Demonetisation decoded: Time to embrace a cashless economy; global trend moving that way Demonetisation, GDP, Cashless Economy, Indian economy

India is not the only country with rising anti-cash movement as the fight against a cash-dominated economy is here to stay and could well intensify.

Demonetisation can hardly be viewed as an isolated action. More is expected to come at domestic and bilateral level. India’s collaboration at the global level for promoting a digital society is an outcome of two major initiatives which have gone unnoticed. (PTI)

Even as demonetisation has triggered an intense debate, particularly on the efficacy of its implementation, most hardened critics of Narendra Modi do not dispute the idea (at least in public) to cleanse the system of the parallel economy and implement an effective strategy to de-risk national security challenges posed as a result of surge in counterfeit.

There are several aspects which missed mention in the debate, some of which extend beyond Indian shores. India is not the only country with rising anti-cash movement as the fight against a cash-dominated economy is here to stay and could well intensify. A case in point is Australia, where less than a week after India’s demonetisation move, similar demands were raised, interestingly, by two major banks—UBS and Citi Bank—for the elimination of the Australian dollar 100 and 50 bills and go cashless.

Recent efforts have shown a healthy coordination at the G20 forum to promote cashless society. Several governments are driving a crackdown on cash economy and tax evasion, with the last piece of Multilateral Convention (MLI), popularly called action point 15 of G-20’s Base Erosion & Profit Shifting (BEPS) initiative, which was released last week. The MLI to which India would be a signatory will result in a series of coordinated efforts by almost 100 nations to bring amendments to over 2,500 double taxation agreements for preventing erosion of tax base of nations, which results in stateless income. Arguably, such tax policy shifts are not isolated steps as they would necessitate nations to put in place a series of domestic economic, fiscal and monetary policy changes to meet goals. Since the past few years, advanced and emerging nations have engaged in coordinated actions to combat corruption, money laundering and terror financing to support creation of transparent ecosystem of formal financial networks.

Demonetisation can hardly be viewed as an isolated action.  More is expected to come at domestic and bilateral level. India’s collaboration at the global level for promoting a digital society is an outcome of two major initiatives which have gone unnoticed. In September 2015, India joined the United Nations’ ‘Better Than Cash Alliance’, an implementing partner for G20 Global Partnership for Financial Inclusion. The ministry of finance also signed a memorandum of understanding with the USAID on partnering for a digital inclusive economy.

Both initiatives were launched to build on the Pradhan Mantri Jan-Dhan Yojana (PMJDY), under which over 250 million bank accounts have been opened with nearly 200 million Rupay debit cards, aggregating deposits of more than R720 million (witnessing a steep rise of 60% post demonetisation). The objective is to make benefits under social schemes better targeted and to move towards digital transactions.

Leaving aside the debate on citizens entitled for PMJDY, anecdotal data suggest that over 90% of retail transactions are in cash. For most advanced economies, the number stands around 10% and for emerging economies the figures range between 30-40%. The question, however, is: How does one figure out the unaccounted income in India’s informal economy? It is easy to gauge what portion would form part of untaxed income and what has been taxed, albeit transacted in cash. India’s retail chain is just the tip of the iceberg; the entire supply-chain of business, particularly payments to unorganised labour, logistics, etc, where transactions are made in cash, skip the legitimate part of the economy! The debate gets more interesting if one factors in other avenues for cash generation such as transaction in real estate and gold/bullion. Imagine implementing a GST law, which attempts to make all transactions in the value-chain visible? The GST roll-out, by flushing out cash—particularly, untaxed—may also render its implementation more effective.

If the objective of demonetisation is to embrace a cashless society, an objective which no citizen will dispute, the question that begs an answer is its timing and measures to smoothen its implementation.

From an economic policy standpoint, there are three key points worth highlighting to understand the broad contours of a nation’s choice of demonetisation and why India chose to walk the path.

First, elimination of cash makes it easier for states to keep track of financial transactions, and reduce instances of under-reporting of income. Governments have made laws—American law-makers passed the Bank Secrecy Act as early as 1970—to enable reporting of small cash transactions. By bringing more income to tax, India can make a compelling case to reduce the corporate tax rates and GST in future, as high rates of tax are partly attributable to spurt in parallel economy and act as an impediment for doing business.

Second, conventional approaches of central banks are continuously challenged, particularly in an environment of global slowdown. Despite years of loose monetary policies marked with quantitative easing, inflation in advanced countries such as the US, the EU and Japan have remained at less than desired levels. India, even with declining inflation in past couple of years, witnessed relatively high growth in money supply. It is interesting to note that currency with the public (a component of money supply) witnessed high y-o-y growth (48% in FY16 and 34% in FY15), which is generally not associated with falling inflation. The trend in cash circulation clearly revealed a rapid increase in high denomination notes which left very few options other than arresting the surge.

Third, a political mandate for an unprecedented, global crackdown on offshore bank accounts could partly be attributed to ultra-low interest rates. A case in point is the EU venturing into negative nominal interest rates; some banks are demanding to charge customers for cash deposits. A section of economists and policy experts are calling for abolition of cash to suppress savings and fuel consumption to boost economy. While this might not be the case for India, the argument of going cashless to boost consumption holds significance given several domestic policy move on digitisation, JAM, PMJDY, income disclosure scheme, impeding GST law, etc.

To gauge cashless systems the Citi Bank–Imperial College London’s ‘Digital Money Index’, based on Financial and Technology Infrastructure, Presence of Digital Money Solutions and Propensity to Adopt, ranked India 63rd among 90 countries in 2016. The biggest drag on India’s ranking comes from its performance on the indicator ‘Propensity to Adopt’ (ranked 74th).

Demonetisation gives a chance to Indians—though it may be not a voluntary move—to move in tandem with the global trends of going cashless. As the famous English poet John Masefield said, “Most roads lead men homewards, my road leads forth.” The question we should ask ourselves after life comes to normal is how many steps we took to embrace change, given that most effective changes have an element of inbuilt disruption.

The author is partner, BMR Legal. Views are personal

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