Bharat’s Demonetisation – A Review

8th November, 2017 marked completion of one year when the Indian government announced demonetisation of Rs 500 and Rs 1,000 currency notes. These banned notes of Rs 500 and Rs 1,000 constituted 86% of the total value of the currency in circulation of Rs 14.18 trillion and 24% of the total volume of currency of  90.26 billion (as per the RBI’s annual report dated 31st March, 2016).  On 28 October, 2016 the total banknotes in circulation in Bharat was Rs 17.77 trillion. On November 8, 2016 when the demonetisation was announced by the government, there were 17.17 billion pieces of Rs 500 notes and 6.86 billion pieces of Rs 1,000 notes in circulation.

The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.

To tackle the menace of black money Indian government has introduced Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and the Benami Transactions (Prohibition) Amendment Act, 2016 which is an amendment of the Older Benami Transactions (Prohibition) Act,1988. The Government has also amended the Prevention of Money Laundering Act and Foreign Exchange Management Act in 2015, to tighten the noose on the culprits.

Simultaneously a small window of opportunity was opened to voluntarily declare the undisclosed incomes under the Income Declaration Scheme (IDS) during June-September, 2016. Incidentally this IDS was not an amnesty scheme as it did not give tax exemption but levied applicable tax deductions. Government has imposed excise duty on gold and made PAN mandatory for transactions over Rs 2 Lakhs in order to track the large value investments in gold. Therefore, demonetisation on 8th November, 2016 is a sequel to the above and one among the above measures to track the black money stashed in cash in Bharat. 

Let’s review the post demonetisation scenario to find out its impact and outcomes as we have completed one year on 8th November, 2017.

By the end of August 2017, 99% of the banned currency was deposited in banks, leaving only around Rs 14,000 crore of the total demonetised currency discarded. Nearly 83 per cent of the currency impounded has been remonetised so far. The central bank said that the value of notes in circulation was down 20.2 percent YoY to Rs 13.1 lakh crore till March-end 2017 from a year ago. On the other hand, volume of notes in circulation has increased by 11.1 percent.

According to Ministry of Information Technology the details of digital transactions are as under. (Source- The Times Of India)

Monthly digital transactions (Rs in Crores)

October, 2016    87
November, 16  102
December, 16  149
January, 2017  146
Febraury,17  131
March,17  156
April,17  156
May,17  143
June,17  136
July,17  138
August,17  138
Total 1482

Digital transactions in Bharat were Rs 607 crores in 2015-16, Rs 1086 crores in 2016-17 and estimated to clock Rs 1800 crores in 2017-18. Cash less payments in October 2016 increased by 22% when compared to October 2015. This indicates that digital payments have been steadily increasing even before the demonetisation and its growth rate has almost doubled post demonetisation.

                                                                               (Average daily transactions in lakhs)                     

November, 2016 October, 2017
UPI/ BHIM 0.10 23.36
AEPS 12.06 29.08
IMPS 8.96 32.42
M-Wallet 46.03 72.72
Debit Cards 46.86 N.A.

(UPI– Unified Payments Interface; BHIM– Bharat Interface for Money; AEPS– Aadhar Enabled Payment System; IMPS-Immediate Payment Service; M-Wallet– Mobile Wallet)

One can observe from the above data that the volume of overall digital transactions has increased post demonetisation and this is a positive sign.

According to RBI the total retail payments through various non cash channels during the period 2014-15 to 2016-17 are as under:

                                                Volume ( in Millions)   Value (Rs in Billions)
2014-15 2015-16 2016-17   2014-15 2015-16 2016-17
CTS 964.9 958.4 1,111.9 66,770 69,889 74,045
MICR   22.4 0.0 0.0   1,850 0 0
NON- MICR 209.2 138.0  94.8 16,814 11,972   6,923
Total Paper Clearing 1,196.5 1,096.4 1,206.7   85,434 81,861 80,958
ECS- Debits 226.0 224.8       8.8  1,740   1,652         39
ECS- Credits 115.3   39.0     10.1  2,019   1,059       144
NEFT 927.5 1252.9 1622.1 59,804 83,273 120,040
IMPS   78.4   220.8   506.7      582   1,622     4,116
NACH 340.2 1,404.1 2057.3   1,221   3,802     7,916
Total Retail Electronic Clearing  1,687.4 3,141.5 4,205.0   65,366 91,408 132,255
Credit Cards     615.1    785.7 1,087.1 1,899 2,407 3,284
Debit Cards     808.1   1,173.6 2,399.3 1,213 1,589 3,299
PPIs     314.5     748.0 1,963.7    213     488    838
Total Card Payments 1,737.7 2707.3 5,450.1   3,326 4,483 7,421
Total Retail Payments 4,621.6 6,945.2 10,861.7   154,126 177,752 220,634

(CTS– Cheque Truncation System; IMPS– Immediate Payment Service; NACH– National Automated Clearing house; PPIs– Prepaid Payment Instruments).

Overall, the total retail digital payments have increased from Rs 1,54,126 billion in 2014-15 to Rs 2,20,634 billion in 2016-17, showing an increase of 43.15%, registering an annual growth of 21.58%.

However, if one makes an analysis of the data from January -September 2017 for the debit cards and credit cards one can observe an interesting trend as under:

  ATMs POS (Credit Cards)
Period No. of Transactions (Millions) Amount (Millions) No. of Transactions (Millions) Amount (Millions)
Jan-March’17 1.35 5740.2 315.34 948029.7
April-June’17                          1.58              7607.2              331.38            1047668.0
July-Sept’ 17                      719.67           2358912              488.84            1068079.0
  ATMs POS (Debit Cards)
Period No.of Transactions (Millions) Amount (Rs in Millions) No.of Transactions (Millions) Amount (Rs in Millions)
Jan-March’17 2115.03 5704275 851.55 1205467
April-June’17                   1983.60           6589442              787.38               1121680
July-Sept’ 17                   2140.19           7043258              786.37               1066102
  • The volume of ATM (cash) transactions for credit cards and debit cards has increased significantly (particularly since July 2017 onwards) whereas the volume of debit card swiping transactions at POS (point of sale) has indeed come down during July- September 2017 onwards as compared to the earlier quarters in 2017.
  • Similarly the volume of credit card cash withdrawals has increased during July-September 2017. This indicates cash transactions have increased for both debit cards and credit cards since July 2017 onwards.
  • Card swiping charges (POS) for both debit cards and credit cards is a deterrent which may be encouraging the people to go for cash transactions.

When one swipes credit card on the POS terminal, the charges, known as Merchant Discount Rate (MDR), are divided between the banks involved in the transaction, the firm/bank that installed the POS devices and payment gateway companies such as Visa and MasterCard. The Reserve Bank of India capped the MDR on debit card use at 0.5% for transactions of up to Rs 1,000, 0.75 % for those up to Rs 2,000 and 1% for those more than Rs 2,000. However, there is no cap on MDR in credit card transactions and banks usually charge up to 2%.  These costs are expected to be borne by the merchants but in reality in many cases these charges are passed on by the merchants to the customers.

NEFT Transactions

Quarter Volume (Million) Value (Rs in Billion)
April- June’17 451.33 37261.18
July-Sept’17 457.42 38694.12
Total (April- Sept’ 17) 908.75 75955.30
April’16-Mar’17 1622.10 120040.00

It can be concluded from the above data that the value of NEFT transactions in the half-year ended September’17 has just clocked 63.27% of the annual turnover of the year 2016-17.  But, NEFT transactions grew at 16% during November’15-October’16 (compared to November’14-October’15).

The number of IMPS transactions (i.e., mobile and internet banking) rose from 78.4 million in 2014-15 to 506.7 million in 2016-17. The value of the transactions has rapidly increased from Rs 582 billion to Rs 4,116 billion during the same period.

Though mobile banking share was very low at 0.1% of the total banking share (2015), it is expected to grow in the coming years and the above data gives greater hopes indicating positive trends for the future. UPI/BHIM, AEPS, M-Wallets along with IMPS offer greater scope for penetration of digital payments in view of convenience and very nominal charges.

Unfortunately cyber frauds on e-payments have been on the rise of late.  Cases related to e-wallets and e-payments (that were reported to banks) jumped from 13,083 cases in 2014-15 to 16,468 cases in 2015-16. To address this issue the government is considering the creation of a dedicated cyber- forensics lab. The government is also working on a digital payment fee policy which is expected to bring clarity on the levy and recovery of the charges and also provide insurance to cover the frauds in digital payments.  We have a long way to go before we claim digital payments are a major source of settlement of financial transactions in Bharat since cash payments constitute 97 percent of the total payments.

Back to Square One?

Since 83% of the demonetised money has been remonetised by now, it can be inferred that the people have again started their financial dealings in cash (though within the permitted limit of Rs 2 lakhs) as adequate cash is available in the system.

The charges on debit credit and credit cards that are ultimately passed on to the customers by the merchants and issues of security concerns (both cyber security threats and risk factors in swiping of the card payments) are two major deterring factors in expansion of the cash less payments in Bharat.

Major Gaps

One major area where gaps were found post demonetisation in the initial phase during the period November 2016- February 2017 was in remonetisation which had obviously taken a reasonably long period due to the challenges associated with new currency printing, circulation and distribution to the people as there were complex logistic issues involved. As this was a foregone conclusion, it was expected that the government, RBI and the banks should have had better co-ordination to put in place an effective alternative mechanism within a minimum time frame when the demonetisation was announced on 8th November, 2016.

All the bank customers should have been provided ATM cards and larger number of merchant establishments (including small retail outlets) should have been given the POS machines particularly in tier I and tier II cities.

RBI could have advised the banks to ensure that all the customers were provided ATM cards and dump the POS machines in the market by October, 2016 as a prelude to the impending demonetisation on 8th November, 2016 (even without divulging to the banks about the impending demonetisation).

A onetime huge reduction in the sale price of the POS and lower monthly charges fees for the period November 2016- March 2017 as a special case should have been announced to incentivize both the customers and merchants for switching over to ATM card payments through POS machines.

Unfortunately this type of strategic approach to avert the crisis management in the initial days of demonetisation was found lacking resulting in hardships to common man. The government and the central banking authority must share the blame in this regard.

Issues

RBI has stated that it does not have any information on the black money identified post demonetisation. Also, RBI has not provided any information on the adverse impact of demonetisation on the unorganized and informal sector. Though this could be only a temporary phenomenon that is likely to become normal in due course, it has had its casualty in the form of a decline in GDP and concerns of unemployment (particularly in the unorganized sector) on which there is already a hue and cry.

Premature Debate on Black Money Unearthed

Nearly 2,00,000 bank accounts of suspected shell companies who had deposited and withdrew Rs 17,000 crores post demonetisation are frozen and around 3,00,000 directors have been black listed. Additionally Income Tax Department started giving notices to the people who had deposited large sums of cash post demonetisation. The final outcome of these measures will be known only in 3- 5 years as there is a due process to be followed and the aggrieved people will have the legal option to go for appeals. Therefore, it is premature to indulge in a debate whether demonetisation has unearthed black money stashed in Bharat in the form of cash or not.

Way Forward

Digitalization along with GST (once the initial teething problems of GST are resolved and when the mechanism stabilizes) will enable integration of the informal sector with the formal economy in the long-term which could help Bharat in moving towards less cash economy. By that time the GST tax slabs are expected to be simplified further and the tax rates are likely to be reduced considerably. Also the government needs to focus on the timing and sequencing of various measures post demonetisation so that apart from unearthing the black money stashed in cash the other important objective of becoming a less cash economy too becomes achievable.

For that the order of priority to the policy makers must be:

  1. Introduction of digital payment fee policy,
  2. Strengthening the cyber security and laws on cyber crimes,
  3. Insurance to cover the frauds in digital payment,
  4. Greater financial inclusion,
  5. Withdrawal of currency notes above Rs 500 denomination,
  6. Expansion of the tax base, and
  7. Lowering the tax rates (both income tax and GST).

(Featured Image Source: http://www.rediff.com/getahead/report/money-achche-din-for-those-without-black-money/20161109.htm)


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About the Author

B.N.V. Parthasarathi
Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected]