Has Demonetization Improved India's Digital Transactions?

by Sohini Bagchi    Nov 08, 2017

mobile wallet

A year ago, Prime Minister Narendra Modi came up with a sudden decision to wipe off Rs 500 and Rs 1,000 notes, a move touted as demonetization, which brought the nation to a standstill. With the passage of time, the Central government pushed for digital payments, compelling people to use various digital modes of payments. While experts have observed that the market for digital payments has become much more acceptable, there have been a number of challenges that needs attention.

With over 800 million debit cards and over 30 million credit cards in the market, almost every household in India now has access to a digital payment, but this has not yet translated into digital transactions. In fact, studies show, there is very little evidence to suggest any behavioural change because of demonetization. The spike in digital payments and the decline in ATM withdrawals were both caused by artificial constraints, and do not seem to have had a lasting impact on Indian citizens.

Other kinds of electronic payments, such as NEFT/IMPS did not register much change in the post-demonetisation period either. The year-on-year growth in the number of point-of-sale (PoS) terminals shows a sharp increase compared to the previous years as does the number of credit cards in the country. However, compared to other large economies, India continues to be a laggard in terms of digital infrastructure. For example,  despite a near doubling of POS terminals after demonetization, India is still ranked last among major economies in terms of the number of POS terminals per million people, according to a research report.

According to industry pundits, India should have taken lessons on use of mobile payments from Kenya where technological change and the right policy moves did drive the adoption of cashless payments, and improved financial inclusion efforts.

A boost to digital infrastructure along with technological innovations is key to driving cashless economy, believe experts. At the same time, the density of ATMs also seems to play a role in driving cashless payments. In India’s case the growth in the number of ATMs over the past year has been muted, which likely slowed the transition to a cashless economy. 

The silver lining

Mayuresh Joshi, researcher and fund manager, Angel Broking said, “Over the last one year there were some sectoral losers and some gainers due to demonetization. While NBFCs took a hit due to weak rural demand following the liquidity crunch, private banks and the banking sector in general benefited due the surge in deposits which was duly reflected in the CASA ratios. Sectors like electrical goods and textiles also benefited as the demonetization squeezed the unorganized sector a lot more.”

However there’s a silver lining, observed Joshi. “Interestingly, as one examines with a sense of perspective, the demonetization has done a lot of good for the economy. Firstly, it has pushed India much faster towards digital adoption. Forget about the elegant statistics; the truth is your grocer baker, veggie vendor, chemist is more willing to accept digital money. Secondly, money that was idling with people landed up with banks giving a $100 billion boost to liquidity. It not only ensured full transmission of rate cuts, but also gave the RBI enough ammunition for rescuing banks via recapitalization bonds,” he said.

Reserve Bank of India statistics show that UPI (Unified Payments Interface) grew at a compounded monthly rate of over 100% in the first 6 months following demonetization. While 90% of the old currency has been returned to banks and new notes are much more in circulation, boosting the market of digital payments.

The ecommerce advantage

One of the biggest gainers was the mobile commerce sector, as observed in the last 12 months. M-wallet firms like Paytm Freecharge and Mobikwik announced major expansion plans soon after demonetization partnerning with cab operators, vegetable vendors and kirana stores for digital payment. 

Sunil Gupta, Director, ExportersIndia.com said he sees a big gain for the SME sector. ”Demonetization has ushered in an era of cashless e-commerce economy as we saw concomitant reduction in cash flow. Coupled with GST, the unorganized sectors have taken a brunt even as the smaller players who have had the right foresight who have worked towards being compliant are reaping the rewards,” he comments.

For some online businesses, the move to digital was a big win. BookMyShow, for example, which has always been an online business saw a big jump in its transaction. Mitesh Shah, Head of Finance, BookMyShow informs, “Demonetization has helped us in our natural growth by encouraging people at large to move from offline to online transactions. In the last one year, our user base has grown by around 50% with demonetization playing an integral role in it.”

Moglix, a Ratan Tata-backed B2B e-commerce company that specializes in digitally transforming supply chain of manufacturing units says it has successfully on-boarded several wholesalers to go digital and most importantly the government made a strong policy that evasion of tax is no longer going to be easy.

“The policy of demonetization, at this time last year, had given a much-needed digital push to our economy. It was a preparing ground for the reform of GST and a boost to the government’s Digital India. The reform has evaded the unorganized players in the market pushed the organized players to meet the trends of digital consumption. Consumers in both B2C and B2B space are more digital savvy and opting for hassle-free methods of transaction. Digital technology and digital-based governance are now taking a forefront,” mentions Rahul Garg, CEO & Founder, Moglix.

Upasana Taku, Co Founder, Mobikwik also agrees that India needs to embrace less-cash and become a cash-less society if we must compete with advanced countries. Digital payments must become a daily habit and frankly demonetization gave this push now companies like ours MobiKwik are taking this forward in a big way through strategic collaborations and partnerships.”

Road ahead

Despite certain pockets of development and growth, the state of digital payments in India and the overall impact of demonetization need a rethink. Analysts and industry experts say for further accelerating the growth momentum and moving towards a cashless economy, both the government and the regulators need to continue the initiatives taken by them.

Policies, regulation versus current approach of product or entity based regulations, seamless access to payments network and other critical payments infrastructure like UPI and RTGS, among others, to all the authorized payments players will make sure that incentives continue to grow for digital transactions.