Indian Finance Minister Arun Jaitley says “India has to move towards the cashless society.” Cashless society? India? Last month’s demonetization continues to wreak economic havoc, and now defenders say it will pay off long-term by promoting digital-payment systems that increase efficiency and transparency. But why should Indians believe that officials exercising arbitrary power over their cash will keep their hands off a system that monitors every transaction?
In a cashless society the state has far greater means to harm the public, both through inept policies and abuses of power. Recent weeks have been bad enough, starting with the shock announcement that 85% of Indian currency in circulation was no longer legal tender and would have to be exchanged at banks for new bills not yet printed. As citizens idle in long bank lines and businesses fold without liquidity, officials are issuing contradictory directives about the new cash regime. Now these same officials want a digital record of every exchange.
India already has a too-powerful bureaucracy that imposes punishing licensing, labor, tax and other regulations, stifling entrepreneurship and innovation. This is a major reason an estimated 95% of all transactions use cash and some 45% of the economy is “informal” or off the books. When it’s prohibitively expensive to comply with every regulation, businesses that are otherwise legitimate stay underground. Without sweeping deregulation, going digital and cashless would strengthen bureaucrats to be even more intrusive and burdensome.
There’s also the loss of financial privacy. As journalist Amit Varma writes in the Times of India, “If you buy AIDS medication or a porn magazine or book a hotel room for a romantic alliance, this information can be accessed by the government—or any hacker with the requisite skills—and used against you.” It would also hurt people in regular interactions. “Cash is empowerment: Ask the young vvife who saves spare cash from her alcoholic husband,” Mr. Varma notes, “or the old mother who stuffs spare notes under her mattress for years because it gives her a sense of autonomy.”
In Germany, where memories of communism and Nancy help citizens prize anonymity, some 80% of transactions are in cash. The U.S. figure is 32%. In Japan and Switzerland savers hoard cash to avoid punitive negative interest rates on deposits. This is an entirely reasonable response to runaway monetary policy, but it annoys Keynesians like Harvard’s Kenneth Rogoff and Citigroup’s Willem Buiter, who want cash limited so central banks can squeeze savers with impunity.
Sweden may be the best model for cashlessness, as only 2% of transactions use cash. But Sweden has low corruption in government, reliable legal protections, high social trust and advanced financial and technological infrastructure. India has none of that, but it does have government officials with radical plans to reshape a society in which half of the population (some 600 million) doesn’t even have a bank account.
Indians would benefit from access to digital finance, which can cut transaction costs, make credit more affordable and channel state aid directly to citizens, bypassing sticky-fingered bureaucrats. The government can help by liberalizing financial regulation and improving telecommunications infrastructure. But it should also respect citizens who want to keep at least some cash. Imposing a “cashless society” is antithetical to economic liberty.
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