How The Demonetisation of the Rupee is Affecting Indian Commerce
India, like many countries in south and southeast Asia, is a society where cash is king. By volume, cash transactions in India make up 98 per cent of all transactions (by value, it’s around 75 per cent). In part, this reliance on paper-and-coin currency is because the infrastructure for cashless transactions just doesn’t exist to the same extent it does in countries like the U.S. and China. Whereas the ratio of point of sale machines to people is one for every 25 people in the U.S. and one for every 60 people in China, it’s only one for every 1,785 people in India. It’s not the desire to pay without cash that’s lacking; it’s the ability.
But all that is beginning to change. In response to widespread counterfeiting and “black economy” activity, Narendra Modi, India’s prime minister, scrapped 86 per cent of the country’s banknotes overnight last November. The result of this Indian demonetisation has been a big governmental push to move commerce from cash-based to machine based, and a scramble among private merchants to get a hold of the technology that will allow them to do so.
When cash becomes mere paper overnight
Imagine if almost all of the money you had been saving up was in cash form, and then overnight the government declared it worthless. That was the reality for many people in India following Prime Minister Modi’s decision in November.
It’s unusual for a country to take the drastic step of demonetising particular denominations of legal tender, especially denominations that make up more than 80 percent of the country’s banknotes. So why the radical move? The short answer is that India had a major problem with counterfeiting and black money, and this measure was designed to root it out and help formalise India’s economy. The idea was that eliminating the existing high-denomination notes would light a fire under those holding on to the notes for illegal reasons and encourage a shift toward electronic payment systems, which are more efficient and less susceptible to criminal activity.
Of course, Indians who earned their money legally and paid taxes on it ostensibly had nothing to worry about. Up until the end of 2016, the banks were busy exchanging those Rs500 and Rs1,000 notes into legal tender denominations, provided the cash was earned legitimately. For people who had been sitting on piles of cash accumulated through black market activities, however, exchanging that money without arousing suspicion was not possible. That’s precisely why the move was enacted in the first place.
New denominations of Rs500 and Rs2,000 have been issued with additional security features to safeguard against counterfeiters. But in order to further spur the transition to an electronic money based economy, the government temporarily restricted Indians to withdrawing Rs2,000 per day from cash machines or banks, while introducing new policies to actively encourage banks to issue more debit cards and merchants to adopt POS terminals. The “cash is king” mentality is slowly being undone.
The implications for Indian merchants
Most analysts agree that this move will be good for India’s economy in the long-term by boosting tax revenues and discouraging black market activity, but it may have a negative impact on small businesses in the short term.
Among the most affected by this measure are street vendors and merchants who have historically relied on those Rs500 and Rs1,000 notes. Now that the Rs1,000 note no longer exists, these merchants are worried that business might suffer. In particular, they’re concerned that they will lose out to business rivals who are more technologically savvy and already have point-of-sale systems in place.
Most Indians have been ready to make the shift to electronic forms of payment for a while now – the barrier has been a lack of technology and infrastructure. As mentioned above, the ratio of POS machines to Indians is only one for every 1,785 individuals, significantly lower than it needs to be. Now with these new laws and practices, the demand for POS technology has skyrocketed. According to an HDFC Bank official, last November the number of requests for POS machines increased from an average of about 5,000 per month to 5,000 per day.
Undoubtedly adopting POS technology will be good for these merchants – electronic money is more secure and more efficient than cash. But there will be some growing pains as merchants and consumers both adapt to the new commercial reality and the current shortage of appropriate technology solutions.
The opportunity for Indian POS resellers
As a global bulk supplier, Firemane is well positioned to respond to the growing demand for POS solutions in India. We buy, sell and refurbish an extensive range of credit card terminals, including the Verifone VX675, which is quite popular with our Indian customers.
The market for these kinds of solutions in India is ripe and will only continue to ripen. India is ready to join countries like the U.S. and China in the electronically based commercial economy.
If you are a reseller of POS technology solutions, get in contact with us today to place your order and take advantage of this unprecedented opportunity in one of Asia’s largest commercial markets.