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

If Nation is Expected to Go Cashless, Stop Political Parties from Taking Cash Donations


In the November 27, 2016, mann ki baat address to the nation, prime minister Narendra Modi talked about India moving towards a cashless society. As he said: “The great task that the country wants to accomplish today is the realisation of our dream of a ‘Cashless Society’. It is true that a hundred percent cashless society is not possible. But why should India not make a beginning in creating a ‘less-cash society’? Once we embark on our journey to create a ‘less-cash society’, the goal of ‘cashless society’ will not remain very far.”

A very noble thought indeed, the practical part of implementing it, notwithstanding. The interesting thing is that the mention of this dream of India moving towards a cashless society wasn’t made in Modi’s November 8, 2016, address to the nation. In this address Modi announced the decision to demonetise the high denomination notes of Rs 500 and Rs 1,000.

Neither was it a part of the ministry of finance press release that accompanied the decision. The primary goal of demonetisation was to tackle fake currency notes and black money. As the press release pointed out: “With a view to curb financing of terrorism through the proceeds of Fake Indian Currency Notes
(FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating Black Money which casts a long shadow of parallel economy on our real economy, it has been decided to cancel the legal tender character of the High Denomination bank notes of Rs.500 and Rs.1000 denominations issued by RBI till now

Of course, it can be said that the dream towards a cashless society goes hand in hand with the dream of eliminating black money. So, to that extent they are connected. Nevertheless, with the way the entire issue of demonetisation has been handled up until now, it is safe to say that this was not something that the government had thought about originally. They are making it up as they go along.

It is worth asking how feasible this dream is. A PwC report titled Disrupting cash: Accelerating electronic payments in India points out that 98 per cent of volume of consumer transactions in India are still in cash. The number is 96 per cent in case of Mexico, 94 per cent in case of South Africa, 90 per cent in case of China and 86 per cent in case of Japan. While this figure can be brought down, there is no way India is moving towards becoming a cashless society any time soon.

Then there are other issues. Smart phones are not a universal phenomenon. The moment one goes beyond the big cities, internet speeds both on mobile and broadband, tend to crash. There is a large portion of the population which is barely literate. So, yes there are many issues. Some structural and some cultural.

But given that the prime minister wants India to move towards a cashless society, there is one thing that he should do to tell the nation how serious he is about the cashless dream. If the nation is expected to go cashless, why are political parties still allowed to take cash donations? This is something that the prime minister and the Bhartiya Janata Party (BJP) can work towards eliminating .

Let’s look at this issue in a little more detail. As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “On the expenditure side, candidates face strict limits on spending once elections have been announced, but election authorities struggle to properly verify their reported expenditure since a substantial portion typically occurs “in the black.”” Hence, black money which mostly finances political parties and in the process elections in India.

The laws are also structured to help this. As Sukhtankar and Vaishnav point out: “For instance, corporations and parties are only legally required to publicly disclose political contributions in excess of Rs. 20,000. This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure.

And this is where things get really interesting. As the National Election Watch-Association for Democratic Reforms point out in a report titled Analysis of Income & Expenditure of National Political Parties for FY- 2014-2015: “A comparison of total donations declared by the parties in their IT returns (both above and below Rs 20,000) and that declared in the donations report shows that only 45% of the total donations of the parties came from voluntary contributions above Rs 20,000.”

It needs to be pointed out upfront that this analysis does not take the Congress Party into account because the Party had not submitted its accounts for 2014-2015 to the Election Commission at the time of writing the report.

The report makes multiple points.

1) Only 45 per cent of the total donations of the parties came from voluntary contributions above Rs 20,000. This means that 55 per cent of the donations came from those making donations of Rs 20,000 or lower. Hence, the donors are unknown. A total of Rs 582.72 crores (55% of total donations) of the total donations to National Parties was collected during FY 2014-15 from donors whose details are not available in the public domain. There are six national political parties: BJP, Congress, BSP, NCP, CPI(M) and CPI.

2) NCP is only party which has not received donation below Rs 20,000 during FY 2014-15. Thus all voluntary contributions are available in the public domain. It is to be noted that BSP claims not having received any donation above Rs 20,000 hence no donations details of the party are in public domain.

3) How do things look for the BJP? BJP, which declared the highest total income and highest income from donations above Rs 20,000 amongst the National Parties, had collected Rs 434.67 crores (50% of total donations) from donors whose details are unavailable.

4) The “unknown sources include ‘sale of coupons’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’, ‘contribution from meetings/ morchas’ etc. The details of donors of such voluntary contributions are not available in the public domain.”

If Narendra Modi is serious about his fight against black money and moving India towards a cashless society, this needs to stop. If you, I and everybody else, are being encouraged to go cashless, why are political parties still allowed to take donations in cash and not declare the source of funds.

Since the entire demonetisation issue is more about making a political point, the BJP can take a step forward on this front and promote the usage of Unified Payment Interface for cash donations that are made to a political party. In fact, the BJP should make all donations of less than Rs 20,000 compulsorily to be made through the Unified Payment Interface.

This will work at multiple levels. The BJP will score political points over its rivals and allow Modi to take a moral high ground again. The economy will become more cashless. Further, there will be less infiltration of black money in political parties, given that those making a donation of Rs 20,000 or lesser can be identified as well.

The column originally appeared on November 30, 2016, in Vivek Kaul’s Diary.