India’s Demonetisation – What could have been (…and still can be)

Why did demonetisation not have the impact it was supposed to? More importantly, after removing the two most substantial currency denominations for 1.3 billion people, why is all that currency back in circulation? Did it really make a difference? Are PayTM’s 100 million new user accounts really a metric that translate into 100 million new digital citizens of India?

As the first anniversary of that fateful day in November 2016 is upon us, if you follow what the ruling government projected as some of the key performance indicators for demonetisation, the end results have been…well, murky.

  1. Cripple corruption and take down the parallel black money economy.
  2. Raise India into the digital age by making the vast majority of payment systems cashless.

Let’s break these down in order to comprehend their effectiveness in achieving their goals, which to be fair, were noteworthy, if mostly just in theory.

The dark side – beating down corruption

Moving the entire country away from black money and a parallel economy is a necessary and noble cause, but it has a lot less to do with the actual money, and far more to do with the culture and habits of people. Take Singapore where I live as a perfect example of this. 50 years ago, Singapore was just as polluted, dirty, distrusting and disorganized as any Indian city, and most often compared to Mumbai. Indian ship owners would avoid bunkering (fuel for cargo ships) from Singapore, because it was always adulterated. However, as any visitor to the Lion City today will tell you, it is one of the most structured, clean, safe and streamlined city-states in the world. Singapore is the most expensive city in the world from a cost of living perspective, often times that promotes the use of shortcuts and backhanded payments. But not here. The cure that the government used is efficiency in process. The speed at which government-related tasks such as resident permits being issued, internet fiber connections to your apartment or opening a bank account is supremely managed. There is no “Jugaad” here (India’s self-famed approach to finding hacks to problems – often times skirting a very grey line). Steps 1-10 will be followed and the intended result is achieved. This mentality has trickled into every interaction with a Singaporean, whether at a food court or in business. At times it can be frustrating because you are so used to finding the shortcut to avoid bureaucracy and getting things done; but trusting the system, results in a rather peaceful way of getting things done in your daily life.

Digital everything – migrating people towards a cashless India

So we all want to live in a digital, cashless economy. Getting there is not as straightforward as taking physical cash out of people’s hands and replacing it with NCF-enabled smartphones. Spending habits are like muscle-memory, and that’s a short-sight that was not addressed by the government’s demonetisation and the meteoric rise of mostly one payer, PayTM. When you have such a staggering level of illiteracy in the country, when the majority of people live in a 0% tax agricultural industry and can go from their crib to their grave without ever needing a bank account, the ‘sell’ for cashless needs to be deeper and more meaningful to people. That is not the world most Indians live in today. Of those who do fall into a taxable income tier, many are afraid of the taxman. Repairing this distrust comes from a simple structure that is lacking. The financial technology, although still spotty in many ways, exists to be able to allow people to operate their lives with digital currency. We see this coming down the pipe with the revolution and evolution of crypto-currencies. Once these are embraced, most probably from government-backed digital currencies, there will be a stronger case for people to use their smartphones as opposed to their mattresses for storing their often hard earned money. There also needs to be a hard-stop by the government when it comes to taxation. Taxes are often highest in societies with the largest parallel economy, as the government has fewer active taxpayers to fill the coffers with. This can only be addressed by a strong, and rather brave government. If you pay 10-15% income tax, and does not have an 18% GST burden on your food, odds are you will feel the government is not trying to rub salt into your wound.

Is it all bad, though? The rest of the world is still attached to legacy systems of remittance, point of sale and credit cards, and India has the greatest potential (like China) to leapfrog these legacy systems and lean forward into a far more inclusive digital economy. Imagine your local carpenters and electricians get paid instantly by you, and are happy to pay a realistic tax imposition. Beyond that, cashless means there is an opportunity for people at every level of financial inclusion to be able to profit from a digital economy. Imagine buying a piece of hand-crafted furniture in Mumbai directly from the craftsman himself in Rajasthan. Both parties profit from having a direct, person-to-person financial relationship as opposed to needing middle-men.

It is key for the government to engage with technology companies to create the most open system of payments possible. This is of such critical importance for a capitalism across the nation, and will ensure that digital citizenship of Indians is embraced just as freely as cash is from tip to toe.

So now looking back, how do you feel about the two key anticipated wins for demonetisation? Did the government really tackle corruption? It certainly disrupted a lot of plans, but the greatest damage to any organised system has been to the nation’s GDP, which now has fallen to below 6%. In a developing country with an inflation rate hovering around 6-7%, that’s a clear indication of negative growth, even if people are shying away from calling it so. From a cashless, digital-economy perspective, beyond the initial spike to PayTM’s userbase (primarily down to the lack of any other option for those without bank accounts or credit cards at the time), the number of users along with the traded value of their transactions has steadily been slipping in every subsequent month since demonetisation took place. This is indicative of what was stated earlier in this diatribe – spending habits are like muscle memory.

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