Could India be the first to get rid of cash?
lines, though, were its recommendations that cash transactions of over Rs. 300,000 (about $4,500) be banned and that nobody should be permitted to hold more than Rs. 1.5 million in cash. While those ideas might sound extreme, some developed countries already have similar laws. Belgium, for example, which has the highest proportion of cashless transactions in the world -- 93 percent, according to MasterCard -has banned cash payments of over 3,000 euros. And in India, pressure to move away from cash has been building among politicians and regulators. In a radio address two months ago, Modi tried to persuade listeners to stop using cash.
And even the Reserve Bank of India, which tends towards conservative thinking about financial innovation, has come onboard, setting up a joint committee with the government to push cashless transactions. The committee will focus on reducing the cost to consumers of using credit cards, currently around 2 percent of each purchase.
Of course, only when the far more nimble Indian private sector gets involved will this transition gain steam. And that's the surprisingly good news. The Indian government is also quietly and patiently putting into place, over the next five to seven years, the plumbing that would let the private sector lead India into a cashless future.
Recently, the Indian policymaker and IT billionaire Nandan Nilekani listed some of these changes. Most important, perhaps, is the "unified payment interface" that Nilekani and RBI Governor Raghuram Rajan rolled out last month, which made it easier for Indian consumers to use their mobile phones to transfer money to each other. Nilekani argues that "this will also shift the business models in banking from low-volume, high-value, high-cost and high fees, to high-volume, low-value, low-cost and no fees."
Rajan, for his part, says "a banking revolution" will add to what India already has -- "the most sophisticated public payments infrastructure in the world." Building on this infrastructure, a host of financial technology startups are trying to reduce transaction costs for Indians. As one such entrepreneur recently pointed out, merely transporting cash to and from villages in India cost about $335 million last year: "We are replacing that truck of cash".
India's got a long way to go, to say the least. China already boasts futuristic banks where you can set up an account in a minute, with just a mobile phone number, your national ID number and a selfie. In the U.S., 80 percent of transactions are cashless.
But there's good reason to suppose that cashless payments could be adopted much faster in India than elsewhere. It's the classical example of leap-frogging. India's many poor people and migrants still struggle to access its chronically inefficient banking system, despite the government's efforts at reform.
If presented with an easy and frictionless way of transferring cash, there's no reason to think consumers wouldn't embrace it quickly just as most Indians skipped fixed-line telephony to go straight to mobile phones. Smartphone penetration is increasing faster in India than anywhere else in the world.