The Indian cash economy refers to the significant portion of economic transactions that occur in cash, with limited or no traceability or documentation. This informal sector of the economy has positive and negative effects on the country’s GDP (Gross Domestic Product). Let’s discuss some of the adverse effects:
Economic activities:
In a cash-based economy, a substantial portion of economic transactions may go unreported or underreported, resulting in a tax revenue loss for the government. It may direct the overall GDP calculation to the negative side, as it fails to capture the full extent of economic activities.
Inefficiency and productivity losses:
Cash transactions often involve more time and effort compared to electronic ones. The reliance on cash may lead to inefficiencies and productivity losses. For instance, cash-based businesses may spend significant time and resources on cash management, counting and verifying it, and transporting it to banks.
Limited access to credit and financial services:
The prevalence of the cash economy can hinder financial inclusion and limit access to formal credit and financial services. It is because many transactions in the informal cash sector lack proper documentation and are thus worthless for creditworthiness assessment. It restricts economic opportunities for individuals and businesses, potentially stifling growth and investment.
Higher Corruption and Black Money:
Cash-based transactions offer greater anonymity and can facilitate corruption and the accumulation of black money. Black money refers to income that is illegally earned, unreported, or untaxed. It undermines the formal economy, reduces tax revenue, and distorts economic indicators such as GDP.
Lack of Transparency and Accountability:
The cash economy lacks transparency and accountability compared to digital transactions. It makes it challenging to track and monitor economic activities, enforce regulations, and combat financial crimes such as money laundering and illicit financial flows. These factors can have a detrimental impact on the overall health of the economy.
To address these adverse effects, the Indian government has undertaken various initiatives, such as demonetization, promoting digital payments, and implementing stricter tax compliance measures. These efforts aim to formalize the economy, increase tax revenue, enhance transparency, and boost economic growth.
