Has demonetisation resulted in lesser cash and more digital?

Last Updated: Tue, Oct 31, 2017 16:20 hrs
Demonetisation (Reuters image)

November 8 is in fact just two weeks away. A year ago, on that day, PM Modi in his 'mitron' speech, unleashed what he packaged as a transformational reform. But did demonetisation achieve its objectives? At least, did it make India a more digital economy?

Surprisingly, ​latest research shows that ​usage of digital payment methods ha​s​ ​in fact ​slowed down and ​is​ back to trends spotted during pre-demonetisation days.

A report from HDFC Bank, written by its Chief Economist Abheek Barua​, states​ that a structural drop in cash usage resulting from the financial reform is a misleading thought to begin with.

The economist compared current level of currency with the public with pre-demonetization levels and suggested a flawed linkage. Between January and October 2016, currency with public increased at a monthly average rate of 15% YoY compared to average growth of 11% in 2015 and 10% in 2014.

Many theories came to the fore to support the increase in cash in the system. Most prominent among them were theories like former RBI governor Raghuram Rajan's- the elections in Assam, Kerala, Tamil Nadu, West Bengal, and Puducherry. There were other theories too that attributed rising cash to the environment of low real interest rates which made savings less attractive.

But Barua suggests that the 2016 level of currency-with-public was an aberration from the normal trend. "A comparison with that number gives a wrong picture," he said.

Economists at the bank used a Hodrick-Prescott (HP) filter, a statistical tool that draws a fine dynamic trend and enables an accurate differentiation about cyclical patterns, to find that currency with the public was now back to the trend level.


The economists also found that Debit card usage at the ATMs (primarily used for cash withdrawals) also showed similar results. On the aspect of card-usage, the report suggests a slow reversal in usage of digital payment methods.

There have been reports of merchants reverting back to cash, either with an intention to save the merchant rates, or in instances many are also resorting to illegally cut-short total transactions to evade taxes.

Economists concurred that after the easing of liquidity crunch, transaction volumes, especially with retail electronic payments have seen a marginal dip.

For Mwallets too, there has been a gradual tapering after the initial bounce.

Analysts said, "Having said that, a complete return to the pre-Nov. 8 trends has not yet happened, holding out the possibility that there has been some behavioral change in the transactions patterns. Whether the big jump above trend represents a short-term blip, or whether demonetization has given a structural push to the already rising trajectory of digitization, remains an open question."

Although the objective to utilize more digital transactions in order to build efficiency was a good one. Indian banking infrastructure certainly was not upto the mark in order to serve the large population base.

An RBI paper titled "Card Acceptance Infrastructure" (8th March, 2016) too highlighted the lack of adequate digital infrastructure in the country and high cost of acquiring business as one of the main reasons inhibiting the growth of digital platforms in India.


An Ernst & Young Accelerating Financial Inclusion report from January 2013 finds that there were only 693 machines per million of India’s population, compared to 32,995 terminals per million people in Brazil and 4000 terminals per million people in China.

Number of POS machines have increased, with the National Payments Corporation of India (NPCI) suggesting that the number in the country touched the 3 million mark. A year ago India had just 1.5 mn PoS terminals (November 8 2016).

Economists from HDFC conceded that change in consumer behavior will eventually happen but the fact that there now exists tangible infrastructure to make it happen is a step forward.

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