Saturday, June 19, 2021
Home Opinions Are less-cash economy and more people in banking system just ‘side effects’ of demonetisation?

Are less-cash economy and more people in banking system just ‘side effects’ of demonetisation?

It is widely believed and acknowledged that the demonetisation programme was announced to curb black money (and thus curb corruption) and to curb counterfeit notes (that often form the shadow economy supporting insurgency and crime).

And we are seeing those effects too. While black money is getting unearthed, there are reports of insurgency too getting hit.

The side effects of demonetisation of course is the cash crunch, which is causing myriad of short term problems. Due to this cash crunch, a lot of people are moving towards using netbanking and mobile wallets i.e. people are being “pushed” towards a cashless economy, or better, “less cash” economy.

But is that just a side effect? An unintended outcome? Or the government actually wanted and planned this push?

First let’s focus on the cash that is impacted by demonetisation. This can broadly be divided into three parts:

  1. Black Money generated via tax evasion or via over/under invoicing by various entities.
  2. Black Money generated via illegal activities like drugs, counterfeit notes trafficking etc.
  3. Legitimate cash used by formal as well as informal economy.

Demonetisation seems to be addressing all three aforementioned aspects of money circulation in the following manner respectively:

  • Strategy 1: Income Disclosure Scheme (IDS), GST, Aadhar/PAN Based data collection, monitoring and compliance, rationalising provisions of withholding tax, capital gains, etc. Setting up of International Financial Services Centre (IFSC), Country by Country Reporting, Revision of DTAA agreements with Mauritius, Cyprus and Switzerland.
  • Strategy 2: Demonetisation has already made the old counterfeit notes invalid as they can’t be deposited or exchanged. The ill-gotten money is being recovered through income tax assessments/raids across the country. Some are destroying their ill-gotten money that helps RBI remove its liabilities.
  • Strategy 3: A move towards “Less Cash Economy” by encouraging adoption of mobile/net banking and other E-Payment options.

But are we sure that it was one of the central strategies?

Let’s look at some data which provides a very important background to the whole affair.

Firstly, online transactions and cashless transactions have been growing in India at a rapid pace; be it in common known modes of fund transfers like NEFT or the transactions via Point of Sale machines (the monitor that the cashier bangs at the payment counters in supermarkets), Debit Cards, Credit Cards and ATM machines:

  • The number of NEFT transactions saw a stunning 1412.07% rise from 8.28 crores in 2013-14 to 125.2 crores transactions in 2015-16
  • The number of RTGS transactions saw a huge rise of 1039.53% from 86.4 lakhs to about 9.8 crores transactions in 2015-16.
  • Number of ATM’s saw a rise of 25% from 1,70,473 units in 2014 to 2,15,039 unit in 2016.
  • Number of POS machines grew from 10,18,264 machines in August 2014 to 14,61,972 machines in August 2016. It should also be noted that all these machines except for 300 of Bank of India are online while the number of offline machines in 2014 stood at 7566. As per few news reports the demand post Demonitisation has shot up to 5000 machines daily for just 1 bank.
  • The number of transactions via credit cards rose by 66.54% from about 5.08 crores in 2014 to about 8.46 crores transactions.
  • The number of transactions via debit cards rose 32.42% from about 65.49 crores in 2014 to about 86.72 crores transactions.

All the data and more can be read in more detail by checking out this twitter thread.

In all, the total volume of transactions involving a bank saw a growth of about 1521.22% from 933.15 million transactions in year 2013-14 to 15,126.04 million so far in 2015-16.

If cashless transactions were already growing, why should the theory that demonetisation was brought in to purposely ensure more people move towards less-cash economy have any credence?

That’s where another set of data becomes critical: While the digital form of online transactions has been increasing, so has been the amount of cash with the public in the now defunct denominations. The total amount in these notes rose from about 1073800 crores in 2013-14 to 1417800 crores in 2014-15, or near about a staggering 50% increase in just two years.

So the cash in the economy was not going down, even though as pointed above, there has been a very substantial growth in the amount of digital non-cash dealings during that period.

A cash based economy is expensive. Currently it costs about 0.25% of India’s GDP. Excess cash in the market is not just difficult to track for taxation purposes, such a high amount of currency printing, bulk of which happened during the UPA period, might also have seriously depreciated the value of the currency and in the worst case led to hyperinflation.

A less-cash economy comes with its own advantages. Cost of transactions goes down, time and cost of accounting goes down, and of course, costs of printing currency  goes down. Compliance is better as there is better documentation. Better documentation and compliance plugs loopholes in public distribution system. And there is better tax monitoring, and better revenue collections.

Thus looking at the above points it will not be unwise to conclude that one of the reasons demonetisation was brought in was to ensure that more people took to banking, and that the cash in people’s hand, which rose so alarmingly, could be reduced.

It is not just a “side effect” but one of the main objectives. Though the objective is not easy to achieve.

One of the main reasons why people prefer cash over e-payments is that cash gives ease of use. If a big chunk of the legitimate cash is out of banking system as people still prefer to keep physical cash, it is something to ponder about. Cash brings parity and there is no case of “rejections”. With penetration of mobile telephony, POS, and bank accounts in both rural and urban areas as highlighted above, the difference of “Cash in hand” and “Cash at bank” will become narrower and this move shall keep a check on future generation of black money.

Some signs are already starting to show as total deposits and exchanges in the demonetisation period from 10th Nov to 18th Nov stood at Rs. 5,44,571 lakh crores while withdrawals stood at only 1,03,036 lakh crores. Even though this number may go up in the future as the restrictions are eased.

Getting masses into the banking system will need a major change in attitudes and spending patterns in our country where more than 90% of the transactions happen in cash.

Prime Minister’s Jan Dhan Yojana and its outreach was a part of this. Ministers also have been talking about cashless economy. Recently, the government announced special drive to bring more people into the banking system. And today, the Prime Minister in his Mann Ki Baat radio address, talked at length about moving towards cashless economy and how the youth should help older generations and poor people to adopt technologies that enables this transition.

However, getting people into the banking system is just the beginning; they will have to be sensitised and educated about digital transactions and convinced that it was easier and safer.

The transition from Demonetised India to Digital India will have to be a special project in itself.

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Ashutosh Muglikar
Articles on Corporate Laws, Policy, Economics and Politics. Maverick. Lover of Ideas. Slayer of Hoaxes.

Related Articles

Trending now

Mukesh was burnt alive at Tikri Border because he was a Brahmin? Village head thinks so, the family wants speedy justice

Residents of Kasar village near Tikri border, where Mukesh was burnt alive, demand immediate removal of tents of farmer protestors

“Law of land is supreme, not your policies”: Parliamentary committee to Twitter after its officials said they follow the company’s policies

When the committee asked what Twitter follows, Indian law or own policies, company officials replied that they follow their policies

TISS research paper calls Kashmir ‘India occupied’, blames Indian Army for domestic violence in Kashmiri society

A dissertation paper by a student at TISS-Hyderabad has come under the scanner for calling Kashmir "India occupied Kashmir".

Ghaziabad fake ‘hate crime’: Police send notice to Twitter India MD for ‘provoking communal unrest’, ask him to appear within a week

UP Police had registered an FIR against Twitter India MD and 7 others in the Loni fake hate crime case for spreading lies.

Information about a fictitious train on ‘reliable’ Wikipedia, picked up by websites and academic journals: Here is how it originated

A 2016 edit about fictional Mashriq-Maghreb Express was removed from the East Pakistan Railway's Wikipedia page in 2020 only

‘Being targeted because I am Muslim’: SP leader Umed Idris plays victim card after giving Ghaziabad incident a communal spin

SP leader Umed Idris was booked by Ghaziabad police on May 17 for giving the Loni incident a communal spin in his Facebook video.

Recently Popular

Pakistani audience go ballistic over Zee5 web series featuring Muslim girl-Indian Hindu boy love story, call it ‘haram’

The Pakistani web series features the love story between a Pakistani Muslim girl and Indian Hindu boy who have both lost their fathers to the conflict between the two nations.

Republic TV issues statement over Arnab Goswami’s disappearance from the news network: Here is what they said

Arnab Goswami was last seen on May 2 during a discussion on West Bengal assembly polls. He will make a return on Monday.

Dhruv Rathee fans mark YouTuber Karolina Goswami for targeted harassment after she exposed his lies

After Karolina Goswami pointed out the factual errors and mistakes in the Dhruv Rathee video, Rathee's supporters have been harassing and abusing Goswami.

AAP celebrates Delhi’s new architectural marvel, the Moti Nagar speed breaker

AAP's Moti Nagar MLA has recently inaugurated a speed breaker, along with dozens of supporters flouting social distancing norms.

Ghaziabad fake hate crime case: Unmuted video of elderly man seconds before he was beaten up released. Watch

In the video, Abdul can be heard admitting that one Intezar sent some people to him to make the 'tabeez' (occult amulet) and put them in his spell as he had some work from them.

Virtual hearing embarrassment: Congress leader Abhishek Manu Singhvi caught attending the court proceedings without pants

Abhishek Manu Singhvi was caught attending court proceedings in boxer shorts when one of the screens accidentally fell off and showed the naked legs of the senior advocate
- Advertisement -

 

Connect with us

255,564FansLike
554,467FollowersFollow
24,400SubscribersSubscribe