1. IMPORTANCE OF CASH TRANSACTIONS
IN THE
INDIAN ECONOMY
By Sayali Saoji
Cash refers to money in the physical form of currency, such as bank notes and
coins.In book keeping and finance, "cash" refers to current assets comprised of
currency or currency equivalents that can be accessed immediately or near-
immediately (as in the case of money market accounts). Cash may be defined as
any legal medium of exchange that is immediately negotiable and free of
restrictions. An essential requirement is that it must be immediately available as
legal tender; therefore, loans to employees, postage stamps and fixed period
deposits cannot be regarded as 'cash' since they are subject to conversion
before they are available as cash.
We know that a transaction can be a cash, credit or a cheque transaction. Cash
is legal money, credit is an optional way and cheque is bank money. Cash can
further be classified into notes and coins. Usually, notes are used for higher
denominations of money and coins for smaller ones. So a cash transaction today
will 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 as
money. For example, since the very early ages, Indians used grains and cattle as
money. Thereafter came the use of metallic coins – gold, silver, copper coins – a
phase which continued well into the last century. And now with the advent of
plastic money, cash transactions has taken an entirely different form.
Ours is a cash based society and the reasons are simple and ample. Analysing
the statistics regarding some important human development factors and certain
facts regarding macroeconomics will help us know the influence of these
characteristics on the magnitude of cash transactions in the Indian economy.
According to the Census of India 2001, the overall literacy rate in India is just
61%. And this is marked by extreme regional variations.There is an absolute
contrast 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

2. (57.36%), Jammu and Kashmir (54.46%), Arunachal Pradesh (54.74%) and
Jharkhand (54.13%). Lower the literacy rate, the greater is the predominance of
cash transactions. This is due to the fact that if such countless millions of Indians
do not know how to read or write or count, opening and operating a bank account
is a too far fetched concept for them. So uneducated folks live with cash and also
have a stong belief in it.
Rural population is estimated to be 72.2% of the total population! This means
more than half of the Indian citizens live in rural areas.The rural population
outnumbers the urban population by a huge margin. And in India, these places
do 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 cash
transactions.
Coming to Indian economy; it consists of three sectors - the agricultural,
manufacturing and service sectors. Agriculture includes cultivation and allied
activities, animal husbandry, horticulture, etc. The industrial (or manufacturing)
sector is classified into small, medium and large categories. Services include
banking, warehousing, transportation, communication, advertising and
information technology (IT) services, etc. Here, worth noting is the fact that even
though the agricultural sector contributes least to the overall GDP of the nation, it
stands as the highest employer of human workforce with around 60% of the total
working population of the country engaged in it. Most of the transactions in this
sector are dependent on cash as majority of the agricultural labourers are poor,
uneducated and living in hinterlands. Almost all the transactions here are low
valued and so cash is the most convenient and easy form of medium of
exchange in such a circumstance.
Hardship is evident everywhere in our nation. Common people, on any given
day, just to survive, spend a great deal of time doing essential activities: working
or begging to make the ends meet, walking miles to fetch water, waiting in line to
catch a train or a bus to go to work or different places, waiting in line to buy basic
things like ration, dairy products, vegetables, fuel for cooking, waiting in line to
see 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 the
means to go to a bank and then once at a bank, standing and waiting in line to
deposit or withdraw money or both. That is why people live with cash. Even
though modern facilities like online banking have been introduced, they are
highly inadequate to help the vast population of India. For instance, the basic
necessity like the internet connectivity is not available in the remote areas. The

3. places where the required infrastructure is provided; people are devoid of the
knowledge 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 for
the miscellaneous bank charges which are imposed for its services. For a
reputed financial institution‘s or a bank‘s credit, customers need to climb the
prison walls of collateral. Also in backward areas, illiterates are exploited with
high interest rates. Thus majority of the citizens find cash, as a medium of
exchange, free of hassles. It takes time to become a cheque-and-credit card
society. At present many people and businesses do not accept cheques or credit
cards.
Thus the above points highlight the importance of cash transactions in the India
economy given the quantum of citizens prefering and dependent on the cash
route. Cash in this perspective has been looked at a much larger scale and
therefore 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 and
that is regarding ‗black money‘. We buy and sell things with cash. Now, the
businesses that receive cash from selling their products or services often do not
record or report it in order to pay taxes on it. Similarly, people who receive cash
as bribe or baksheesh or salary, do not record or report it in order to avoid having
to pay taxes on it. And the higher the number of cash transactions, the greater
the probability of not reporting them to the government. This phenomenon is
unavoidable in a cash based society. It is hard to know the total supply of black
money in India, but it is easy to know its importance. For example, it is
impossible 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 finance
minister P.Chidambaram told Lok Sabha that there was no exact estimate of
black money in circulation. Its estimates vary from economist to economist, from
estimator to estimator, and from time to time.
Here are some estimates: Social Scientist wrote in its issue of August 1972 that
according to Wanchoo Committee nearly Rs.1400 crore were unreported in
1968-69 to evade tax and as a result of this evasion, tax revenue of Rs. 470
crore 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 an
estimate that each year Indian economy generated nearly Rs. 12,000 crore of

4. black money. The National Institute of Public Finance and Policy ranged it to be
between Rs. 31,584 crore and Rs. 36,786 crore during 1983-84. As recent as
year 2008, Indian newspapers reported that Rs. 70,00,000 crore are in
Switzerland banks — it couldn‘t be all black. No one knows the accuracy of any
of these statistics, but they are mind-boggling and show that black money is
growing.
Also, the estimates of the underground economy as a percentage of GDP vary
considerably. Poonam Gupta and Sanjeev Gupta wrote in Economic and Political
Weekly 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 amount
had jumped to nearly half of the official GNP.‖ Since then some economists have
estimated that unreported economy grew from 20 percent of GDP in 1980s to 40
percent in mid 1990s. Again, no one knows the accuracy of any of these
statistics, but they show that the underground economy is booming.
So what should be done to prevent black economy from growing, keeping in
mind 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 a
given instance can be reduced. Businesses merely add their cost of income tax
to their prices of products or services they sell. It is the consumers who have to
compensate for this in terms of higher prices of goods. By freeing businesses
from the burden of income tax, citizens will have more time and energy to devote
to their products, to make them better and cheaper, and to compete with other
businesses. These actions, in a free market economy, will cause prices of
products and services to go down.
The government has tried numerous solutions to flush out black money. It
lowered income tax rate; it gave amnesty to people who disclosed funds
voluntarily; it raided peoples‘ homes and businesses; it made tax laws
tougher. But it is illusory to believe that raids, tax laws, and schemes will reduce
or eliminate the black money. On discussion with some Chartered Accountants, it
has also been gathered that a provision has been made in the Income Tax Act
according to which bar traders and businessmen have to reduce the number of
cash transactions in their daily routine which in turn will inhibit the growth of
parallel black economy.

5. The basic elements of the financial system were established during British rule
(1757-1947). The national currency, the Rupee, had long been used domestically
before independence and even circulated abroad. And now, Reserve Bank of
India being a central bank (from a private bank earlier), it is playing a very crucial
regulatory role and hence ensuring safety and confidence of common man.
In the recent times, with the changing scenario worldwide, cash has taken a very
broader position; unimaginable a couple of years back- which is the ‗plastic
money‘, popularly known as credit, debit and ATM cards. ―Charge it!‖ has
become like a fashion statement and it is commonly heard in various service
establishments like malls, multiplexes and hyper markets. People buying food or
shopping for clothes using their credit cards has now become a trend. To sum it
in a line, a credit card provides you with convenience, safety, more purchasing
power and a host of fringe benefits. What‘s more, credit cards today have
assumed different avatars. You have Add-on cards (for a family member), ATM
cards (to withdraw instant money), co-branded cards, petrol cards (Citibank +
Indian Oil, for instance in India) debit cards, smart cards ---- the innovations are
endless. You get more too. Most cards offer privileges like free insurance,
discount coupons and invitations to exclusive events. Yes, for many the credit
card has become a vital necessity. By use of these plastic credentials, one need
not carry bulk or cash on person, but just a simple card is equivalent to loads of
cash on person. The idea of using a card to make purchases was first thought of
by Edward Bellamy in 1887. He wrote a book, ―Looking Backward‖, which
described his idea of a utopian society. In this book, he coined the term ―credit
card.‖ Since that time, advancements have been made that have allowed this
idea to become a reality. This is the achievement of the 21st century. Thus the
future is only the past which has entered through another gate.