contrary, the circulation of high denomination notes have increased from 57 percent of the total amount of Rs 43,000 billion (about $643 million) coin and currency in 2005-06 to 79 percent of the total value of Rs 95,000 billion (about $1.4 billion) coin and currency in 2010-2011.

Even if the country is to walk such a path, international experience shows that complete elimination of high denomination notes is a slow process. In Canada after 16 years after its abolition, 20 percent of C$1,000 bills are still in circulation. Many fear “less cash” translates into eventual “no cash” and the irreparable loss of privacy. Similar privacy concerns are expressed in India about AADHAR which is the cornerstone of “less cash” initiatives.

It seems we are in for a long war on cash.


Suvrajyoti Gupta is Assistant Professor at O.P. Jindal Global University in Delhi, India, and Assistant Director of the Centre for Alternative Dispute Resolution. His teaching and research interests include dispute resolution, international arbitration and corruption.

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