Debit cards

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 It depends on whether the government decides to replace the entire currency withdrawn through demonetisation or not.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).

Mr Jaitley, for war on black money, make political funding digital and through cheques. No cash.

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
By September 30, 2015, those who had black money hidden abroad had to declare it to the government. On this “declared” black money, the government will charge a tax of 30 per cent and a penalty of 30 per cent.

From the numbers that have been put out by the ministry of finance, and the fact that in the last one year the government has spent a huge amount of political capital on it, it’s clear that the effort to unearth black money that has moved abroad has been a complete flop.

During the compliance period offered by the government, 638 declarants declared assets and income amounting to`4,147 crore. There is perhaps more black money hidden just in Lutyens’ Delhi. Given that the government is levying a 30 per cent tax and 30 per cent penalty on this money, the total revenue collected from this effort would be `2,488 crore. This is not even a drop in the ocean of black money in this country.

In response to these poor collections, finance minister Arun Jaitley wrote on his Facebook page: “The bulk of black money is still within India. We thus need a change in national attitude where plastic currency becomes the norm and cash an exception. Being seized of this problem, the government has been working with various authorities in order to incentivise this change. The opening of a large number of payment gateways, Internet banking, payment banks and the emerging reality of e-commerce will prompt the use of banking transactions and plastic money rise significantly.”

With the rise of plastic money, the hope is that the total amount of black money generated in the Indian financial system will go down. With plastic money it is fairly easy to keep track of transactions and hence tax them.  While this may or may not happen, there is a simple thing that Mr Jaitley and the Modi government can do to kickstart their war against domestic black money.

It should be made compulsory for political parties to receive donations only through the plastic money route and in the form of cheques. Given that it is so passionate about unveiling the black money in the country, the Bharatiya Janata Party can take a lead on this and start taking in donations only through the plastic money and cheque route, shunning all cash donations.

One bogey that can be raised against this suggestion is about those who do not have a bank account. How will they donate money to a political party if they want to?

The ministry of finance in a press release dated September 4, 2015, had said: “The achievement under Pradhan Mantri Jan DhanYojana (PMJDY) is heading towards saturation. Initial demand for bank accounts was expected to be around 7.5 crore (75 million). However, so far close to 18 crore accounts have been opened. 15.74 crore Rupay Debit cards have been issued.”

If these numbers are to be believed, then most Indians now have access to a formal banking channel. They also have access to debit cards. And this can be used to make donations to political parties as well.

While everyone who has a debit card may not know how to use them currently, it can be easily taught. Prime Minister Narendra Modi has communicated extensively on asking people to give up their subsidised cooking gas cylinders. He can do the same with Rupay debit cards. The government can run ad campaigns around it as well, explaining how these cards are used.

Once donations made to political parties move away from cash, there will be an audit trail. No black money will go into the funding of political parties, breaking the nexus between politicians and those who have black money (read traders and businessmen). Once black money stops political funding, political parties and the government (the present government and the ones to come) are more likely to crack down on domestic black money. Until then they will only make statements because there is no incentive to crack down on black money.

Also, political parties should be brought under the ambit of the Right to Information (RTI) Act. The current government is against this move. In an affidavit submitted to the Supreme Court in late August 2015, the Modi government had said: “If political parties are held to be public authorities under RTI Act, it would hamper their smooth internal working, which is not the objective of the RTI Act and was not envisaged by Parliament. Further, it is apprehended that political rivals might file RTI applications with malicious intentions, adversely affecting their political functioning.”

I guess the only reason the government is opposing political parties being brought under RTI is because then people can file an RTI and be able to get the funding details of political parties. And that is something no political party is comfortable with.

At the state level, real estate companies are big financiers of political parties. Real estate is where most black money gets invested. Once political parties are brought under RTI, this nexus can start to unravel as well.

The nation has a genuine problem of black money. The problem is well known. The solutions to it are also well known. The question is, will our politicians do something about it or will they just keep talking about it?

My bet is on the latter. Yours?

The column originally appeared in The Asian Age and Deccan Chronicle on Oct 9, 2015

Money lessons from Uber


When it comes to technology I am a slow adopter. I got an email account only after most of my friends already had one. I started using Facebook and Twitter after these two social media websites had already taken off big time. Further, its been less than a year since I got a smart phone and given that I have only recently started using the app-based Uber taxi service.

For those who have used Uber will know that the company primarily offers three levels of taxi service. Its most basic service is uberGO. This is followed by uberX in the mid-range and UberBLACK in the top-range.

Further, the company does not take cash payments. In order to use Uber, you first need to create a wallet account with Paytm, transfer money into it from a bank account and then link it to the Uber app on your smart phone. The cost of the travel is deducted against the money in the Paytm account.

After using the Uber service, you don’t pay paper money or cash to the company. As mentioned earlier, the payment is deducted directly from the Paytm account. Hence, in that sense the situation is similar to when you buy something using a credit card or debit card.

And this is where things get interesting. Research shows that when people use their credit/debit cards they are likely to end up spending more in comparison to when they use cash, simply because there is no pain of purchase, as is the case when using cash.

Gary Belsky and Thomas Gilovich explain this phenomenon beautifully in Why Smart People Make Big Money Mistakes and How to Correct Them: “Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”

The same stands true about using a debit card as well or for that matter a wallet account like Paytm, to purchase things. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” the authors add.

Hence, as people don’t feel the pain of spending money, they are likely to spend more. “You may be surprised to learn that…you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash,”Belky and Gilovich write.

So how is all this linked to Uber? The area that I live in central Mumbai, uberGo, which works out cheaper than even a kaali-peeli taxi and is air-conditioned, is not so easy to get. On days I don’t find an uberGo I end up using an uberX which is more expensive than a kaali-peeli. And on a couple of occasions I have also ended up using UberBLACK, which is significantly more expensive than a kaali-peeli taxi.

The reason for this is straight forward. Since I don’t have to pay Uber in cash, I don’t feel the pain of paying and end up using a service which is more expensive than a kaali-peeli. In fact, since I am paying using a smartphone the pain of payment is even lower than when using a credit or a debit card, given that payment through a smart phone using a wallet is one more step removed from cash than a credit or a debit card.

This also explains why almost every e-commerce site wants you to shop using an app and not from their website. Since you may pay using a smartphone through a mobile wallet account, there is chance that you will end up spending more money.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on June 17, 2015