The Numbers Behind Demonetisation Just Don’t Add Up

Posted on November 19, 2016 in Business and Economy

By Avikal Somvanshi:

While the U.S. was breathing heavy counting ballots cast in the 2016 presidential election, the Indian population gasped for breath as the government demonetised majority of Indian currency giving people less than six hours of notice to comply. On the night of November 8, in a surprise television address to the nation, Prime Minister Narendra Modi declared that all the in-use INR 500 and 1,000 bills would cease being legal tender starting midnight of the same day, snowballing monetary chaos of unprecedented scale.

The stated short-term goal of the demonetisation is to bring the unaccounted wealth (23–26 per cent of Indian GDP) into the tax bracket. It is a politically correct message to get public support for this drastic measure, though it is part of Modi’s larger Digital India and Smart Cities Mission which includes making India a cashless economy. This move is bound to do little to achieve the said short-term goal as tax evaders keep a very small portion of their ill-gotten wealth in hard cash, going by income-tax data. Cash recovery has been less than 6 per cent of the undisclosed income seized from tax evaders. But it might just tilt the public perception of digital platforms offering cashless transactions.

How Big Was The Shake-Up?

India has a unique culture of saving that is dying at large globally. Not only do Indians habitually save money instead of investing but when out to spend, they prefer to spend in cash. About 78% of all consumer payments in India so far this year were made in cash compared to the 3.5 – 8.0% for developed countries such as the U.S. and the U.K. According to the Reserve Bank of India (RBI), as of March, 86.4% of the value of all currency bills in circulation was in INR 500 and 1,000 notes. In fact, cash in circulation in India accounts for 18% of the country’s GDP.

A majority of the 1.2 billion population of the country did not have a bank account till 2014, which was changed by the Prime Minister’s Jan Dhan Yojana, a scheme which opened bank accounts for much of the excluded population. But there is a difference between having a bank account and operating a bank account. According to the World Bank report, India with a dormancy rate of 43%, accounts for about 195 million of the 460 million adults around the world that have a dormant account. With this as the background, one is tempted to assume that Modi had a foolproof roadmap in place.

Logistics Of Declaring 18% Of The GDP As Invalid

The outlawed bills can no longer be used for transactions but can be redeemed at banks and post offices until December 30. The measure devised to absorb the shock didn’t quite get off to a smooth start. Banking infrastructure was ill-equipped to handle the influx and the situation was made worse by the fact that all banks and ATMs were shut down for the first day post-transition. This literally left the country almost cashless, and not in a way technologists had hoped for.

Banks and ATMs continue to malfunction as horror stories flood the internet of people left with no cash to go about even their daily errands. There have been some hilarious side effects as well, like the under-utilisation of car parking at Delhi’s airport because parking fee is collected only in cash, which in turn resulted in mass illegal parking on roads leading to the airport causing traffic congestion.

But worst hit are the people who don’t have online access. About 94% of Indian work force is employed in informal (cash-based) economy, with majority belonging to economically weaker sections of the society. Devoid of banking access, most have been forced to turn to local thugs to exchange their hard-earned savings at times paying 20–25 per cent as ‘convenience’’fee.

Sowing Chaos And Reaping Status Quo?

Government is now issuing new INR 500 and INR 2,000 bills and it will be a while before normalcy is restored. But all this chaos is bound to break Indians out of their saving habits and become more open to the idea of digital transactions, something which is already becoming popular among the well-off sections of mega cities.

Both public and private sector have been working towards this transition. RBI launched RuPay in 2013, to facilitate electronic payment at all Indian banks and financial institutions, in competition with MasterCard and Visa in India. Multiple mobile commerce platforms, like PayTM, have found a strong hold among urban centers, offering their customers a digital wallet to store money and make quick payments.

Overall, urban and rich India might very well transition to a digital cashless economic environment in the near future, but the road for the rest looks long and winding as Kenya found out in its Google-sponsored failed cashless experiment. Cashless economy is a desired target to aim for but with just about 200,000 ATMs and around 1,440,000 point of sale terminals, a majority of whom are concentrated in big urban centers, in a country of 1.2 billion people, the government needs to do more than just digitise policy overnight.

This article was originally published on Medium.

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