Importance of cash transactions in the indian economy
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Importance of cash transactions in the indian economy

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Importance of cash transactions in the indian economy Importance of cash transactions in the indian economy Document Transcript

  • IMPORTANCE OF CASH TRANSACTIONS IN THE INDIAN ECONOMY By Sayali SaojiCash refers to money in the physical form of currency, such as bank notes andcoins.In book keeping and finance, "cash" refers to current assets comprised ofcurrency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts). Cash may be defined asany legal medium of exchange that is immediately negotiable and free ofrestrictions. An essential requirement is that it must be immediately available aslegal tender; therefore, loans to employees, postage stamps and fixed perioddeposits cannot be regarded as cash since they are subject to conversionbefore they are available as cash.We know that a transaction can be a cash, credit or a cheque transaction. Cashis legal money, credit is an optional way and cheque is bank money. Cash canfurther be classified into notes and coins. Usually, notes are used for higherdenominations of money and coins for smaller ones. So a cash transaction todaywill imply a transaction wherein the medium of exchange are notes and coins.Before the introduction of coins and notes, a variety of objects were used asmoney. For example, since the very early ages, Indians used grains and cattle asmoney. Thereafter came the use of metallic coins – gold, silver, copper coins – aphase which continued well into the last century. And now with the advent ofplastic money, cash transactions has taken an entirely different form.Ours is a cash based society and the reasons are simple and ample. Analysingthe statistics regarding some important human development factors and certainfacts regarding macroeconomics will help us know the influence of thesecharacteristics on the magnitude of cash transactions in the Indian economy.According to the Census of India 2001, the overall literacy rate in India is just61%. And this is marked by extreme regional variations.There is an absolutecontrast of high education levels in Kerela (90.92%), Maharashtra (77.27%),Pondicherry (81.49%), Mizoram (88.49%), Delhi (81.82%), Chandigarh (81.76%)and Goa (82.32%) to very poor levels as in Bihar (47.53%), Uttar Pradesh
  • (57.36%), Jammu and Kashmir (54.46%), Arunachal Pradesh (54.74%) andJharkhand (54.13%). Lower the literacy rate, the greater is the predominance ofcash transactions. This is due to the fact that if such countless millions of Indiansdo not know how to read or write or count, opening and operating a bank accountis a too far fetched concept for them. So uneducated folks live with cash and alsohave a stong belief in it.Rural population is estimated to be 72.2% of the total population! This meansmore than half of the Indian citizens live in rural areas.The rural populationoutnumbers the urban population by a huge margin. And in India, these placesdo not even have the essential facilities – a doctor, hospital, school, post office;let alone a bank. That is why village and town dwellers depend on cashtransactions.Coming to Indian economy; it consists of three sectors - the agricultural,manufacturing and service sectors. Agriculture includes cultivation and alliedactivities, animal husbandry, horticulture, etc. The industrial (or manufacturing)sector is classified into small, medium and large categories. Services includebanking, warehousing, transportation, communication, advertising andinformation technology (IT) services, etc. Here, worth noting is the fact that eventhough the agricultural sector contributes least to the overall GDP of the nation, itstands as the highest employer of human workforce with around 60% of the totalworking population of the country engaged in it. Most of the transactions in thissector are dependent on cash as majority of the agricultural labourers are poor,uneducated and living in hinterlands. Almost all the transactions here are lowvalued and so cash is the most convenient and easy form of medium ofexchange in such a circumstance.Hardship is evident everywhere in our nation. Common people, on any givenday, just to survive, spend a great deal of time doing essential activities: workingor begging to make the ends meet, walking miles to fetch water, waiting in line tocatch a train or a bus to go to work or different places, waiting in line to buy basicthings like ration, dairy products, vegetables, fuel for cooking, waiting in line tosee doctors or buy medicines, if they are sick; and many more of a similar nature.In the midst of all these activities, many of us do not even have the time or themeans to go to a bank and then once at a bank, standing and waiting in line todeposit or withdraw money or both. That is why people live with cash. Eventhough modern facilities like online banking have been introduced, they arehighly inadequate to help the vast population of India. For instance, the basicnecessity like the internet connectivity is not available in the remote areas. The
  • places where the required infrastructure is provided; people are devoid of theknowledge to extract the benefit out of them ie there is no knowledge utility.It costs money to avail bank and credit facilities. A bank customer has to pay forthe miscellaneous bank charges which are imposed for its services. For areputed financial institution‘s or a bank‘s credit, customers need to climb theprison walls of collateral. Also in backward areas, illiterates are exploited withhigh interest rates. Thus majority of the citizens find cash, as a medium ofexchange, free of hassles. It takes time to become a cheque-and-credit cardsociety. At present many people and businesses do not accept cheques or creditcards.Thus the above points highlight the importance of cash transactions in the Indiaeconomy given the quantum of citizens prefering and dependent on the cashroute. Cash in this perspective has been looked at a much larger scale andtherefore cash in bank has been considered as good as cash in hand.But however there is a serious drawback in the mode of cash transactions andthat is regarding ‗black money‘. We buy and sell things with cash. Now, thebusinesses that receive cash from selling their products or services often do notrecord or report it in order to pay taxes on it. Similarly, people who receive cashas bribe or baksheesh or salary, do not record or report it in order to avoid havingto pay taxes on it. And the higher the number of cash transactions, the greaterthe probability of not reporting them to the government. This phenomenon isunavoidable in a cash based society. It is hard to know the total supply of blackmoney in India, but it is easy to know its importance. For example, it isimpossible to complete large transactions such as buying or selling of a house,building or land without it.As to its circulation, back in 2006 on December 8, the then Indian financeminister P.Chidambaram told Lok Sabha that there was no exact estimate ofblack money in circulation. Its estimates vary from economist to economist, fromestimator to estimator, and from time to time.Here are some estimates: Social Scientist wrote in its issue of August 1972 thataccording to Wanchoo Committee nearly Rs.1400 crore were unreported in1968-69 to evade tax and as a result of this evasion, tax revenue of Rs. 470crore were lost for that year. In the Illustrated Weekly of India of October 25,1981, Nani Palkhiwala, a former ambassador to the United States, cited anestimate that each year Indian economy generated nearly Rs. 12,000 crore of
  • black money. The National Institute of Public Finance and Policy ranged it to bebetween Rs. 31,584 crore and Rs. 36,786 crore during 1983-84. As recent asyear 2008, Indian newspapers reported that Rs. 70,00,000 crore are inSwitzerland banks — it couldn‘t be all black. No one knows the accuracy of anyof these statistics, but they are mind-boggling and show that black money isgrowing.Also, the estimates of the underground economy as a percentage of GDP varyconsiderably. Poonam Gupta and Sanjeev Gupta wrote in Economic and PoliticalWeekly of January 16, 1982 that for the year 1967-68 the black economy―constituted 9.5 percent of the official GNP… however, by 1978-79 the amounthad jumped to nearly half of the official GNP.‖ Since then some economists haveestimated that unreported economy grew from 20 percent of GDP in 1980s to 40percent in mid 1990s. Again, no one knows the accuracy of any of thesestatistics, but they show that the underground economy is booming.So what should be done to prevent black economy from growing, keeping inmind the importance of cash transactions?According to me, the corporate income tax should be abolished or minimized.Other different taxes can be levied due to which the total payment by a firm, at agiven instance can be reduced. Businesses merely add their cost of income taxto their prices of products or services they sell. It is the consumers who have tocompensate for this in terms of higher prices of goods. By freeing businessesfrom the burden of income tax, citizens will have more time and energy to devoteto their products, to make them better and cheaper, and to compete with otherbusinesses. These actions, in a free market economy, will cause prices ofproducts and services to go down.The government has tried numerous solutions to flush out black money. Itlowered income tax rate; it gave amnesty to people who disclosed fundsvoluntarily; it raided peoples‘ homes and businesses; it made tax lawstougher. But it is illusory to believe that raids, tax laws, and schemes will reduceor eliminate the black money. On discussion with some Chartered Accountants, ithas also been gathered that a provision has been made in the Income Tax Actaccording to which bar traders and businessmen have to reduce the number ofcash transactions in their daily routine which in turn will inhibit the growth ofparallel black economy.
  • The basic elements of the financial system were established during British rule(1757-1947). The national currency, the Rupee, had long been used domesticallybefore independence and even circulated abroad. And now, Reserve Bank ofIndia being a central bank (from a private bank earlier), it is playing a very crucialregulatory role and hence ensuring safety and confidence of common man.In the recent times, with the changing scenario worldwide, cash has taken a verybroader position; unimaginable a couple of years back- which is the ‗plasticmoney‘, popularly known as credit, debit and ATM cards. ―Charge it!‖ hasbecome like a fashion statement and it is commonly heard in various serviceestablishments like malls, multiplexes and hyper markets. People buying food orshopping for clothes using their credit cards has now become a trend. To sum itin a line, a credit card provides you with convenience, safety, more purchasingpower and a host of fringe benefits. What‘s more, credit cards today haveassumed different avatars. You have Add-on cards (for a family member), ATMcards (to withdraw instant money), co-branded cards, petrol cards (Citibank +Indian Oil, for instance in India) debit cards, smart cards ---- the innovations areendless. You get more too. Most cards offer privileges like free insurance,discount coupons and invitations to exclusive events. Yes, for many the creditcard has become a vital necessity. By use of these plastic credentials, one neednot carry bulk or cash on person, but just a simple card is equivalent to loads ofcash on person. The idea of using a card to make purchases was first thought ofby Edward Bellamy in 1887. He wrote a book, ―Looking Backward‖, whichdescribed his idea of a utopian society. In this book, he coined the term ―creditcard.‖ Since that time, advancements have been made that have allowed thisidea to become a reality. This is the achievement of the 21st century. Thus thefuture is only the past which has entered through another gate.