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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%.

 

25

It isn't just in India, that people are being forced to put money into banks. Banks worldwide are in trouble. Banks worldwide are needing bailouts. Demonetisation of notes is being considered as well as put into action in country after country - Europe (plan to not make 500 Euros post 2018), Venezuela (got reversed after protests from people) and now Pakistan (plan to demonetise Rs.5000 notes) and Australia (may abolish $100 note), though none of them have been as extreme as the abrupt discontinuation of 86% of the cash in the country, as India did. Governments are in difficult positions. If banks collapse, chaos will result. If they bail out banks, it is not sustainable. And worldwide, government and banks seem to have hit on the bright idea of using the people to get money into banks. Or rather, use the money of customers to continue with their mismanaged methods that have got them to this point. It wouldn't work, normally. One whiff of banks using the customer's money would have people withdrawing their money from banks. Unless - they couldn't withdraw, because there was no real way to do it.

The idea is simple. Go cashless - or as close to cashless as possible. With people unable to withdraw money, their money will remain in the banking system, even while they transact and it moves from account to account. Banks would have most of the money of the whole country to tap into. And no matter what happened, no matter how mismanaged, no matter how close to collapse, there would be no way for people in the country to prevent banks from looting them. Eventually you progress to what is called negative interest rates, where you pay banks for keeping money in them.

What could possibly go wrong?

Please note, I am not an economist. But it doesn't take rocket science to figure out that mishandled anything can only be fixed by handling it right. If banks are in a crisis, demonetisation may fill them flush with cash, but it cannot fix the problem. It will only give banks the freedom to make even bigger, catastrophic mistakes with money that isn't even theirs. Of course the government gets the side effect of unprecedented surveillance and control over lives of citizens. Soon, being harrassed by tax officials or being framed in cases would be the least of worries for dissenters. With very little effort, the government would have the power to cut off your access to all life essentials - or at least make access very difficult as yourself - your own money in your banks, access to cooking gas, your phone numbers... and it goes downhill from there. Whatever you have attached to this monolith.

Here are some very possible scenarios the current debate on demonetisation does not cover adequately:

Shrinking of the economy

Economic migrants are returning to their places of origin by the hordes. Jobs are being lost in entire sectors. Tourism has as good as crashed without money to spend freely. Most tourism in India happens away from the city in small towns and remote places where internet connectivity can be iffy. No matter the propaganda on TV, very few will (or indeed are) risking travel without actual hard cash to back up any cashless plans. A friend in the adventure tourism industry reports of hotels running empty with Christmas coming up, even when they are giving rooms at off season rates. They actually made a tidy profit, because a large chunk of a trip's expense is hotel rooms, which they got for way less than what they budgeted for. So he should be thrilled, right? um... Nope. That one trip is the only business he has in sight at the moment. Usually, they don't have time to breathe in this season. Automobile manufacturers have stopped or cut down production drastically. Local markets everywhere are shrinking. Reduced number of sellers seeing some sales in essential goods creates an illusion of normalcy, but it is an illusion, because the number of sellers have reduced to the point where the few left can try to survive on half of what they used to earn.

Agriculture has been hit unevenly. Those who got their produce sold and new crops planted before demonetisation are relatively unaffected, but most farmers are facing severe crisis with an entire year's worth of profits wrecked. The season that was just over was good. Good rain leading to good harvests. Except demonetisation resulted in their crops selling at the rates of the dirt they grew in. Devastated farmers have dumped tomatoes on roads because the prices they get wouldn't even cover taking them anywhere to sell. As reports of farmers unable to buy seed created outrage, an oblivious government did the one thing it was doing rapidly - poked a few more holes in their grand demonetisation to temporarily allow farmers to buy seeds from government outlets using the old demonetised notes. The government still appears to be oblivious, because the biggest cost of sowing crops is not the seed, but the labour and related expenses that go into it. To add insult to injury, in several places (notably in Uttar Pradesh), the government shops didn't accept the old notes anyway, because the banks wouldn't accept the notes from them - under the directions of the government.

Small industries - garment manufacturers, beedi manufacturers, etc - are rapidly shutting down or drastically cutting down workers, leaving thousands out of work. The pundits of the "market" appear to think that once cash is back (and note, they aren't even talking cashless at this point), things will get to normal. I admit I don't have their knowledge of economics. But I have the experience of living in countless small towns, villages and remote places on shoestring budgets (or credit) and I can assure you, there is no such thing as a jobs bonanza. The jobs being lost as a tsunami had trickled into existence over decades. Banks may be ready and willing, indeed eager to give cheap loans, but other than big companies and their audacious attitudes, I cannot imagine people coming out of a money crisis even thinking of risking loans before their depleted savings are shored again and loans taken to survive are repaid. Because for these people, the consequences of not repaying loans are not write-offs.

To be blunt, even before demonetisation, we weren't really adding much jobs. If the loss of jobs can be reversed, it still isn't an impressive pace. And I don't think it will reverse with the ease it was broken. It will have to recover from this trauma. Less jobs and less incomes mean less taxes after this one time bonanza and more NPAs. So the government and banks may end up losing income while they gain access to use a lot more money of depositors. That way lies bad news, in my view.

Security risks

The overall situation of desperation puts India at risk of unrest and lawlessness. We already see increased violence at banks. That is the most obvious. People want money, banks don't have money, anger happens, bankers are overtired, something blows on occasion, more frequently as time passes and the pressure does not relent. The government appears to be oblivious to this, as the usual propaganda channels are recklessly blaming banks for black market trading of cash, telling people via television that there is plenty of money and so on. Bankers have died of stress at work. There has been a suicide as well. This is bad news waiting to happen unless the government wakes up fast. Which it does not seem inclined to do, given that it is still trying to prevent a "cut" of demonetised money from being deposited at all and their absurd rules and roll backs and new rules to try and make it happen are further stressing banks and depositors. But still, this is the most obvious.

Situations of mass desperation are ripe for creating hostility and generating violence with rumors and incitement. With elections coming up in several states, this is a very real risk. Given that the ruling party seems to consistently profit from elections held after riots, I don't know whether they see this as a bug or a feature.

Another kind of security risk that would be very high right now is internet banking crimes. With most of the country's money in banks, bankers overworked, and a lot of new people beginning to use cashless transactions, India right now is ripe for internet banking crimes. Furthermore, the government's reckless promotion of services like Paytm, with no liability to protect users from fraud and unknown security measures and unaccountable management, the risk is magnified drastically. Several serious issues leading to loss of money crop up daily on social media, including organized fraud and tax evasion. Our own Godavar found that Paytm has an absurd process for responding to the loss of a phone with a Paytm app on it. The Cyber Appellate Tribunal being non-functional for the last five years is the icing on this cake.

The banks are also vulnerable to threats from terrorists or other enemies of the country. Attacks on the banking system at this point have the potential of bringing the entire country to a complete standstill. And they don't even have to involve theft of funds. Even simple DoS attacks preventing cashless transactions from succeeding would create considerable disruption. It is unclear whether the government has even prepared for such an eventuality.

Money being funnelled out of citizens and into banks and foreign services

When you spend Rs.100 as cash, and the next person spends Rs. 100 as cash and so on, the Rs. 100 remains Rs. 100. If you swipe a card and incur a 2% charge, With every transaction, the Rs.100 bleeds money to service providers and there is a continuous loss of value that can be recovered from it. Rs. 100 becomes Rs. 98, which becomes Rs. 96 and so on (yes, I know I should be getting into decimals and more accurate percentages. Too lazy). This is a tremendous bonanza for banks and other service providers. It doesn't get any more free money than this. For them, not you. Keep servers running, completely automated transactions keep dumping money at you. Is it any surprise that there is a rash of providers applying to become payment banks? It is likely that rates would be lowered. And why not, if they are able to get a cut on literally every single time anyone transacts for any reason - doesn't even have to be business - say someone giving their child pocket money? But the money with people will keep shrinking like this.

Worse, we will be bleeding money out of the country with every use of payment systems owned fully or partially by foreign companies. The government may well promote fully Indian solutions (not in a hurry, Paytm is 40% Chinese and the government is promoting it the most right now). But even with Indian solutions promoted, there will be considerable use of companies like Visa and Mastercard by those who need compatibility outside India - online purchases, travel... I am no economic expert, but I cannot imagine this to be a good thing - for foreign companies to profit from massive amounts of routine transactions in India. Would probably have serious implications for the trade deficit or something.

Collapse of banks

Here I say with even more stress that I am not an economist. But I don't see how this would not happen. Even with withdrawal of cash prevented, the flow of funds from one bank to another cannot be prevented without completely ending all pretense at an economy. Sooner or later, banks with accounts of mostly spenders and small businesses will start collapsing, because money from those accounts will be used to pay those with accounts in bigger banks. Smaller businesses would be more vulnerable for collapse and NPAs given to them will disrupt matters further. Now here is the irony in this. The banking crisis is largely of banks lending to big corporations. They are the ones most likely to cannibalize smaller banks with far less NPAs. Saraswat Bank for example apparently has a pretty healthy 2.6% of NPAs. If this happens (and I hope it doesn't - as a result of failure to go cashless), it would be like punishing banks for not serving problem customers.

Where does this end?

What this whole circus achieves is cosmetic covering up of the problem. Preventing the money of citizens from being withdrawn to prevent collapse of banks cannot be a functional solution to anything. It is a violation of citizen rights. It is an exploitation of their money. It does nothing to prevent banks from taking their mismanagement further into a loss making zone, confident that the customers money cannot escape. What would a point be where anyone says "enough"? What comes next? Any other asset citizens can use to escape the banks? Gold? Silver? Diamonds? Real Estate? How many of our rightful and honestly earned possessions will be regimented for this forced rescue of banks? What point is enough? And why is it not "enough" right now instead of pulling this horrendous attack by a government on the country at the behest of businesses?

It is alarming that when some global opportunistic plan says "jump", our government doesn't even ask how high, it throws the country off the cliff.

4

Over the last few days, I've had many discussions with various people about going cashless. So far, I haven't met anyone who applied for internet access if they didn't already have or installed a payment app if they didn't already have, contrary to reports in media (which may possibly be largely limited to the metros). Here are some reasons I found out.

Ours is an area that would classify as a town though it has now been clubbed with several other towns into a city. It is close to Mumbai and a lot of people who work in Mumbai but can't afford to live there live here. About half the population is lower middle class and tenants in the properties of people in Mumbai who have purchased flats here as an investment - me too. There are also several people who are quite poor and live in slums and old buildings in small cramped quarters. In other words, there are few people who'd qualify as rich in this area or even well off enough to not care about monthly budgets - perhaps some of the more prosperous shop owners. Our building is probably among the most "posh" in this area and there are maybe 6 cars parked in the compound with a few hundred flats, and 3 of those are cabs.

Note: I am neither for, nor against the use of cashless transactions. It is a useful method for those willing to spend that little bit extra for convenience. It is invaluable for doing online payments and a handy record of spending in bank account doesn't hurt for those, like me, who cannot remember where they spend money five minutes later. However, forcing people to go cashless is extremely unwise, in my view. Regardless, this is merely a disclosure of where I stand and the below are not my views. 

Domestic workers

I spoke with several of these. My regular maid usually gets paid into her bank. Another I hired to help her out financially takes cash. Apart from these two, I spoke with about 4-5 others. Only one of them who was previously getting paid in cash is getting paid by cheque this time (she will be withdrawing the money for use, not spending cashless). Among the others, reasons varied. They found the bank intimidating and cash easy and familiar - is a common sentiment. All but one of the others didn't have their own bank accounts and did not want to deposit their income into the accounts of their husbands or other family members. The remaining one had a bank account in her village, and when she applied for a new cheque book, it got delivered to her village address, so she wants cash till she has a way to withdraw money. Only my maid has a smart phone that is compatible with an app (she didn't buy it, she is using my old one) and she uses it without an internet connection. The phone automatically connects to the WiFi when she comes into range, but she has never shown any interest in using the internet and is reluctant to do it now. In any case, I would never advise her to begin her introduction to the internet with a high stakes thing like payments.

Vegetable vendors

I've spoken with about a dozen of these. Most of them didn't know about apps. I informed them. They don't think their transactions are large enough to afford commissions to receive money on. Additionally, there aren't people buying. No one seems to have asked them if they will accept an app payment, so they don't think there is any point in using it unless people in the area adopt it.

Grocers

Business is very low for grocers, but none of them showed any interest. When people have money, groceries are a priority, and they usually offer credit to regular buyers at such times, so they don't think an app will add any business for them. Like the vegetable vendors, no one has offered to pay them by app so far.

Car mechanic

I spoke with one. Business is down enough to be as good as zero. No work other than emergencies like punctures is happening. No one has offered to pay him by app before, but he would consider it if there promises to be a good amount of business. We speculated on the possibility of vehicle owners being likely to own phones that could install such apps and perhaps trying to pay that way if he put up a board, but he didn't sound anywhere like he was headed for a download. He would have to upgrade his own phone first - it is not a smartphone. Another reason he was reluctant is that he would likely have completed the work first and then if the payment did not happen, he could suffer a loss. I explained that there was very little chance of that happening, but it is unfamiliar tech and he is not internet savvy and I couldn't with any sense of ethics recommend it beyond discussing it as a possibility for the same reasons as my maid - first experience of the internet being payments is asking for trouble.

Garments shop

I spoke with two. Both had near zero business and were very interested in the app. They had smartphones and had even experimentally downloaded after seeing all the ads. However, the problem is that no one is coming to their shops at all. Whether paying with cash or cashless. There are no customers at all.

Housewives

I spoke with several asking if they had considered buying using an app. All of them had some money (one of them having borrowed from me). All of them had priorities and were managing those priorities in the cash they had, which admittedly is very little. None of them were interested in using an app to buy anything. They would rather cut corners and buy when they had the money. Some were making do with dal and pulses and onions and potatoes they could get on credit from the grocer and skipping buying vegetables when they didn't have money, but they weren't interested in installing an app so they could buy clothes - for example.

I am also a stay at home mom, but I am cashless enabled, so to say, so writing my experience separately, because it is different from theirs. I follow news rapidly, and anticipated the problems with cash that would happen, so within the first few days, I had my money converted locally - without paying a single rupee as commission - in medical shops and such. I further withdrew money from ATMs at the crack of dawn to find smaller queues, knowing that people would be needing to borrow as well as my second maid would need a salary. I have cash. There is a Reliance Fresh where I can swipe my card, but I have not used any cashless payment at all since demonetisation, because I believe those unable to accept cashless methods are really suffering for business, so I'd rather spend in their shops.

People with jobs in offices

Most of these in our building are male, but there are a few women too. They mostly seem more inclined to save mone rather than use cards or apps. Most of them have cards. Most of them use cards to withdraw money from ATMs as possible. None of them use cards for anything except withdrawing money from ATMs, though they are aware, and one of them had used cards to make payments before and knows how to do it.

I didn't find any credit card users other than myself in our building and among people I spoke with. One woman whose husband works abroad has an add on card to his credit card for emergencies, but she has never used it. She is also the one who has used a debit card for purchases before.