Cash-to-GDP back at pre-DeMo levels, need to push DigitalPay.
With cash demonised as being synonymous with black money, it is not surprising that the Ratan Watal committee on digital payments—its report was out the month after demonetisation—wanted to reduce India’s cash-to-GDP from the pre-DeMo levels of around 11.5-12% of GDP to around 6% within three years. Two and a half years after Watal set out its vision statement, India’s cash levels are almost back to pre-DeMo levels; Nomura economists estimate it was around 11.3% in April. If cash-intensity is to be used as the barometer of DeMo’s success, and it was by many in government till recently, India has nearly lost all the ‘gains’.
There are several reasons for this, including the possibility that both individuals and political parties are hoarding cash. With the possibility that the government may once again restrict cash availability, it is natural for individuals to try and hold more cash than earlier; and with so many assembly elections coming up, and the general elections in less than a year, it would be normal for political parties to be building up their cash buffers. Also, with DeMo so clearly hitting economic activity, especially in the informal sector, a worried government didn’t want to take any chances and decided to remonetise as fast as the printing presses would allow it. That was a good decision since, while DeMo was based on the premise that cash is evil, there is no ideal cash-to-GDP ratio. Russia and Singapore have similar levels of cash—8.8% and 9.3%, respectively—while everyone acknowledges Russia’s large illicit economy. At 20.8%, Japan’s cash-to-GDP was much higher than India’s in 2016, though its black economy is much smaller. Cash intensity, at the end of the day, is related to custom, to the share of the informal economy (informal is not synonymous with black), to bad laws—firms want to pay workers in cash to avoid cumbersome labour laws—and the need to bribe government officials, among others; with little change in this, it is difficult to reduce the demand for cash without hurting economic activity.
A related issue is that, despite the huge success of digital payment options like UPI and wallets, there has been a dramatic slowing of digital transactions. At a macro level, while such transactions grew 24.4% in value terms in FY17, this halved in FY18. While the use of credit cards at merchant outlets grew by 40% in FY18 as compared to 36% in FY17, the use of debit cards slowed to 39.5% from 108%; taken together, credit cards, debit cards, UPI and wallets grew by 58.3% in FY18 as compared to 71% in FY17. This suggests that, as long as there was a cash crunch, people had no option but to use digital. If the momentum is to be maintained, the government has to seriously look at ways to push digital payments—this means paying for cash-backs and discounts, defraying commissions on such payments, ensuring banks and other players have enough incentives to roll out more debit/credit card machines or UPI-based QR codes, etc.