India is still largely a cash-based economy, especially in rural areas and among small businesses. Cash transactions are preferred because they are easy, quick, do not need internet/bank access, and suit low literacy regions. Cash transaction
However, heavy dependence on cash keeps a large section of economic activity outside official records, strengthening the informal economy, reducing tax collection, and encouraging corruption.

Cash transactions = less traceability = more informal economy

Meaning & Basic Concepts

(A) What is a Cash Transaction?

Cash transaction means the exchange of money using currency notes/coins instead of banking/digital methods.

(B) What is the Informal Economy?

Informal economy includes:

• Unregistered enterprises
• No proper bills/invoices
• No GST registration
• No social security
• Cash wage labour
  Examples: street vendors, small kirana shops, daily wage labour, small contractors, home-based units.

Why Cash Transactions Dominate the Informal Economy?

Low literacy + digital awareness gap

Cash is easier for people with limited education and digital literacy. Cash transaction

Weak banking infrastructure

• Fewer bank branches in villages
• ATM dependency
• Low internet availability

Trust factor

Many people feel cash is “real money” and gives control. Cash transaction

Avoiding taxes and regulations

Cash helps avoid:

• GST
• Income tax
• Labour laws
• Compliance paperwork

High transaction costs in digital payments

Merchants bear charges (POS cost, MDR charges, etc.). Cash transaction

Direct Impact of Cash Transactions on the Informal Economy

Cash strengthens informal businesses

Since cash transactions leave no digital trail:

• Businesses can operate without registration
• No invoice needed
• Easy to underreport income

Result: informal economy expands.

Cash increases tax evasion (Revenue loss)

Cash allows:

• Underreporting sales
• Fake accounts
• Cash-only dealings
  This reduces:
• GST revenue
• Income tax collection
• Municipal tax collection

Cash-based informal economy directly causes low tax-to-GDP ratio.

Cash supports black money generation

More cash means more:

• Black income
• Benami transactions
• Cash hoarding
• Bribery ecosystem

Black money, Parallel economy, Shadow economy.

Corruption becomes easier

Cash helps in:

• Bribes
• Commission culture
• Illegal payments

Cash becomes “fuel” for corruption.

Poor quality of official economic data

When transactions are not recorded:

• GDP estimation becomes difficult
• Employment data becomes unreliable
• Policy planning suffers
  Your file also highlights this issue of poor data collection. Cash transaction

Workers remain vulnerable (social impact)

The informal cash economy means:

• Cash wages (no payslip)
• No PF/ESI
• No pension
• No maternity benefits
• Job insecurity

This is why cash transactions delay formalisation.

Productivity remains low

Informal cash businesses generally have:

• Low credit access
• Low technology usage
• Low-scale expansion

Because banks demand proof of income & transactions (which cash businesses lack).

Cash creates an entry barrier for the modern credit ecosystem

If a business has no digital trail:

• No credit score
• No loan
• Dependence on moneylenders

Hence, the informal economy stays trapped in a cycle.

Sector-wise Impact

Rural economy

Cash dominates:

• Farm labour wages
• Small dairy/farm sales
• Mandi trade

MSMEs & small traders

• Billing avoided
• Partial sales shown

Construction sector

• Daily wage labour
• Contractor chain → mostly cash

Transport sector

• Cash payments, informal drivers, and underbilling

Cash vs Cashless Economy

Benefits of a cashless economy

• Reduces corruption/black money
• Improves tax compliance
• Strengthens financial inclusion
• Better targeting of subsidies
• Easier business formalisation

Limitations of a cashless economy

Your notes highlight real concerns: Cash transaction

• Digital fraud risk
• Technical failures
• Bank dependency
• Privacy concerns
• Transaction costs for merchant/consumer

India cannot become fully cashless immediately, but it can become less-cash economy.

Government Measures to Reduce Cash Dependence

Digital Payments

• UPI revolution
• RuPay cards
• BHIM app
• QR-based payment system

Financial inclusion

• Jan Dhan Yojana
• Expansion of banking reach

GST

GST forces invoice generation → formalisation.

Demonetisation (2016)

Target: Black money + cash-based economy
Impact: Temporary disruption to the informal sector (wages, trade), but push towards digital payments.

Way Forward

What India needs:

• Affordable internet + stable networks in rural areas
• Digital literacy programs
• Reduce MDR / transaction charges
• Stronger cybersecurity ecosystem
• Promote QR and UPI for small merchants
• Incentives for digital invoices (billing culture)
• Encourage formal credit for small traders

Conclusion
Reducing cash transactions is essential for the formalisation of the economy, improving tax compliance, raising government revenue, and ensuring social security for workers.

PREVIOUS YEAR QUESTIONS

Outline multi-faceted impact of cash transactions on informal economy—facilitators & constraints. (MPPSC)​​

Demonetization’s short-term effects on unorganized sector. (CGPSC)

Digital economy challenges for informal workers. (RPSC)

Informal sector formalization while preserving jobs. (UPPSC)​

Financial inclusion in cash-dependent rural economy. (MPPSC)