50 days of demonetisation: Cash no longer king, India will save more

Abhijit Bhave, CEO, Karvy Private Wealth
As I write, demonetisation is already 50 days old. The past few weeks have seen waves of support, dissent and desperation hit India successively. Repeated changes in rules and clarifications from the finance ministry and the Reserve Bank of India (RBI) added to the chaos.

Yes, the pain has not ended. Even as the government hoped to remonetise the currency withdrawn in 50 days, bankers believe that the shortage of cash (and the curbs on withdrawals) will persist for a longer period, with certain studies estimating that it will be at least 6-7 months before the situation normalises. Besides, government officials also hinted that the Centre might only opt for remonetisation according to requirements; it may not print fresh currency worth Rs 15.44 lakh crore that was withdrawn from the economy since November 8.

However, it is essential to understand the long-term benefits of demonetisation and terming it a disaster only because of the cash crunch would be to miss the woods for the trees. Demonetisation holds significant benefits that could be understood only if certain events that unfolded over the past few weeks are put in the right perspective.

Sweeping moves for systemic change

Demonetisation, no doubt, hit the brakes hard on the economy, heavily affecting people’s spending limits and consumption across sectors— especially cash-driven ones like agriculture and the unorganised sector. However, such a short-term stalemate happens in the wake of any major transition (in this case from ‘cash’ to ‘cashless’). There is no gain without pain. Gains will come but they will take time. We must consider the following factors to understand the full potential of the move:

Dominance of cash: A 2015 report pegs cash transactions in India at 98 per cent of consumer transactions in value terms and 68 per cent in volume terms. These figures are much higher than those exisiting in the economies of China, Brazil and South Africa. India also has a much higher cash-to-GDP ratio of 13%, vis-à-vis say, its BRICS counterparts. This dominance also makes cash anonymous and distorts wealth distribution. Demonetisation has reduced the anonymity of cash with the government imposing strict norms on deposits/ withdrawals of cash sans the know-your-customer (KYC) verification.

Financial inclusion: This is an area where rapid moves have been made. While as of 2014, fewer than 40 crore Indians had a bank account; with the launch of initiatives such as the Jan Dhan Yojana, nearly 65 crore Indians have a bank account, of which 25 crore are Jan Dhan accounts. Balances in these accounts have improved after November 8.

Wider tax base: Demonetisation also brings in the promise of a wider tax base, with the government considering taxation of any deposits of above Rs 2.5 lakh made since November 10. Deposits of old high-value denomination notes in banks are estimated at Rs 14 lakh crore (out of the Rs 15.44 lakh crore withdrawn on November 8), not leaving much in terms of unaccounted (black) money. However, higher deposits may have brought, wittingly or unwittingly, more people under the lens of the banks, and by extension the Taxman. This is a major achievement given that barely 1% of the country pays any kind of tax. The biggest dividend of demonetisation may be a complete rehaul of India’s direct tax framework, the slabs could be widened in the 2017 Budget, which ironically, would end up putting money back in taxpayers’ pockets, from a situation where they are bemoaning a ‘shortage’ of cash post demonetisation.  

Days ahead: Cash dethroned but India saves more

Overall, while cash may no longer be the King, it doesn’t mean that money and wealth has vanished. The next 50 days will see more initiatives encouraging cashless transactions through aids such as the Unified Payment Interface, credit and debit card payments, Aadhaar-based payment systems, all of which promote a trend where transactions are done directly from one’s bank account. It is likely that direct or indirect fees may be charged on cash transactions. Thus, it is only the channels money goes through that will change: wallets will turn into e-wallets; cards will take over currency notes.

Payment Infrastructure poses significant challenges on India’s cashless journey. With only around 2 lakh ATMs and 12 lakh Point of Sale (PoS) terminals, there is a lot to do for the government and the RBI. We expect the Government to ramp up its efforts on the infrastructure front over the next 50 days.One must also note that poor power supply, and lack of Internet access (for almost 950 million people), especially in rural India, are serious challenges to be surmounted if the benefits of digitisation must reach one and all.

Nevertheless, demonetisation has reinforced the savings habit among us, as more money flows into the banking system. Eventually, as financial inclusion and awareness take deeper roots, this money will shift into productive financial assets and the capital markets, ensuring a true metamorphosis of money. This often reminds me of the famous song from Bob Dylan – ‘The times they are a-changing’.

The author is CEO, Karvy Private Wealth. The opinion expressed in this article is the personal opinion of the author. The facts and opinions appearing here do not reflect the views of Business Standard and their publication does not assume any responsibility or liability

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