Skip to content

1

DeMonetisation did not promote the uptake of digital transactions

Driving India towards a less-cash, digital payments economy was one of the aims claimed by the Prime Minister when he invalidated 86% of India's circulating currency. The reasoning was that India was a largely cash-based economy; if circulating cash was reduced, people would rapidly move towards electronic, or digital payment systems for their commercial transactions. That at any rate was the hope.

Did it happen?

Rupa Subramanya thinks it did. She claimed as much in a blog in the Hindustan Times. She accepts that the original aim of taking out black money has not been met, given that almost all of the Specified Bank Notes (SBNs) hav now been returned for exchange or deposit. But she goes on to say that her research shows that the secondary aim of pushing the country towards digital payments and away from a cash based economy has been achieved. To quote from her article:

....several key components of digital payments such as Point of Sale Debit and Credit (PoS) purchases, National Electronic Fund Transfer (NEFT), Immediate Payment Systems (IMPS) and mobile banking, are way above their pre-demonetisation trends

.....

The bottom line of the research conclusively demonstrates that there was a structural break after November 2016 with a permanent increase in digital payments and decrease in the relative importance of cash. Whatever you may think of the original goals and whether they succeeded, it’s clear digitisation is one demonstrable success story of demonetisation.

She expresses the use of digital payments not in absolute terms but as a proportion of total M3 Money. However, though she says she has published her findings,  they are not in peer reviewed journals. Rather the findings are published in research papers for the Observer Research Foundation - a think tank. I haven't seen these papers and therefore cannot comment on the methodology of the research. In any case she does not cite a source, nor does her article present the full results of her analysis. Her data source, though is the same that I have used earlier in a series of tweets and in a twitter Moment. This is the Reserve Bank of India's Database on Indian Economy.

I believe her conclusions are premature, they may even be misleading or wrong, based as they are not on absolute value of payments but on payment volumes as a ratio of M3.

I present here my own much simpler and more intuitive analysis of the RBI data set and draw very different conclusions.

Data and Methods: The RBI dataset consists of monthly transaction amounts for each of several different modes of digital transactions. The data goes back to 2004 and the latest available data is for August 2017, 10 months after DeMonetisation. Rather than look at just at the figures a few months either side of D-Day (DeMonetisation-Day if you are a fan or Disaster-day if you are a critic), I suggest it is best to look at the entire period. Since these are time series data (defined as data collected consistently with a defined periodicity - in this case monthly) the most obvious and simple technique would be to chart the data against time, draw a vertical line at D-day and look for a change in the trend . If D-Day did indeed result in qualitative sustained change in aggregate behaviour the change in trend would be obvious. I used the statistical programming language, R and the charting package ggplot2 to draw and annotate the charts. These statistical programmes are widely used in academia and business.

Results: The results of my analysis are best presented as a series of charts. They speak for themselves.

The key point to get is that by looking at the entire time series for each of the main digital payment modalities, two conclusions leap out immediately.

One, that in the first few months after D-Day there was a spurt the volume of payments made by digital means.

Two, for some payment modalities, they have subsequently fallen back to levels that were seen well before D-day. In particular retail electronic clearing, and plastic card volumes are effectively back on the same trend growth they always were since long before D-Day. Mobile banking transactions in particular were going up steeply in the months before D-Day was even a glint in anyone's eye; they went up even more steeply after D-day - and here's the crucial point, they have more latterly dropped right back. If we superimpose what we know about the re-introduction of new currency notes this looks like a perfect fit. As cash was re-introduced into the system, people began giving up on mobile banking transactions.

Another set of charts looks at the volumes (i.e number) of transactions.

Here there appears to be a small shift upward that, despite some month on month fluctuation appears to be settling down at a level clearly higher than anything seen pre D-Day. In the case of mobile transactions it is small-ish numbers and starting from a very low base; in the case of digital transactions its a step change from about 1.4 billion transactions a month to about 2 billion. But the volumes transacted appear not to have shifted much at all - it is in keeping with long-running trend and it is certainly not a step change.

Undoubtedly, there has been a steep growth in the number of Point of Sale outlets, as shown here:

Starting from a very low base, this is only to be expected given the huge Government push including cash incentives and subsidies for the take up of POS machines. The extend to which these have penetrated much beyond the largest urban centres and the plushest retail outlets is the big question. The last chart above is based on data published by NITIAayog

Conclusions. My analysis leads me to conclude that any effect of DeMonetisation on the use of digital payment systems has been transient, small and short-lived. Some change has occurred (POS terminals for example) but the fact that both retail electronic clearing and card usage is back on what I call 'trend growth' (i.e. on the same trend as obtained before D-day) would suggest that there has not been a structural change that can be confidently ascribed to DeMonetisation.

Post-script discussion. In all the commentary on Digital Payments insufficient attention has been paid to a most fascinating report that was published on Oct 5 by Visa India. Amitabh Kant, CEO of NITIaayog, wrote the foreword to this report. Nobody who read the detailed figures or had taken in the measured  recommendations in this report would have supported a sudden, cataclysmic and disruptive withdrawal of 86% of the currency, certainly not with the intention of promoting a digital payments economy. Among the key findings of the report are:

  • Cash usage costs the economy 1.7% of GDP (Note: borne largely by the State)
  • According to a 2014 World Bank survey, only 0.38 percent of women above 15 years old used the internet to make payments compared with 2.04 percent
    of men; 3.25 percent women had used a debit card versus 5.25 percent of men.
  • The cost of a point-of-sale (POS) terminal in India ranges from INR 8,000 to INR 12,000. The annual operating cost is INR 3,000
    per terminal. Low transaction volumes especially outside of Tier 1 cities, make it unviable for banks to expand their footprint into such segments.
  • RBI and the Govt of India already had a plan to transition to a less-cash economy.
  • If India  invested a total of INR 58,000 crores (USD 8.6 billion) over the next five years through tax
    rebates, it could not only expedite the pace of payment digitisation but also save about INR 70,000 crores (USD 10.4
    billion) in that period through a reduction in the cost of cash with a potential to save 4.7 lakh crores (USD 70 billion)
  • If we invested 60,000 crores and undertook a series of reforms and regulatory changes cash use could come down in 2025 from 1.7% of GDP to 1.3%.
  • In particlar see exhibit 7 of the rport which details the benefits from a sustained programe of policy changes as well as investments to improve the infrastructure for digital transactions. Effectively, a 5 year programme of sustained policy implementation and investment would potentially result in a growth of digital payments for Personal Consumption Expenditure from 4% to a whopping 36%, a drop in cash need from 11% of GDP to 10%.

 

Apologists for Prime Minister Modi’s Demonetisation policy are now claiming it led to a  big rise in direct tax revenues for Financial Year (FY) 2016-17. See, for instance this from Swarajya: 

Does this stack up?

The obvious logical flaw in this line of reasoning is the well-known ‘Post hoc ergo propter hoc’ fallacy. This is a Latin phrase that means, ‘After this, therefore because of  this’. The logical fallacy lies in the assumption that X caused Y because Y happened some time after X. It is possible that Y happened despite X, not necessarily because of X. Indeed if X had not happened then it is at least conceivable that something even better than Y might have resulted; we’ll never know. But without further analysis the conclusion is always suspect that X directly or indirectly caused Y.

How do we judge the claimed rise in 2016-17 tax revenues? Is it something we might have observed anyway? Regardless of what happened on Nov 8? Luckily for us the tax revenues in each year are part of a time-series data set published by the Government. The full report is here:

Table 1.1 of this report shows the tax revenues for each year since 2000-01. The first few rows of this table are shown here.


I have examined the trend in tax revenues by drawing trend charts. The following charts show the trend in direct tax revenues for Personal tax and for Corporate tax.

Tax Collection 2000-01 to 2016-17

Personal Income Tax

Corporation tax

These charts clearly show that the trend over nearly 2 decades has been one of  steady year-on-year growth in direct tax revenues.

This is of course to be expected. India’s GDP has grown over this period, economic activity has expanded, wages have risen and more people are tax payers - albeit the vast majority of people are too poor to be liable for income tax. In 2016-17 the total number of direct tax assessees (including companies, partnerships, trusts, individual, and 6 other categories) stood at 62.7 million in a country of 1,250 million people.

The key point is this: the growth in tax revenues in 2016-17 is just trend growth; it’s part of the pattern that we saw for the last decade. At least that much growth would almost certainly have happened even if the PM had not declared 86% of the currency to be no more than worthless scraps of paper.

Arguably it  might have been higher if demonetisation had not battered the economy as hard as in fact it did; we’ll never know. But to claim that the rise this past year is one of the benefits of demonetisation is to clutch at straws. It is a deliberate misuse of the official statistics; It is a cynical attempt to hoodwink the public into thinking that the sacrifices they willingly made in the months after Nov 2016 was worth it. The least the Government can do is not  insult their intelligence by claiming benefits on a fallacious and specious use of statistics.

 

3

Was the demonetisation a success or failure? Various government claims and the subsequent lacklustre results leave no doubt that the demonetisation has resulted in no significant utility to the nation and caused considerable damage.

 

Demonetization
success or failure?

8th November 2016 - 86% of Indian currency was wiped overnight

The Claims

Minor inconvenience

Black money would be destroyed

Initial news of massive raids. Political opponents targeted. News of currency seized from various people. Widespread understanding among critics and supporters alike that the objective was to strangle cash flows (legal or otherwise) of political opponents during the upcoming election campaign in Uttar Pradesh.

ISI fake currency thwarted

Fake currency notes would lose value when the notes it copied were illegitimate

Widely criticized through various versions of "amputating a leg to lose weight" or "bombing a city to kill criminals in it", this was an irrational goal to begin with, to go through an exercise of this magnitude, expense and cost to economy to flush out a relatively minor number of notes that would at best lose value they didn't have to begin with.

Prevent counterfeiting

The new notes would have special security features to prevent counterfeiting

Initial reports in media suggested that the new notes would have special features that prevented counterfeiting them. At the very least, having to imitiate a new design would slow the counterfeiters down and reduce the amount of fake currency in circulation.

Various reports in a pliant news media even took claims of special GPS chips embedded in notes and discussed them seriously, creating a perception among the masses that the new notes would be extraordinarily resistant to misuse or imitation.

Tax Collection would increase

Almost 25% increase in tax collection has been unquestioningly gushed over by a pliant media. This increase in tax collection has been attributed to demonetisation.

The Reality

Massive disruption

Unclear how much black money was recovered

Having cash in itself is not illegal, unless it is established that the cash would not be accounted for while paying taxes. Seizing it without evidence of wrongdoing probably is, but the government legally created impunity for tax officials, who are no longer required to explain their actions to anyone..

Fake currency made legitimate!!!

The reckless demonetisation did not allow for examining notes

The relentless crowds and high stress environment at banks did not allow for adequate examination of notes deposited and the overall understanding is that a large number of fake notes got deposited and converted into real money in accounts or converted to new currency - in effect robbing the country far worse than them being in circulation.

Easier counterfeiting

The new notes had no special features that prevented counterfeiting

The new notes are of poor quality and apparently easier to counterfeit. Various leaders and affiliates of the ruling party have been caught with counterfeited notes and the equipment to make more. The trust in the notes is very low and "even the real notes look fake". Hurried printing has resulted in real notes not having all features they should have.

Among early news of counterfeiting included school children who had photocopied a Rs.2000 note and used it to dupe a sweets shop owner when they purchased treats using it.

There has been no change

Tax collection has been increasing year on year for a long time now, and if you look at the trend over the years, this year's increase in collection fits the curve.


The country would profit

Unreturned money would be money taken away from criminals

82% of the money demonetised was rapidly returned to the banks about a fortnight before the last date to deposit demonetised notes, and the crowds continued unabated way after the RBI stopped updating figures on money returned. It has been over 7 months now and they still have not given out the final figures related with demonetisation, .

RBI would transfer profits to the government

RBI transferred Rs 30,659 crore as surplus to govt. This is lower than the Rs 65,876 crore last year - less than even half the amount. The budget has assumed Rs 75,000 crore would come from RBI and PSBs.

Not just is the windfall absent, the government has not even been able to reach half the amount of the previous year.

The windfall from demonetisation would fund welfare

In addition to the losses made by the government, the citizens have made losses - from disruption and decimation of livelihoods to time taken off daily wage work and expenses.

There will be no benefit/compensation to them. Likely, a reduction of existing benefits will happen due to the lack of funds this "minor inconvenience" will cause.

Yep, demonetisation has been every bit of the clusterfuck it had been predicted to be, and we are not even close to recovering from the damage done.

End of January marks the grape harvest season around Nashik. After falling prices after demonetisation led farmers to slash down standing tomato crops last month to make way for emergency sowing of wheat to eat, hope had rested on the grape crop coming up. However for all the reports in media about farmers adopting cashless methods and grape exports and what not, the ground reality remains grim. Here is a report from the Maharashtra Times.

Maharashtra Times report on the impact of demonetisation on grape trade in Niphad, Nashik

Rough translation

Grape season in crisis

Cash crunch in banks continues; traders and farmers frustrated

Cash crunch in the city (Niphad) continues two and a half months after demonetisation with farmers, traders and citizens furious about not being able to access their own money. This taluka, famous for its grapes is completely strangled by the note ban this time around. Grape trade has slowed due to lack of enough cash with grape farmers.

In many banks in Niphad, there is tension between bank management and employees. The announcement from two days ago of being able to withdraw a lakh rupees from current accounts has dissipated in the face of banks not having enough currency notes to give out and the fury of customers is reaching boiling point. Bank officials are being forced to deal with furious customers due to lack of cash.

RBI's directive of giving 40% cash to rural banks has proved hollow. Rural banks still don't have cash. Forget 40%, not even 4% cash has reached rural banks as seen from the condition of State Bank and regional and nationalized banks in Niphad.

At the moment, the grape season has started in the Niphad region. Even traders coming from other regions are not able to obtain money. Unless the cash crunch in banks is resolved urgently, the grape season will be muted. Grape growers are demanding that the rural banks get provided with cash as per procedure.

Received a mere 12 lakh

Employees of the Niphad branch of the State Bank of India had gone to the Reserve Bank branch in Mumbai to get cash for distributing. They had gone for a day with a vehicle and police escort for the cash they would bring. Instead of a day, they had to stay there for two days and got only 12 lakh on the third. They returned with this meagre amount, having spent for three days stay in Mumbai to obtain a mere 12 lakh.

State Bank provided us cash for 50 days during the note ban. Since the last 5-6 days, they themselves don't have cash. As a result, we are not able to give farmers their own money. We are managing the finances of the bank with great difficulty.

~ Mohan Surana, Manager, Niphad Urban Bank

 

I have come here to buy grapes for trade. For that, to pay labour, minor expenses, I went to withdraw a lakh rupees at the bank. However, they returned my cheque saying that there is no cash.

~ Amitkumar Gupta, grape trader, Ugaav