1. How demonetisation will nudge people to lessen cash dependence

How demonetisation will nudge people to lessen cash dependence

Critiques argue the motives have little economic justification and are more political in nature, in view of coming state assembly elections in Punjab and Uttar Pradesh.

Published: November 30, 2016 6:07 AM
Demonetisation, GDP, Cashless Economy, indian economy Critiques argue the motives have little economic justification and are more political in nature, in view of coming state assembly elections in Punjab and Uttar Pradesh. (Source: PTI)

Economists are widely divided over the efficacy and the impact of demonetisation. Critiques argue the motives have little economic justification and are more political in nature, in view of coming state assembly elections in Punjab and Uttar Pradesh. To them the amount of counterfeit currency in circulation is too small to be of any significance (0.004% of total cash in circulation); and is unlikely to bring out much black money, which is variously estimated at 23%-75% of the GDP. When bulk of the black money is held in illiquid assets such as land or gold and jewellery, such a move will harm the common man, especially when 90% of all transactions are paid in cash. The brunt is more on those associated with the informal sector where 85% of the workers are paid in cash and accounts for 80% of all jobs.

There is also the ‘stock and flow’ argument, that the move may affect the ‘stock’ of black money but leaves the generation of future black money unaffected. In fact, critique argue such an act equivalent to carpet bombing as opposed to surgical strike as the move failed to distinguish between activities generating economic surpluses (such as paying wages to daily labourers in small and medium manufacturing units) with those activities which do not, for instance, terrorism, human trafficking, drugs
and extortion.

Notwithstanding the above critique, there is no doubt that the demonetisation move has been instrumental in creating greater financial and social inclusion. Consider this. Based on recent statistics, demonetisation has operationalised Jan-Dhan bank accounts, with around R21,000 crore deposits. It may be recalled that the PMJDY, which was launched in 2014 although increased the bank account penetration from 35% to 53% during last three years but such accounts were seldom operational (74% of these new accounts had
zero-balances).

Financial exclusion imposes a very high cost on people. 98% of the people use non-banking channels such as hawala, and pay exorbitant costs to remit or receive money from their family member living in other regions. A survey of Indian migrant workers shows average commissions of 4.6% when transferring money through informal routes, whereas money transfers in a formal banking system comes with little or no cost. Similarly, a meagre 10% of Indians avail loans from banks. Most other obtain loan through informal channel (such as money lenders) with much higher rate of interest.

A study involving households in Kenya found people availing M-Pesa service (banking through mobile, and the service is provided by Vodafone) are better equipped to absorb negative income shocks arising from poor health, crop failures, and job loss. Statistically comparable the household not availing M­Pesa service are likely to experience a 6-10% reduction in consumption in response to similar income related shocks.

People are reluctant to try new things unless these become necessary. Demonetisation will nudge a larger number of individuals to lessen their dependence on cash transactions and resort to digital modes. Downloading of Paytm wallet (a mobile e-commerce company with a user base of over 150 million users) has tripled since November 9. The earlier attempt of Reserve Bank of India granting permission to 11 Indian companies such as India Post, Reliance Industries, Airtel, Vodafone, etc. to venture into payment banking space came with limited success.

A move into formal economy is also likely to encourage better working condition and a higher real wage for the labourers. Informal nature of the economy encourages inequality. Increase in income inequality-gap between the top 10 percentile and the poorest 50 percentile of the population has been on rise since 1995. Latest data suggest the richest 1% of the population control 53% of the country’s wealth. Going by India Development Survey Report, the country is more unequal in comparison to Russia, the United States, China, and Brazil. The inequality is aggravated by the fact that the cost of healthcare and education—the two basic necessities of life—has grown faster than the growth in per-capita income.

On its part the government needs to facilitate this transition into digital economy. The year-on- year growth rate of registered Internet users in India stands at an impressive 32%. India has the third largest Internet user base in the world with more than 350 million users, after China with more than 600 million Internet users and the United States with an estimated 279 million users.

For a populous country like India, future strategy for financial inclusion will call for technology to reach the bottom of the pyramid. But a majority of Indians are digitally illiterate and have no clue as how to undertake cashless transaction. To facilitate the use of Internet and digital transactions, the government can consider forming a Digital Sevak Dal—a network of young people to educate and support the Indian public in cities and rural areas to a cashless economy. The Student Police Cadet scheme in Kerala is an example where school children visit the homes of poor and the elderly and help with e-literacy and digital transactions.

Given the large unemployment, and that it requires minimal investment in education, the initiative can create large positive spin-offs. The ministry of telecommunication can join hands with the ministry of road transport and highways, and facilitate laying of fiber cables to achieve greater digital inclusion. The initiative can pay for itself, since bringing people on digital banking platform will prevent leakages from subsidies. A study by McKinsey finds online payment of social benefits can save $22 billion per year. A better implementation of strategies towards greater financial and social inclusion is surely going to raise popularity quotient of the government.

Nilanjan Banik & Milind Shrikant Padalkar

Banik and Padalkar are with Bennett University, Greater Noida, India.

Views are personal

  1. R
    Rajendra Barve
    Jan 2, 2017 at 1:15 pm
    There is is bankruptacy of the critiques. Most who criticize the demonetization have a hangover of the so called leftist economic agenda, they tend to view the policies as RIGHT WING hegemony and aren't willing to look into the future..What the writers of the article focus is on the new think and across department cooperation to usher in e-lietracy at gr root. But it is suprising to see even the more educated aren't eliterate. the move should be inlcusive at all levels!
    Reply
  2. C
    C P
    Nov 30, 2016 at 2:53 am
    Utilising NSS will help in spreading the awareness of digital payments. These youngsters can go to places like Banks, schools, temples or Churches where people congregate in large numbers and hold skits about the digital payments. It is essential to create the enthusiasm among women as they hold the responsibility for domestic expenses. Power companies and telephone companies should discourage cash transactions by asking people who come to their counters to use their mobile instead.
    Reply
  3. I
    India Black
    Dec 3, 2016 at 1:30 am
    Make private loans(based on promissory note) above Rs 2.5 lakhs invalid if it is not backed up with a bank transaction.I have been making all these suggestions(including with drawl of 1000 rupee note) through my twitter account @indblackmoney for the last two years but black money issue was put to back burner for long time.
    Reply
  4. F
    florida international
    Nov 30, 2016 at 5:57 am
    This is the problem in India. You mentioned that "85% of the workers are paid in cash and accounts for 80% of all jobs". I am asking you why? Why workers are being paid this way? Are the employers keeping books for these payouts? Our PM has given enough opportunities for everyone to come clean. People need to change their mindset. They need to understand that they have no right to complain against government if they are not fair, we use every loop in system to evade tax. Today, our so called peon at government office thinks it is his right to ask for bakshish. Who built this system? It is we who did it. So even if you say we are suffering, it is simply because we deserve the pain.
    Reply
  5. D
    DittoThat
    Nov 30, 2016 at 11:12 am
    Agree with the authors absolutely on financial inclusion! The argument here flies in the face of the elite gang of economists (you know who) whose critiques at best amount to saying that 'why do this if it does not target generation of future black money' which is akin to saying 'why punish a criminal if that cannot guarantee a complete stop on his/her future criminal activities'. The w demonetization shock to me at least seems to be a part of the bigger behavioral and transitional aspect of the economy and economic actors - the current pain notwithstanding. Good piece run by the Express.
    Reply
  6. R
    Ranjan Ghosh
    Dec 1, 2016 at 9:49 am
    Agree with the authors absolutely on financial inclusion! The argument here flies in the face of the elite gang of economists (you know who) whose critiques at best amount to saying that 'why do this if it does not target generation of future black money' which is akin to saying 'why punish a criminal if that cannot guarantee a complete stop on his/her future criminal activities'. The w demonetization shock to me at least seems to be a part of the bigger behavioral and transitional aspect of the economy and economic actors - the current pain notwithstanding. Good piece run by the Express.
    Reply
  7. S
    shivam shukla
    Nov 30, 2016 at 2:25 pm
    Haaaaa
    Reply
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