Cashless Economy: Objectives, Importance, Impact on Indian Economy, Advantages and
Disadvantages
By Adnan Ali
|
Updated on: May 21st, 2024
3 min read
A cashless economy prioritises digital transactions over physical cash. This
system, driven by credit/debit cards, mobile wallets, and online transfers, aims to
streamline financial processes, curb black money circulation, and boost financial
inclusion. For India, a cashless economy holds immense importance, as it holds the
promise of greater transparency, improved tax collection, and a more robust digital
infrastructure.
However, challenges like digital literacy gaps and infrastructure limitations
necessitate a balanced approach to evaluate its advantages of convenience and
security against potential drawbacks of accessibility and cyber risks.
What is Cashless Economy in India?
A cashless economy refers to a system where digital transactions have taken
completely over physical cash. Instead, digital channels such as debit cards,
credit cards, internet banking, mobile wallets, electronic fund transfers and
digital currencies are used to carry out day-to-day transactions.
In India, the government has made significant efforts to promote this
transformation, aiming to reduce corruption, enhance transparency, and encourage
financial inclusion for all citizens, particularly in rural areas. The growth of
fintech institutions, rapid digitalisation, smartphone penetration and financial
innovations in India are transforming the country into a cashless economy.
Objectives of a Cashless Economy
The primary objectives of a cashless economy are to:
Promote financial inclusion
Enhance transparency
Reduce black money circulation
Combat corruption, and
Ensure convenient and secure transactions.
Such a system aims to provide digital infrastructure, educate the population on
digital literacy, and reduce dependency on traditional banking channels.
Importance of Cashless Economy
A cashless economy holds immense significance by facilitating easier cross-border
transactions, reducing overhead costs, promoting a more robust and efficient tax
collection system, and stimulating economic growth. Additionally, it encourages
financial innovation, enables targeted financial assistance, and improves overall
economic resilience.
History of Cashless Economy
The concept of a cashless economy traces back to the advent of advances in banking
and the widespread adoption of credit cards and online payment systems globally.
However, in India, the demonetisation drive in 2016 played a crucial role in
accelerating the country's shift towards a cashless economy, as people were
struggling to get physical money from banks and thus started using digital mediums
for day to day transactions.
Following the demonetisation drive, India saw the launch of UPI (United Payments
Interface) as a secure and complete free payment system. It also led the growth of
Financial technologies companies like Paytm, Phone Pay, and etc.
How Does a Cashless Economy Work?
A cashless economy relies on digital payment methods such as mobile wallets,
debit/credit cards, Unified Payments Interface (UPI), and internet banking. These
mechanisms allow individuals and businesses to transfer funds electronically,
eliminating the need for physical cash. Secure encryption, authentication, and
authorised financial intermediaries ensure a smooth and reliable transactional
experience.
Is India Ready for a Cashless Economy?
India has made significant strides towards a cashless economy, evident from the
rapid increase in digital transactions and the government's push for digitisation.
However, challenges such as inadequate digital infrastructure and limited digital
literacy still exist, which need to be addressed for a complete transition.
Different Types of Cashless Modes
A cashless economy offers various modes of digital payments, including mobile
wallets4:20 PM 6/2/2025, UPI, internet banking, NFC-based payments, and QR code
scanning. Each mode caters to different preferences and requirements, ensuring
convenience, security, and accessibility in conducting financial transactions. Some
of the different modes of cashless transactions are as follows:
Mobile Wallet: A virtual wallet accessed via smartphone that acts as a payment
gateway for transactions, eliminating the need for cards.
Plastic Money: Cashless payment method with debit, credit, and prepaid cards, in
physical and virtual forms. It reduces the use of paper currency, tracks history,
and minimises reliance on cash.
Net Banking: Transfers money from one bank account to another via RTGS, NEFT, or
IMPS. Widely used and cost-effective.
Advantages and Disadvantages of Cashless Economy
Advantages
A cashless economy brings advantages like enhanced transparency, reduced black
money circulation, improved convenience, and increased economic growth. Some of the
advantages of a cashless economy are as follows:
A cashless society has the main benefit of leaving a record of all transactions
made through electronic means. This makes it extremely difficult to maintain black
economies or underground markets that can harm the nation. This reduces the
likelihood of black money entering the system and makes it more risky for criminals
to conduct transactions.
An economy that is predominantly cash-based fosters a rampant underground market
that encourages criminal activities such as drug trafficking, human trafficking,
terrorism, and extortion, among others. Digital transactions make it harder to
launder money for such nefarious activities.
The circulation of fake currency notes can be curbed through a cashless society.
In a cashless society, it is difficult to evade tax payments, and such violations
are greatly reduced. An increased tax base would result in greater revenue for the
government and more funds available to finance welfare programs.
Digital transactions bring about better transparency, scalability, and
accountability.
Convenient and efficient, digital transactions can improve market efficiency.
The risks associated with carrying and transporting large amounts of cash can be
eliminated through a cashless economy.
The production cost of paper currency and coins can be saved by reducing the
production of these items through a cashless society.
A lot of data is transferred due to cashless transactions. This data can help the
government plan for future expenses, such as housing, energy management, and
others, based on the pattern of data transmission.
Disadvantages
However, cashless transactions also come with disadvantages such as security
concerns, cyber threats, a digital divide, and the potential exclusion of
vulnerable segments of society. The disadvantages of a cashless economy are
discussed below:
The rise in online transactions has led to an increase in ease of use for
consumers. However, cyber security has become a major concern as the rise of
digital payment methods has opened new avenues for online fraud.
Currently, there aren’t enough strong laws and legal processes in place that can
help prevent online fraud. This coupled with the risk of data theft, can lead to
massive security breaches for banks and uncover the financial information of
thousands of users.
The convenience of cashless transactions can lead to overspending by people and
enterprises, especially for the younger population, which can eventually lead to a
significant increase in unnecessary debt.
Identity thefts are on the rise due to the lack of financial knowledge among
individuals, causing them to lose confidential information and hard-earned money.
In India, financial illiteracy and the reluctance to transition to cashless
transactions remain the biggest barriers. The internet and smartphone penetration
in the country is still catching up. Switching from a cash-based to a digital
medium can be a challenge for people who require a deeper financial understanding.
Impact of Cashless Transaction on Indian Economy
The adoption of cashless transactions in India can have significant impacts on the
economy, such as reducing the informal sector, improving tax compliance, enabling
targeted subsidies, and fostering financial inclusion. However, challenges like
data privacy, infrastructure requirements, and security need to be addressed for
sustainable growth.
Cashless Economy Success or Failure
The success of a cashless economy hinges on careful consideration of its
objectives, addressing technological and infrastructural challenges, and ensuring
that vulnerable sections of society are not excluded. With continuous efforts to
enhance digital infrastructure and promote financial literacy, India has the
potential to make significant progress in its cashless journey.
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