As Digital Transactions Fall, Indians Are Going Back to Cash

Sometime last week I had asked the question, whether Indians were going back to using cash. And I had offered some evidence regarding the same. I had concluded by saying that “there is not enough data to say that Indians have totally gone back to cash, but the data that is available does suggest that they are moving towards it”.

In this piece, I will look at the same question by using a different set of data. On March 10, 2017, the Reserve Bank of India(RBI) released a document titled Macroeconomic Impact of Demonetisation- A Preliminary Assessment.

One of the things that the RBI document discusses is the usage of different digital modes of payment in the aftermath of demonetisation. As the RBI document points out: “After the announcement of demonetisation, digital activity levels were low in the initial weeks as people were busy depositing/exchanging SBNs (specified bank note). However, in December 2016, digital payment activity increased alongside progressive remonetisation.


How does the data look? Let’s first take a look at Table 1, which has the total number of digital transactions for various modes of payment.

Table 1

Volume (in Crore)Nov-16Dec-16Jan-17Feb-17
National Electronic Funds Transfer12.3016.6016.4014.80
Cheque Truncation System8.7013.0011.8010.00
Immediate Payment Service3.605.306.206.00
Unified Payment Interface0.030.200.420.42
Unstructured Supplementary Service Data0.
Debit and Credit Card Usage at Point of Sales20.6031.1026.6021.20
Prepaid Payment Instrument5.908.808.707.80

Source: Reserve Bank of IndiaTable 1 tells us that digital payments went up in the aftermath of demonetisation and peaked in December 2016. Now take a look at Figure 1, which basically plots the total number of transactions.

Figure 1

What does Figure 1 tell us? It tells us that the total number of digital transactions in the aftermath of demonetisation did go up by around 50 per cent in December 2016 in comparison to November 2016, but has fallen since then. In February 2017, the number of transactions (i.e. the volume of transactions) had come down to a little over 60 crore from a peak of around 75 crore in December 2016.

Now take a look at Table 2, which basically shows the total value of transactions carried out through the different modes of digital payments.

Table 2

Value (in Rs billion)Nov-16Dec-16Jan-17Feb-17
National Electronic Funds Transfer8,80811,53811,35510,878
Cheque Truncation System5,4196,8126,6185,994
Immediate Payment Service325432491482
Unified Payment Interface0.9716.619
Unstructured Supplementary Service Data0.0070.1040.3820.357
Debit and Credit Card at POS352522481391
Prepaid Payment Instrument59888778

Source: Reserve Bank of IndiaThis again shows that the digital transactions rose dramatically in December 2016, in comparison to November 2016. This basically tells us that with very little currency being available in the financial system due to the demonetisation of Rs 500 and Rs 1,000 notes, people resorted to digital modes of payment. Having said that the use of digital mode of payment has fallen since then.

The fall in value of digital payments between December 2016 and February 2016 is 8.02 per cent. In comparison, the total number of digital transactions fell by 20 per cent from around 75 crore in December 2016 to 60 crore in February 2017.

As the RBI document quoted earlier in the piece points out: “The catalytic push from demonetisation hastened migration towards digital payments in November and December 2016. However, ease in availability of cash by progressive remonetisation impacted the pace of growth of digitalisation in February 2017.” This is basically the RBI’s way of saying in a very euphemistic way that Indians are going back to using cash.

One of the aims of demonetisation was to ensure that a greater part of the economy becomes digital i.e. people use digital modes of payments while carrying out economic transactions, instead of using cash. The initial evidence on this front is not very good. Nevertheless, as I said in my last piece on this issue, more data is needed to conclusively say that Indians have gone back to cash, though they are currently heading in that direction.

The question is what more needs to be done to keep encouraging people to move towards digital transactions. As the RBI document points out: “Further efforts are essential to enhance the use of digital payment going forward such as: (i) continued efforts to incentivise digitalisation; (ii) removing roadblocks in penetration of payment technology; (iii) handholding of new users to bring in behavioural shift; and (iv) providing an environment for development of a robust and easily scalable payment ecosystem that benefits from the advancements in technology. This will facilitate adoption of digital payments on a sustained basis and help in substantial savings for the country in terms of reduction in cost of cash in the system18; and an increase in accountability and tractability of transactions, thereby circumscribing tax avoidance.”

The column was originally published on March 16, 2017, on Equitymaster

Small isn’t always beautiful

Many people these days find it difficult to believe that the Chinese per capita income was lower than the Indian per capital income up until 1990. Only in 1991, did China go ahead of India.

Data from the World Bank shows that in 1990, the Indian per capita income was $375. The Chinese were at around $318. In 1991, the Chinese per capita income rose gradually to $333, whereas India’s came down to $309.

Between 1990 and 2015, the Chinese per capita income went up more than 25 times to $8,028. On the other hand, the Indian per capita income, went up by around 4.3 times to $1598.

Hence, the Indian per capita income is 80 per cent less than that of China, though a little over half a century back we were at the same level. There is a lot that China did in between and India did not. Trying to summarise that in one column of around 650 words is not possible. Nevertheless, there is one basic point that needs to be made.

China benefitted from a massive economy of scale in its manufacturing sector. Economy of scale essentially refers to the savings in costs as companies grow bigger and produce more. As George Stigler writes in The Scandal of Money: “Perhaps the most thoroughly documented phenomenon in all enterprise, learning curves ordain that the cost of producing any good or service drops by between 20 percent and 30 percent with every doubling of total units sold. The Boston Consulting Group and Bain & Company charted learning curves across the entire capitalist economy, affecting everything from pins to cookies, insurance policies to phone calls, transistors to lines of code, pork bellies to bottles of milk, steel ingots to airplanes.”

The point being that as companies grow bigger and produce more, the economy of scale essentially ensures that costs keep coming down. This makes companies more and more competitive as they keep growing bigger. As Stigler writes: “Growing apace with output and sales is entrepreneurial learning, yielding new knowledge across companies and industries, bringing improvements to every facet of production, every manufacturing process, every detail of design, marketing and management.”

China’s manufacturing sector was built on large factories churning out stuff at rock bottom prices, allowing them to compete all over the world.

This is something that the Indian industry in general and manufacturing in particular totally missed out on. The National Manufacturing Policy of 2011 estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people. This means that any SME, on an average, employed 2.27 individuals.

The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this tells us is that an average Indian manufacturing firm is very small. It lacks economies of scale and in the process is not able to compete internationally and even locally. This explains why so many products that we use in our daily lives are now Made in China.

One area where this is more than obvious is in the apparel sector. The Chinese are vacating this sector given that their labour costs are going up. It was expected that India would capture this vacant space. But that is not happening because Indian apparel firms lack scale.

As the latest Economic Survey points out: “One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam. An estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively.”

To conclude, small isn’t always beautiful.

The column originally appeared in the Bangalore Mirror on March 15, 2017

Of Demonetisation, Black Money and Jan Dhan Accounts

On March 10, 2017, the Reserve Bank of India published a document titled Macroeconomic Impact of Demonetisation – A Preliminary Assessment. One of the things that the document analyses is the number of new Jan Dhan accounts that were opened after demonetisation came into effect and the money that flowed into them.

On November 8, 2016, the prime minister Narendra Modi made the announcement to demonetise Rs 500 and Rs 1,000 notes. Until December 30, 2016, these notes could be deposited into bank accounts and the money was credited against them.

In the aftermath of demonetisation, one of the theories offered was that many Jan Dhan bank accounts were opened and black money was transferred into these accounts. Is that correct? Take a look at Figure 1.

Figure 1 

So, what does Figure 1 tell us? It tells us that the number of Jan Dhan accounts opened in the aftermath of demonetisation did go up. As the RBI document referred to earlier in the column points out: “Post-demonetisation, 23.3 million new accounts were opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY), bulk of which (80 per cent) were with public sector banks . Of the new Jan Dhan accounts opened, 53.6 per cent were in urban areas and 46.4 per cent in rural areas.”

But as can be seen from Figure 1, Jan Dhan accounts were being opened even before demonetisation came into force. And that is why the curve keeps sloping upwards even before November 2016.

I have considered data from September 2016 to see if the pace of opening of Jan Dhan accounts went up dramatically post demonetisation. It doesn’t seem so from Figure 1.

Let’s take a look at some more data. Figure 2 maps out the week on week increase in the opening of Jan Dhan accounts in percentage terms.

Figure 2 

What does Figure 2 tell us? It tells us very clearly that there was largely no spike in opening of Jan Dhan accounts during the post demonetisation period. The only spike came in the second half of December 2016, when the pace of account opening was faster than it was in the past.

This basically lays to rest one theory about many Jan Dhan accounts being opened post demonetisation, in order to deposit black money into them. But that does not mean that black money did not find its way into Jan Dhan accounts? Take a look at Figure 3. It basically maps out the total amount of money in Jan Dhan accounts from early September onwards.

Figure 3 

Figure 3 makes for a very interesting reading. Before demonetisation came into effect on November 8, 2016, the pace of increase in the total money deposited in Jan Dhan accounts was very slow (the curve is almost flat). Post demonetisation the deposits saw a very rapid spurt. On November 9, 2016, the total deposits had stood at Rs 45,636.60 crore. This jumped by 40.8 per cent tor Rs 64,252.20 crore, a week later on November 16, 2016. It jumped again by 13.4 percent for the week ending November 23, 2016.

What happened here? As soon as the demonetisation announcement was made people started to move their black money into Jan Dhan accounts. This is very obvious from Figure 3, with a spurt in deposits of close to 41 per cent in the week following the demonetisation announcement. One of the ways this was done was when small traders and merchants gave interest free loans to their employees in old demonetised notes and asked them to deposit this money in the Jan Dhan accounts. This was done on the understanding that loans would later be cut from their salaries.

The government was not caught napping for once. It limited the total amount of money that could be deposited into Jan Dhan accounts to Rs 50,000 on November 15, 2016. As a ministry of finance press release on the same day put it: “Information has been received that there is sudden spurt in the quantum of deposits in several Jan Dhan Accounts. There are also reports of unscrupulous elements using Jan Dhan Accounts of poor and innocent persons to convert their black money into white. Such spurt in deposits will be looked into closely. Jan Dhan Account holders are requested not to allow their accounts to be misused by anyone.”

This basically ensured that Jan Dhan accounts as a conduit of black money wasn’t a very viable proposition anymore. Hence, people had to find other ways of depositing their black money into normal bank accounts.

As the RBI document points out: “Jan Dhan accounts contributed 4.6 per cent in total accretion of aggregate deposits of SCBs in the post-demonetisation period.” This happened primarily because the government reacted quickly and limited the total amount of money that could be deposited into a single Jan Dhan account at Rs 50,000.

Further, the government is unlikely to disturb the Jan Dhan account holders. And given that those who converted their black money into white using the Jan Dhan route are likely to get away with it.

The column originally appeared on Equitymaster on March 15, 2017

Trump’s Plan to Make America Great Again Will Fail Because of Dollar

In the early 16th century the Spaniards captured large parts of what is now known as South America. The area had large deposits of silver and gold. As I write in my book Easy Money: Evolution of Money from Robinson Crusoe to the First World War: “The precious metals were melted and made into ingots so that they could be easily transported to Spain. Between 1500 and 1540, nearly 1,500 kg of gold came to Spain every year on an average from the New World.” i

Gold wasn’t the only precious metal coming in. A lot of silver came in as well. As I write in Easy Money: “One of the biggest silver mines was found in Potosi, which is now in Bolivia, in 1545. Potosi is one of the highest cities in the world and is situated at a height of 4,090 m. Given the height it sits on, it took Spaniards sometime to get there. Here a mountain of silver of six miles around its base was discovered.ii The mountain or the rich hill, as it came to be called, generated nearly 45,000 tonnes of silver between 1556 and 1783. iii

Most of this new found silver was shipped to Seville in Spain where the mint was. In the best years some 300 tonnes of silver came in from silver mines in various parts of South America.iv

Once the gold and silver started to land on their shores, the Spaniards became proficient at spending it rather than engaging themselves in productive activities. Easy money had spoiled them and they produced very little of their own. Once this happened everything had to be imported. Weapons came from the Dutch, woolens from the British, glassware from the Italians, and so on.v It also led to Spaniards buying goods like bangles, cheap glassware, and playing cards from foreigners for the sheer pleasure of buying them.

As Thomas Sowell writes in Wealth, Poverty and Politics: “The vast wealth pouring into Spain [in the form of gold and silver from South America]… allowed the Spanish elite to live in luxury and leisure, enjoying the products of other countries, purchased with the windfall gain of gold and silver. At one point, Spain’s imports were nearly twice as large as its exports, with the difference being covered by payments in gold and silver… It was a source of pride, however, that “all the world” served Spain, while Spain “serves nobody”.”

Dear Reader, you must be wondering, why have I chosen to point out all this history so many centuries later. The point I am trying to make is that there is an equivalent to what happened in Spain in the 16th century in this day and age. It is the United States of America.

Like Spain, the total amount of good and services that the United States imports is much more than what it exports. The ratio of the imports of the United States to its exports was around 1.23 in 2016. The difference between the imports and the exports stood at $503 billion. In fact, if we look at the imports and the exports of goods, the ratio comes to around 1.51.

The point being that like Spain, the United States imports much more than it exports. Spain had an unlimited access to money in the form of gold and silver mines of South America. This gold and silver over a period of time was mined and shipped to Spain and in turn used by Spaniards to buy stuff from other parts of the world.

What is the equivalent in case of the United States of America? The dollar. The US dollar is the international reserve currency. It is also the international trading currency. As George Gilder writes in The Scandal of Money-Why Wall Street Recovers But the Economy Never Does: “Today it [i.e. the dollar] handles more than 60 percent of world trade, denominates more than half the market capitalization of world stocks, and partakes in 87 percent of global currency trades.”

Spain had almost unlimited access to the gold and silver from South America. Along similar lines, the United States has unlimited access to the dollar. Other countries need to earn these dollars by exporting goods and services. The United States needs to simply print the dollars (or digitally create them these days) and hand it over for whatever it needs to pay for.

While the unlimited access to gold and silver was Spain’s easy money, the dollar is United States’ easy money. And given this, it isn’t surprising that like Spain, the United States imports much more than it exports. This basically means that the country consumes much more than it produces. Also, while the Spaniards had to face the risk of gold and silver ultimately running out, the United States does not face a similar risk because dollar is a fiat currency unlike gold, and can be created in unlimited amounts. As long as dollar remains the global reserve currency and trading currency, the United States can keep creating it out of thin air. Of course, the role of the United States in global politics will be to ensure that the dollar continues to remain the reserve and trading currency. Having the biggest defence budget and military in the world, will help.

The supply of silver in Spain peaked around 1600 and started to fall after that. But the spending habits of people did not change immediately, leading to Spain getting into debt to the foreigners. The government defaulted on its loans in 1557, 1575, 1607, 1627, and

One impact of access to the easy money in the form of gold and silver, was a huge drop in human capital in Spain. As Sowell writes: “What this meant economically was that other countries developed the human capital that produced what Spain consumed, without Spain’s having to develop its human capital… Even the maritime trade that brought products from other parts of Europe to Spain was largely in the hands of foreigners and European businessmen flocked to Spain to carry out economic functions there. The historical social consequence was that the Spanish culture’s disdain for commerce, industry and skilled labour would be a lasting economic handicap bequeathed to its descendants, not only in Spain itself but also in Latin America.”

So, what is human capital? Economist Gary Becker writes: “Economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.”

What is happening on this front, in case of the United States? As Michael S Christian writes in a research paper titled Net Investment and Stocks of Human Capital in the United States, 1975-2013, published in January 2016: “The stock of human capital rose at an annual rate of 1.0 percent between 1977 and 2013, with population growth as the primary driver of human capital growth. Per capita human capital remained much the same over this period.”

So, over a period of more than 35 years, the per capita American human capital has remained the same. And this is clearly not a good sign.

Further, unlike Spain which ultimately ran out of gold and silver, given that there was only so much of it going around in South America, the United States does not face any such risks given that dollar is a fiat currency and can be printed or simply created digitally.

But like Spain, the access to this easy money will ensure that in the years to come, the United States will continue to import more than it exports. This will go against the new President Donald Trump’s plan to make America great again. His basic plan envisages increasing American exports and bringing down its imports. But as long as America has access to easy money in the form of the dollar, the chances of that happening are pretty low because it will always be easier to import stuff by paying in dollars that can be created from thin air, than manufacture it locally.

The column was originally published on Equitymaster on March 14, 2017

Is the 26 Week Maternity Benefit Really a Benefit?

Last week, the Parliament passed the Maternity Benefit Bill. Once the President gives his assent to the Bill and it becomes an Act, women will be entitled to a maternity leave of 26 weeks. Currently, it stands at 12 weeks.

The new law will apply to organisations employing 10 or more people. It will be available only for the first two children. Beyond that the leave will be limited to 12 weeks. The prime minister Narendra Modi called it “a landmark moment in our efforts towards women-led development”. The labour minister Bandaru Dattatreya said the new Bill was his humble gift to women.

Nevertheless, the question is, is this really a gift to women? Before I answer this, let’s try and understand a concept called the broken window fallacy. This concept was put forward by the nineteenth century French economist Frédéric Bastiat.

Bastiat basically talks about a shopkeeper’s careless son breaking a pane of a glass window. He then goes on to say that those present would say: “It is an ill wind that blows nobody good. Everybody must live, and what would become of glaziers if panes of glass were never broken.”

The point being that if windows weren’t broken, how would those repairing windows, the glaziers that is, ever make a living. This seems like a fair question to ask, but things aren’t as simple as that.

As Bastiat writes in Essays on Political Economy: “This form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.”

Bastiat then goes on to explain what exactly does he mean by this. Let’s say replacing the pane of the broken window costs 6 francs. This is the amount that the shopkeeper pays the glazier. If the shopkeeper’s son would not have broken the window there was no way that the glazier could have earned these six francs.

As Bastiat puts it: “The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.” This leads us to conclude that breaking windows is a good thing because it leads to money circulating and those who repair broken windows doing well in the process.

Nevertheless, this is just one side of the argument. As Bastiat writes: “It is not seen that our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps have replaced his old shoes, or added a book to his library. In short, he would have employed his six francs in some way which this accident prevented.”

Now how does all this apply in case of the 26-week maternity benefit? Like the above case, there is a seen part to the benefit and an unseen part. The seen part of the benefit is very obvious. Women currently working in establishments with 10 or more people will get a 26 week maternity benefit during pregnancy. Of course, it is more than likely that this benefit will be limited to the organised sector. It is unlikely to benefit women working in the unorganised sector, which forms a bulk of the lot.

Further, this seen part comes with a cost attached to it. Small and big establishments will have to pay an employee for half a year her full salary, when she is not available at work. While, the big establishments will be able to manage this, the small ones won’t. Hence, the likely unseen impact of this is going to lead to managers not hiring women of child bearing age.

A newsreport in The Guardian points out: “A survey of 500 managers by law firm Slater & Gordon showed that more than 40% admitted they are generally wary of hiring a woman of childbearing age, while a similar number would be wary of hiring a woman who has already had a child or hiring a mother for a senior role.” This evidence is from the United Kingdom. Along similar lines, increasing the maternity benefit to 26 weeks is going to ensure that Indian managers will work along similar lines, not that they don’t already.

This is not to suggest that women should not be entitled to an extended leave post child-birth. Nevertheless, it is only fair to keep in mind that perfect is the enemy of good. The male-female ratio in most of corporate India is anyway lopsided to begin with. As an October 2015 report in The Economic Times points out: “The fairer sex comprises less than 2% of the workforce of marquee companies like Adani Ports, Bajaj Auto, Grasim, UltraTech and Hero MotoCorp.”  The 26-week maternity benefit is likely to make it worse and that is clearly not a good thing.

Further, this is in line with the Indian tendency to implement welfare measures much ahead of economic growth.

The other unseen impact of this move is that with a 26-week maternity leave, the mother is likely to become even more of a primary caregiver to the child, during the initial days. Hence, to that extent the extension of maternity benefit is patriarchal in nature. And that possibly cannot be a good thing.

The column originally appeared on on March 14, 2017