## 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 Data0.000.010.030.02
Debit and Credit Card Usage at Point of Sales20.6031.1026.6021.20
Prepaid Payment Instrument5.908.808.707.80
Total51.1375.0170.1560.24

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
Total14,96419,39919,04917,842

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

## Are Indians Going Back to Cash?

One of the so-called aims of demonetisation is to reduce the total amount of cash in the financial system. As of now, the financial system continues to have a lesser amount of cash than it had before demonetisation.

Take a look at Figure 1. It plots the currency with public between September 2016 and middle of February 2017. Currency with public forms a major part of the currency in circulation. The remaining being cash with banks. Before demonetisation, the cash with banks used to be around 4 per cent of the currency in circulation.

Figure 1

Figure 1 clearly tells us that the currency with public has been going up post December 2016. Nevertheless, it is still some way away from the pre-demonetisation level. Whether that level is achieved remains to be seen. It depends on whether the government decides to replace the entire currency withdrawn through demonetisation or not.

Now take a look at Figure 2. This basically plots the rate of weekly increase in currency in circulation. I have taken currency in circulation and not currency with public because there are more data points that are available. The currency in circulation is declared by the Reserve Bank of India(RBI) every week, whereas the currency with public is declared once in two weeks. Also, I look at this data from January 13, 2017, onwards. This is because December 30, 2016, was the last date to submit the demonetised notes to banks.

Figure 2

The rate of weekly increase in currency in circulation has had a downward trend since January. Nevertheless, we will probably need a month’s data more to say something with certainty. If the downward trend continues then the conclusion that can be drawn is that the government does not want to replace the entire currency that was demonetised. What will be the impact of that remains to be seen.

Let’s look at some more data. Figure 3 shows the number of ATM transactions using debit cards since November 2015.

Figure 3

As far as ATM transactions using debit cards go, they have bounced back post demonetisation. In fact, the total number of transactions in January 2017 was more than that in January 2016. Having said that the total number of transactions in January 2017 was still lower than the pre-demonetisation level. If we ignore the jump in total number of transactions in October 2016 due to the festival season, the difference between the total number of transactions in January 2017 wasn’t much in comparison to September 2016.

Having said that, we also need to look at the total value of ATM transactions using debit cards, which we do in Figure 4.

Figure 4

Figure 4 tells us that ATM withdrawals in rupee terms month on month tend to be very stable. There is some jump in October 2016, perhaps due to the festival season. After that ATM withdrawals in rupee terms crashed between November and December 2016, in the aftermath of demonetisation.

ATM withdrawals in rupee terms went up by around 79 per cent between December 2016 and January 2017. If ever there was a data point that showed that Indians preferred cash to carry out economic transcations, this is it.

Having said that, the total ATM withdrawals in rupee terms still remain below the level they were before demonetisation. This, despite the fact that the total number of ATM transactions using debit cards are more or less at the same level as they were before demonetisation (as we can see from Figure 3, ignoring the October 2016 data, which I think is a blip due to the festival season).

One explanation for this lies in the fact that the currency in circulation in January was still a long way off from the total currency in circulation before demonetisation. Hence, there was only so much currency going around which the public could withdraw. So, while the government might say that there was never a currency shortage in the aftermath of demonetisation, that is clearly not the case. Over and above this, there were withdrawal limits.

The data from the coming months will tell us if Indians continue to use cash or move towards digital transactions, as the government wants them to.

One data point that we can look at is the point of sale data using debit cards as well as credit cards. Point of sale is essentially any point where a consumer uses a credit card or a debit card to pay for goods or a service, with the card getting swiped in a point of sale machine.

Now let’s take a look at Figure 5.

Figure 5

Figure 5 clearly tells us that the usage of credit cards and debit cards spiked up in the aftermath of demonetisation. But the value of goods bought using credit and debit cards through the point of sale route, fell by 8.4 per cent between December 2016 and January 2017, as more currency became available in the market. If we look at just debit cards, the fall is around 16 per cent. Of course, we need more data to see if this trend has continued in February as well.

To conclude, while 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.

(The column was orignally published on Equitymaster on March 8, 2017).

## Demonetisation: How Much of Black Money is in Cash

One of the original aims of demonetisation was to eliminate “Black Money which casts a long shadow of parallel economy on our real economy.”

Since then through some deft marketing, the prime minister Narendra Modi has shifted the goal of demonetisation towards going cashless and digital payments. Nevertheless, given the fact that demonetisation of Rs 500 and Rs 1,000 notes was carried out to curb black money, it is worth asking how much black money did Indians hold in the form of cash.

Black money is essentially money which has been earned through legal as well as illegal means but on which tax has not been paid. It is also important to understand that people do not hold all their black money in the form of cash in their homes. They convert it into gold and real estate, and move it abroad to tax havens. From there it comes back through Foreign Institutional Investors(FIIs) and is invested in the stock market as well as debt market.

Hence, black money can be held in several forms. From real estate to gold to bonds to stocks. And of course, cash as well. The idea behind demonetising Rs 500 and Rs 1,000 notes was to hurt those who stored black money in the form of cash.

As the government press release accompanying the demonetisation decision pointed out: “Use of high denomination notes for storage of unaccounted wealth has been evident from cash recoveries made by law enforcement agencies from time to time. High denomination notes are known to facilitate generation of black money.”

This essentially leads to the question what portion of black money was held in the form of cash. In May 2012, the finance ministry released a White Paper on Black Money. And that had some very interesting data points. Take a look at the Table 1 below, which deals with the search and seizure operations carried out by the income tax department.

Table 1: Value of assets seized (in Rs. Crore)

YearCashJewelleryOther assetsTotal Undisclosed Income
2006-07187.4899.1977.963,612.89
2007-08206.35128.0793.394,160.58
2008-09339.86122.1888.194,613.06
2009-10300.97132.20530.338,101.35
2010-11440.28184.15150.5510,649.16
2011-12499.91271.40134.309,289.43

Source: White Paper on Black MoneyThe cash seized at the time the search and seizure operations were carried out by the income tax department, is a small portion of the total undisclosed income. This becomes clear from Table 2.

Table 2:

YearCashTotal Undisclosed Income
Proportion of cash in total
undisclosed wealth
2006-07187.483,612.895.2%
2007-08206.354,160.585.0%
2008-09339.864,613.067.4%
2009-10300.978,101.353.7%
2010-11440.2810,649.164.1%
2011-12499.919,289.435.4%
Total1,974.8540,426.474.9%

Source: Author calculations based on White Paper on Black Money

If we look at data for the period of six years of close to 24,000 seizure and search operations, cash formed 4.9 per cent of the undisclosed wealth. Also, the proportion varied from 3.7 per cent to 7.4 per cent over the years.

What this data tells us is that people who have black money do not store it in the form of cash. There are better ways of storing that wealth.

The next question that crops up here is that what is the total amount of black money in India. The official sources of the total amount of black money in the economy as a proportion of Indian GDP are very old. Take a look at Table 3.

Table 3:

YearBlack money as a
percent of GDP
1975-197615 to 18
1980-198118 to 21
1983-198419 to 21

NIPFP estimate. Source: White Paper on Black Money.

As the White Paper on Black Money published in May 2012 points out: “The last official study for estimating black money generation was conducted at the behest of the Ministry of Finance by the NIPFP [National Institute of Public Finance and Policy] in 1985.”

In 2010, the World Bank came up with estimates of the size of black money in India between 1999 and 2007. Take a look at Table 4.

Table 4:

YearBlack money as a
percent of GDP
199923.2
200023.1
200122.8
200222.6
200322.3
200422.0
200521.7
200621.2
200720.7

Source: World Bank

Both the White Paper on Black Money and the recent press release on demonetisation refer to these data points. But they end up flipping the figures. As the press release on demonetisation points out: “The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007.” As can be seen from Table 4, this is exactly the opposite of the World Bank figures.

I wonder how a mistake of this kind can be made in the case of something as important as demonetisation is. I guess what must have happened is that the Babu drafting the demonetisation press release must have lifted the figures straight from the White Paper on Black Money, which had them wrong in the first place.

Anyway, the nit-picking aside, what these data points clearly tell us is that the black money in India amounts to around one-fifth of the GDP. The Indian Gross Domestic Product (current prices) for 2015-2016 stood at Rs 135.76 lakh crore. Hence, the total amount of black money amounts to Rs 27.15 lakh crore, using these estimates.

Data from the search and seizure operations of the Income Tax Department tells us that black money in the form of cash forms just 4.9 per cent of the total black money. This means that the total black money in the form of cash amounts to Rs 1.33 lakh crore (4.9 per cent of Rs 27.15 lakh crore). This is the money that the government is going after through demonetisation.

The question is, is this worth all the trouble? Take a look at Table 5.

Table 5: Recovery of Black Money

Financial yearSeized assets
(in Rs. Crore)
Undisclosed income
(in Rs. Crore)
2015-2016(up to November 2015)4706,167
2014-201576210,288
2013-201480810,792
2012-201357510,292
2011-201290614,017
2010-201177510,649
2009-20109648,101

Source: Annual reports, Ministry of Finance.

Table 5 clearly shows the limited abilities of the Income Tax Department when it comes to digging up black money in the economy. Even if we ignore this and assume that this time around given the government focus, the Income Tax Department will be able to do better, the question is how much better?

The total amount of black money in the form of cash amounts to Rs 1.33 lakh crore. If the government can recover 50 per cent of this, by taxing it, it amounts to around Rs 66,000 crore. The fall in GDP growth because of demonetisation will turn out to be much greater than this. The Centre for Monitoring Indian Economy estimates that just the transaction cost of demonetisation will amount to Rs 1.28 lakh crore.

To conclude, this brings us back to the question, whether all this was worth the trouble?

The column originally appeared on Equitymaster on December 13, 2016.