Demonetization: Has India moved towards being a cashless society

gyansager editior @ august 30, 2017

November 8, 2016 : Prime Minister Narendra Modi announces demonetization of 500 and 1000 rupee notes in an effort to curb black money and move India towards being a cashless society.

It’s been over eight months since that landmark event, an event touted by some to be the biggest economic reform since independence. Although the Reserve Bank of India is still to give definitive details about the effects of demonetization, looking through various indices and spending patterns of people, we can somewhat come to a conclusion for the major question, has India moved towards being a cashless society? Lets look at it in detail.

Background

The Indian government had demonetised bank notes on two prior occasions—once in 1946 and then in 1978—and in both cases, the goal was to combat tax evasion by "black money" held outside the formal economic system.[19] In 1946, the pre-independence government hoped demonetisation would penalise Indian businesses that were concealing the fortunes amassed supplying the Allies in World War II.[19] In 1978, the Janata Party coalition government demonetised banknotes of 1000, 5000 and 10,000 rupees, again in the hopes of curbing counterfeit money and black money.[20]

In 2012, the Central Board of Direct Taxes had recommended against demonetisation, saying in a report that "demonetisation may not be a solution for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewellery."[21][22] According to data from income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a successful strategy.[23]

On 28 October 2016 the total banknotes in circulation in India was ₹17.77 trillion (US$280 billion). In terms of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to ₹16.42 trillion (US$260 billion) of which nearly 86% (around ₹14.18 trillion (US$220 billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90266 million (9026.6 crore) banknotes were in circulation.[24]

In the past, the Bharatiya Janata Party (BJP) had opposed demonetisation. BJP spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and the aadmis (general population), those who are illiterate and have no access to banking facilities, will be the ones to be hit by such diversionary measures."[25][26][27][28]

In June, the Government of India had devised the Income Declaration Scheme, that lasted till 30 September 2016, providing an opportunity to citizens holding black money and undeclared assets to avoid litigation and come clean by declaring their assets, paying the tax on them and a penalty of 45% thereafter.

Demonetization: The aftermath and teething issues:

Since the demonetization move was all of a sudden ( this was necessitated to ensure black money hoarders do not get any leeway and make alternative arrangements), people all across India did face some troubles. In the days after November 8, long queues outside Banks and ATMs were the norm, with some political parties already terming the move a massive failure. However, after some days normalcy began to return and by mid January, things were pretty much back to normal. The banks deserve all the credit for quickly sorting out all the pressing issues and being able to bring things back to normal in a country as large as India ( which was a herculean task to say the least ).

Procedure

The plan to demonetise the rupee 500 and rupee 1000 bank notes began six to ten months prior, and was kept highly confidential with only about ten people aware of it completely. The logistical processes and preparations for printing the new rupee 500 and rupee 2000 bank notes began in early-May. The cabinet was informed about the demonetisation on 8 November 2016 in a meeting called by the Prime Minister of India Narendra Modi which was followed by Modi's public announcement about the demonetisation in a televised address.

How people reacted:

In the initial days, despite having to face troubles and interruptions in their busy day to day life, the fact that people were willing to stand in long queues to get their own money was heartening. Across India, you would have found people appreciating the move, hoping that it would curtail the passage and usage of black money, in spite of the visible discomfort they were having. Although beginning December, some people did start to get frustrated, still the percentage of such people was very less compared to those who were still prepared to face troubles.

The rise of mobile wallets:

Perhaps the biggest beneficiaries of the demonetization move were mobile wallets such as Paytm, MobiKwik etc. The fact that people could make payments through just scanning a bar code at any restaurant, shop was very convenient. Although Paytm had already spread out and reached brick and mortar stores in all major cities in India, the demonetization move gave Paytm an unprecedented push. The exponential growth of the firm along with around 5 percent rise in valuations was primarily due to the demonetization move. Paytm was not alone, other mobile wallets such as mobikwik, citrus etc. had similar kind of windfall, all be it on a much lesser scale due to Paytm having the first mover advantage. As of today, even after banks and ATMs getting back to normal functioning, the rise in usage of mobile wallets has continued.

Exchange of old notes

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following deposit of demonetised currency notes in bank on 15 November 2016.

The Reserve Bank of India stipulated a window of fifty days until 30 December 2016 to deposit the demonetised banknotes as credit in bank accounts. The banknotes could also be exchanged over the counter of bank branches up to a limit that varied over the days:[2]

Initially, the limit was fixed at ₹4,000 per person from 8 to 13 November.
This limit was increased to ₹4,500 per person from 14 to 17 November.[37][38]
The limit was reduced to ₹2,000 per person from 18 November.[39]
All exchange of banknotes was abruptly stopped from 25 November 2016.[40]

International airports were also instructed to facilitate an exchange of notes amounting to a total value of ₹5,000 for foreign tourists and out-bound passengers.

A marked increase in card transactions:

While some analysts were saying in jest that India seems to have skipped the age of plastic money and went straight to mobile wallets, figures suggest otherwise. Almost all major banks reported a minimum increase of 30 percent in card transactions after demonetization. A large portion of these card transactions were not through credit cards but through existing debit cards. Moreover, a lot of commercial facilities also did start using card swiping machines, resulting in increased card usage. The government also wasn’t left behind and announced a slew of incentives for using card transactions. As with mobile payments, although card transactions haven’t kept on surging after things got back to normal but compared with the time period before demonetization, card transactions are being increasingly preferred.

April fools joke

Seven months before the announcement, the Gujarati newspaper Akila published an article that "announced" the demonetisation of 500 and 1000 rupee notes.[76][77] The editor of the newspaper claimed that it was only an April fools day prank.[78] The article contained many details that matched the actual announcement in November, including the creation of new ₹2000 notes. The coincidence received wide coverage, and was called "mystical" and "uncanny.

Conclusion:
All this brings us to our moot point, has India become more cashless since demonetization? The answer to this question would be a straightforward yes. As mentioned above, people and firms that were formerly averse to using digital payments now use it for almost every transaction. As expected, there will always be naysayers who will churn out innumerable figures to dispute this narrative but the fact remains that transactions in cash have declined and with the government continuing to incentivize digital transactions, this reduction is only expected to continue further. Moreover, another piece of information is that after demonetization, 91 lakh people have been brought into the tax net. For a country like India which has one of the lowest tax compliance figures , this is News.