5 Economic Benefits of Indian Demonetisation
Six months after Prime Minister Modi shook up India’s economy by demonetising 500 and 1,000 rupee bank notes, the effects of this large-scale change are beginning to be felt.
A major reason for the Indian demonetisation was to root out black market activity, with the idea being that people who had earned cash illegally would find it difficult to deposit it into the bank before the cut-off date of December 30, 2016 (when the notes would lose all value) without raising red flags. On this measure, it is difficult to call the policy a success. Of the 15.4 trillion rupees’ worth of currency that was demonetised, 14.97 trillion rupees (or 97% of the total) found their way back to the banks. It is highly unlikely that only black marketeers held only 3% of the Rs 500 and Rs 1,000 notes in circulation, so clearly many of these people found ways to deposit their undeclared cash without any negative repercussions.
However, while Modi’s policy may have failed to weed out the black money draining India’s economy, that was not the only reason the policy was introduced. It was part of a wider plan to nudge India’s economy into the digital age and bring more money into the nation’s tax coffers, and on that measure the plan has been far more successful.
Here are just five of major advantages that demonetisation has delivered to the Indian economy, according to the results of an internal report prepared by top government officials.
1. 5 trillion fewer rupees worth of currency is in circulation than would have been otherwise.
When demonetisation was enacted, there 17.77 trillion rupees worth of currency in circulation (approximately 15.4 trillion of which was in denominations of Rs 500 and Rs 1,000). According to the government’s internal calculations, if currency had been continued to be printed at the same rate as it was prior to demonetisation, then by this time the currency in circulation would have been valued at 19.25 trillion rupees. Instead, the total amount of currency currently in circulation is valued at 14.2 trillion rupees.
What does this mean? In short, it means that the amount of cash being hoarded by Indian citizens has decreased by about Rs 5 trillion. This translates into an advantage for the economy since cash that is stashed away in paper form delivers no value to the country’s economic growth.
2. Personal income tax revenue is expected to double over the next couple of years.
One of the major advantages of a country moving from paper money toward digital money is that it is far more difficult to evade taxes when dealing in digital money. As a result, government tax revenues increase. Modi’s demonetisation policy has sent a message to tax evaders that the law is now going to take their crime more seriously. The government estimates that India’s net personal income tax revenue could double over the next couple of years. Already there has been a 23.8 percent increase in the number of people filing self-assessment forms for FY 2016-17 compared to FY 2015-16.
3. Digital transactions, and especially debit card transactions, have increased significantly.
While cash still accounts for by far the majority of commercial transactions in India, digital transactions are on the rise. Digital transactions occur through three avenues: mobile banking, POS transactions and internet banking. Of these avenues, the rise came primarily through POS transactions. An article from The Economic Times reported that debit card swipes at POS terminals tripled from 109 million to 328 million in January year-over-year. Comparing FY 2016-17 to FY 2015-16, total debit card transactions doubled from 1.17 billion to 2.4 billion, and the aggregate transactional value grew from Rs 1.58 trillion to Rs 3.3 trillion.
4. Digital wallets won out big.
With an estimated 340 million smartphone users in India, it is no surprise that digital wallet payment solutions are growing in popularity. Part of this growth is likely due to demonetisation. In the six months since demonetisation, 20 million people have downloaded the BHIM app, which is the government-backed payment app. Privately owned payment apps have likewise won big, with market leader Paytm claiming 170 million users, a growth in traffic of 435% and a growth in transactions by 250%. As with debit card transactions, mobile transactions benefit the economy since these transactions are more easily trackable and taxable.
5. Interest cut rates will be better passed on to small businesses and consumers.
Demonetisation benefits the people by making it easier for banks to pass on the effects of interest rate cuts. Between January 2015 and October 2016, while the Reserve Bank of India reduced interest rates by 175 basis points, on average only about 50 basis points were passed on to the consumer. Following demonetisation, banks have already reduced the Marginal Cost of Fund Based Lending Rates by around 100 basis points. The benefits of this interest rate cut will be felt especially strongly by small and medium sized businesses, who will find it easier to borrow money and pay off debts. These savings will, in turn, be passed on to consumers.
Where to from here?
The transition of India’s economy from a cash-based one to a digital one will take time – nobody expected miracles to happen overnight. But already there are a number of positive indicators of economic success. As these successes trickle down to merchants and consumers throughout the country, the march toward digitisation will surely continue. It is an exciting time for POS terminal suppliers in India.