CITYZEN. Why people don’t choose to go cashless

As the debate continues over the costs and benefits of demonetisation it is evident that officialdom had underestimated the gap between the supply and the demand for currency notes. While some delay would have been anticipated in replacing 86 per cent of the value of the currency of one of the world’s largest economies, the continuing long queues every day before ATMs in the country’s metropolitan centres, including its capital, suggests things have not gone according to plan.

This gap in the metropolitan availability of currency notes has been seen largely as a problem of supply. And this is an important dimension of the problem. The assumption that secrecy could not be ensured if more than a handful of people knew about the decision in advance necessarily ensured a period of currency shortages. It did not help that a new ₹2,000 rupee note was expected to seamlessly replace the smaller denomination notes that were withdrawn. In reality a ₹500 note offers a flexibility that a note worth four times that amount cannot. Expecting the new ₹2,000 rupee note to play the role that the earlier ₹1,000 and ₹500 notes did is clearly evidence of inadequate attention to detail.

Despite these serious shortcomings the long queues in metropolitan centres need not be a matter of supply alone. It is possible that officialdom and many of the other experts discussing the issue have seriously underestimated the intrinsic demand for currency notes in the urban economy.

This can be seen in its most extreme form when experts argue that we can easily move towards a cashless economy based on the fact that there are a large number of mobile phones in use among the relatively poor in urban centres. And if the less educated can master the art of the smartphone, there is no reason why they cannot learn to operate the machines of a cashless economy.

There a problem with this articulation. It assumes that the reason why many of the relatively poor prefer to rely on the cash economy is because they do not have the knowledge to press the buttons required for a cashless transaction. There is no effort to even consider the possibility that the choice of the cash economy is a conscious one made by people who could, if need be, train themselves to use the machines of the cashless economy. As a consequence they fail to see the specific advantages offered to the poor by a cash economy.

A migrant worker sending money back to his or her illiterate family in a remote part of the country may not want the family to be put through the often formidable ordeal of dealing with the educated environment of a bank. She might also prefer a degree of secrecy if the new earnings from urban areas could change their economic status in a socially exploitative rural regime. Any connections between the elite of the rural system and those who control rural bank branches could ensure the worker stays well away from the rural banking system.

The uncertainties for the poor when operating in India’s metropolitan centres could also add to the preference for a cash economy. The possibility of a need for cash to deal with economic, health and other emergencies leads the poor to seek out sources of credit that do not have the rigidity of the banking system. A large number of the poor, particularly women, prefer local chits where a group of them deposits money every month. Each month’s collections are given to the person who bids the highest for it. The one who does so would typically be in greater distress than the others in the group.

To be sure, the preference of the poor for the informal financial systems that are deeply entrenched in our urban centres can also have less enlightened motives. The speculative urge of those who invest in stock markets has its informal equivalents that are available for the poor. They are poorly regulated and carry a high risk but their promise of substantial rewards is very attractive for those desperate to break out of poverty.

Demonetisation has undoubtedly dealt a body blow to these and other informal institutions of the metropolitan poor. The instruments of a cash economy cannot function when the cash they have been functioning with is suddenly derecognised.

And it certainly cannot operate when there is a shortage of other cash to replace it. But the underlying reasons for the preference of the poor for the informal cash economy are not going to disappear in a hurry. It should be no surprise if, as and when the new currency notes become available on the required scale, the informal cash economy of our metropolitan centres reasserts itself.

The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bengaluru