Demonetisation: A baby step to a ‘less-cash’ economy

Indians are a very emotional lot and tend to quickly come to conclusions without delving deep into issues. The public outcry against demonetisation — especially by those who are at the receiving end — is one good example where emotions run high, with few solutions at their hand to face the problem of cash crunch.

One can’t do much, but to sympathise with those who faced the brunt of the Narendra Modi-led government’s abrupt demonetisation move on November 8. The banking infrastructure in India is still weak in terms of reach and not large enough to cater to the teeming millions in interior India.

Depending on one’s political leanings and personal financial situation, people have described the move as either an “economic robbery” ( aarthik dacaiti) or a “masterstroke” in the war against black money.

With more than five weeks gone since the demonetisation announcement, there is no doubt that the Prime Minister is on the backfoot, with some of the initiatives, as part of the exercise, backfiring on the government.

First, nobody expected — not even the government — Indians to return so much old demonetised notes (nearly ₹13-14 lakh crore) to the banking system, prompting the government to hurriedly design a scheme — Pradhan Mantri Garib Kalyan Yojana, a last and final chance for black money hoarders.

Second, the banking system — a key partner for such a massive exercise — was ill-prepared to face the situation. The Reserve Bank has issued 60 directions and notifications after November 8, making life more miserable for those standing in queues. Either by design or coincidence, the absence of adequate new currency has left a bad taste among people, especially those who had to face withdrawal restrictions from banks. Bank officials themselves exploited the situation at the cost of small-time bank customers.

The main criticism — justified to a large extent — against the government is that demonetisation has inflicted more pain on the poor and innocent while opening a window for the rich to cleanse their unaccounted income, of course, after paying a handsome share to the exchequer.

The jury is still out on whether demonetisation was the best route to tackle the fake currency problem.

But, one thing is clear. As Abhijit Bhave, Chief Executive Officer, Karvy Private Wealth, put it succinctly: “Demonetisation alone can’t turn India cashless. It is only a signal to India and Indians that money in their hands has changed shape.”

Sample this: The dominance and significance of cash in India’s monetary ecosystem is mind-boggling. A 2015 report by PricewaterhouseCoopers pegs cash transactions at 98 per cent of consumer transactions in value terms and 68 per cent in volume terms, much higher than comparable economies, such as China, Brazil and South Africa

In light of this, Modi’s demonetisation exercise could also be viewed as the eventual culmination of steps taken to foster financial inclusion, according to Karvy’s 2016 India Wealth Report.

The Jan Dhan-Aadhar-Mobile (JAM) trinity, Rupay Cards (which made a splash in 2014) and now Unified Payment Interface have put in place a robust base for India’s digitisation programme to take wings.

There is huge potential that India holds in turning into a cashless economy going by the following data points. There are 104 crore debit/credit cards in circulation as of October 2016. As much as 88-90 per cent of debit card transactions are done at ATMs, with only 10-12 per cent of transactions occuring at point-of-sale (PoS) terminals.

India barely has 2.1 lakh ATMs and 12 lakh PoS terminals to service such a huge population. It’s in this context that the Modi-led government’s directive to banks to add at least one million new PoS machines in the next three months should be welcomed.

India has taken a huge step towards improvising digitisation in the economy. One would do well to pay heed to what Finance Minister Arun Jaitley said recently: “Digital transactions are a parallel mechanism, not a substitute, for cash transactions, and a cashless economy is actually a less-cash economy, as no economy can be fully cashless.”

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