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Demonetisation: Why salaries in cash may soon be a thing of the past

21 December, 2016

The government could soon make it mandatory for employers of certain categories to pay their employees via cheques or direct bank account transfers. Several news reports including by the Press Trust of India and NDTV said late on Tuesday night that the cabinet could issue an ordinance to this effect. Here is all you may want to know.

What will the new rule mean?

The so-called Payment of Wages Ordinance will mandate employers to pay salaries directly in their employees’ bank accounts or via cheques. This will mean that certain categories of employers will no longer be able to pay their employees in cash.

Which employers are likely to be impacted by this new regulation?

An NDTV report says that, to begin with, it will impact central government-administered establishments, although there is no clarity on this yet. Since labour is a state subject, respective state governments will have to adopt the same rules individually.   

But don’t employers already mostly pay via direct transfers or cheques?

Not really. In fact, a significant number of low-level employees in the organised sector and daily wagers in sectors like real estate, small and medium enterprises and tea gardens are paid in cash. The new law will make it compulsory for all such employers to pay their employees using cashless means.

Will this have any bearing on the unorganised sector?

For now, it may not directly impact the unorganised sector including household helps and other staff who are personally employed by people. But if the government’s drive to go cashless following demonetisation is any indication, it may only be a matter of time before you may be asked to pay your household help via a cheque or direct account transfer.

What impact will such a move have?

It can possibly have a four-pronged impact.

First, it will reduce the amount of actual cash in circulation. Finance minister Arun Jaitley has already indicated that the cash being infused into the system may be less than what was sucked out of it on 8 November. Simply put, the government simply does not want you to deal in large amounts of cash.

Second, it may help check pilferages. Employers are often accused of underpaying their employees and siphoning off funds. If payments go directly into employees’ accounts, this will be checked.

Third, it will get millions of unbanked people into the formal banking system.

Four, it will prompt more people to use debit and credit cards, and possibly even mobile wallets, to make cashless payments, something the government has been trying to hard-sell ever since it demonetised nearly 86% of currency in circulation.

Is the system ready to handle such a rush of non-cash transactions?

The system will have to ramp up quickly. Already, there have been reports that people have faced trouble getting their debit and credit card transactions through. Even mobile wallets like Paytm have faced outages because of a sudden upsurge of transactions. 

There’s also the question of millions of retailers simply not having point-of-sale machines to accept debit and credit cards. Unlike other cashless countries, India does not yet have seamless and near ubiquitous Internet connectivity. Finally, this could see queues at ATMs getting even longer.

When will such an ordinance become law?

Although an ordinance is immediately enforceable, the government will have to bring a bill in the coming budget session of parliament in January to formalise the same into law.

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Demonetisation: Why salaries in cash may soon be a thing of the past

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