Post-demonetization, cash deals refuse to disappear from India

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Demonetization and digitization may have been launched as the ultimate and all-pervading game changers by the financial pundits in India, but still the reality is that, in this second largest populated country in the world, the traditional mindset of cash transactions continue to be as active as ever.

According to a recent study, China and India seem to be dragging their feet in the global movement towards a ‘cashless’ society, whilst Japan and Australia are fast embracing the digital options.

The report stated that the cash dealings in the two economies within the next 3-4 years alone is projected to be at least $8.1 trillion.

India’s Demonetization Mode
India saw a sudden switch-over to the digitization mode, with the surprise announcement of the de-monetization of her old INR 500 and INR 1000 currency notes from the midnight of Nov.9, 2016.

This was immediately followed by the introduction of the new 500 and 2000-rupee notes, with advanced digital-embedded features.

Dubbed as a ‘strategic strike’ (a battlefield terminology) on the illegal, counterfeit and underground ‘black money market’, which haunted the economy for decades, the surprise move was announced and overseen by the Prime Minister himself, as a fulfilment of his pre-election promise to the nation.

The de-monetization released nearly 86% of the country’s currency in circulation, into the accounted mainstream cash-flow.

It is estimated that Indians have about 2 trillion dollars worth of ‘black money’ stashed abroad, and an attempt to set India’s population of 1.3 billion people on track of financial stability would need such drastic attacks on the underworld economy.

Cash is King
However, after six months from the drastic move by the Central Bank, the battle for a ‘clean economy’ seems to be far from over.

While at the end of March 2017, cash transactions recorded just a 0.6% increase from the date of de-monetization, the following months showed marked increase in cash consumption.

Practical hurdles faced by the man-on-the-street, such as ATMs not provided with enough dispensing currency, lack of operating knowledge of smart phone and digital equipment for currency transactions, poor reach by telecom and internet network, etc., were reasons seen for this slow pickup.

Once the initial slump and hesitation of adopting to a cashless methodology got over and the assured circulation of the new currency notes became a reality, the economy saw the revival of cash transactions and it has been observed that the slump experienced from November 2016 to January 2017, has been replaced by a sudden spike in cash-based transactions.

That is to say, in effect, demonetization led to a sudden increase in use of digital payments in November and December of last year, but with the increased circulation of the new currency, digital transactions again sunk low by 20% in February 2017.

Hurdles Remain
However, the new system of monitoring money movements is working well for the RBI, with a continuous check and balance kept in place from all quarters on overall financial transactions in the country.

Top echelons of India’s banking and finance sector bear witness that the new digital-based money transaction process introduced in the country will bear fruit over the next several years, when the nation will adopt to the system of dealing in cashless mode.

A large section of the population has already moved to accepting payments thru Paytm, a digital payments platform.

The lack of interest or awareness to electronic system of financial management or money movement is a major hurdle in the mindset of the people, especially in the upcountry areas.

About 66 percent of Indian consumers use mobile internet connectivity primarily to access social networking sites, with 46 percent using it for entertainment websites, notes a socio-economic study.

People are comfortable using their phones to stream videos or download messages or watch YouTube, but transacting money through these digital platforms is still an issue, noted a leading analyst.

Focussed Optimism
The focus for the digital payments industry needs to be on not just touting the benefits of these services, but also on educating consumers about their security, the expert feels.

With the recent formation of the Payments Regulatory Board under RBI, as well as an overhaul of the Payment and Settlements Act of 2007, it is hoped that a more effective and larger picture of digital transaction based monetary dealings will emerge in the country.

But then, according to the latest findings, that picture would be more of a long term reality than in the short term. For the present, cash based transactions will continue to dominate followed by card and online payments.

It is projected that cash transactions will register a growth of 11.9% CAGR until 2020 and it will be a while before the next generation will appear with a new mindset of dealing as a cashless society.

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