Digital Transactions Were Growing Faster Before Demonetisation

The finance minister Arun Jaitley recently said: “Through demonetisation, the government created a new normal, with a big step in removing the earlier scenario of cash economy and shadow economy.”

If this is true then there should have been a substantial jump in digital transactions in the recent past. If people are not carrying transactions in the cash economy, then they should be carrying out transactions digitally. But is that true?

Let’s first look at the number of digital transactions (i.e. volume of digital transactions) that have happened every month between November 2016, when the demonetisation of Rs 500 and Rs 1,000 notes was announced, and May 2017, the latest monthly data available. All the digital data used in the column deducts the transactions carried out through Real Time Gross Settlement system simply because it is not a retail mode of digital transactions, which is primarily what we are looking at here. The minimum amount that can be transferred through this mode is Rs 2 lakh.

Take a look at Figure 1. This basically plots the total number of digital transactions that have happened between November 2016 and May 2017.

Figure 1: 

As is clear from Figure 1, the volume of digital transactions peaked in December 2016, when the impact of demonetisation was at its peak. With very little currency available to carry out transactions, people had no option but to use digital modes of settling transactions. In May 2017, the total number of digital transactions was down by 11.4 per cent in comparison to December 2017. This clearly tells us that fewer people are using digital modes of transactions in comparison to the period right after demonetisation.

Now take a look at Figure 2. In this we look at the total value of digital transactions carried out every month between November 2016 and May 2017.

Figure 2: 

From Figure 2, it is clear that the total value of digital transactions peaked in March 2017, and has fallen by 20.2 per cent since then. Past data shows that the digital transactions tend to increase in the last month of the financial year as people settle their dues and pay their taxes. Having said that, the total value of digital transactions in May 2017, was higher than that in December 2016. But with volume of transactions being lower, what this means that people who were already on the digital bandwagon are spending more digitally. And that is one piece of good news for a government looking to increase the proportion of digital transactions in the overall economy.

This comparison just tells us how things have evolved on the digital front after demonetisation. How do things look, if were to stretch the timeline a little more? Let’s compare May 2017 data with May 2016 data (In this case I have ignored the data for United Payments Interface and Unstructured Supplementary Service Data (USSD). I could not find this data for May 2016 and May 2015. This will not have any impact on the overall result because the USSD form of digital payment is close to zero and can be effectively ignored.

When it comes to UPI even in May 2017 with all the push and promotion by the government, it made up for 1.1 per cent of the total digital transactions by volume and 0.1 per cent by value (of course we have ignored RTGS here).

Take a look at Table 1. It has the total digital transactions both by volume and value, over the years.

Table 1:

Digital transactionsMay 2017May 2016May 2015
Volume (in millions)831.5726.3491.2
Value (in Rs billion)20,901.515,364.612,173.9

Source: Author calculations on Reserve Bank of India data 

What does Table 1 tell us? Between May 2016 and May 2017, the total number of digital transactions (i.e. volume) went up by 14.5 per cent. In value terms, the digital transactions jumped by 36 per cent. So, doesn’t this tell us that demonetisation had a positive impact on the digital transactions? Before we jump to that conclusion, let’s look at how the situation was between May 2016 and May 2015, when there was no demonetisation to contend with.

Between May 2015 and May 2016, the total number of digital transactions grew by 47.9 per cent in volume terms, which was significantly faster than the increase between May 2016 and May 2017. Of course, the low-base effect is at work, but even with that the jump in percentage terms was significantly more last year.

This also tells us clearly the negative effect that demonetisation has had on the overall economy, with the larger section of the economy going slow on spending. This ultimately reflects in the slower jump in digital transactions.

How do things look in terms of value? In terms of value, the jump between May 2015 and May 2016 stood at 26.2 per cent, which is lower than the jump between May 2016 and May 2017. (I did not look into data from May 2014 and before, because the structure of the digital data changes dramatically, with the importance of ECS increasing in comparison to NACH today).

What does this tell us? It tells us that demonetisation has led to those who were already on the digital mode to spend more digitally. It also tells us that the better-off haven’t been impacted much by demonetisation. Nevertheless, the main aim of demonetisation was to increase the total number of digital transactions (the dream of a cashless society i.e.), which was happening anyway and seems to have slowed down after demonetisation.

The fact that digital transactions in India were growing at fast pace even before demonetisation, isn’t surprising given that India is one of the youngest nations in the world. More than 54 per cent of India’s population is under 25 years of age. Youth take on to new technology faster than others. Hence, the digital transactions in India will continue to grow in the years to come, as they had before demonetisation.

This brings us back to the question was demonetisation necessary? The useful idiots of Narendra Modi (with due apologies to Thomas Sowell who coined the term for a different context) through their WhatsApp forwards and analysis in the media, would like us to believe that. But as more and more data comes out, it is becoming more and more clear that demonetisation was a more or less whimsical decision carried out without any due-diligence. Of course, it needs to be defended now.

The column originally appeared on Equitymaster on June 12, 2017.

Is the RBI Telling Us Something That the Govt Isn’t?

One of the things that we have learnt in the business of economic forecasting is to highlight the forecasts that we get right and tom-tom about it. The new Reserve Bank of India deputy governor Viral Acharya said something two weeks back that we seemed to have missed (you know with the media expanding at the rate it has, it is difficult to keep track of everything).

Nevertheless, here we go. Acharya said on March 6, 2017, a few days after his birthday: “I think everyone should keep in mind that the remonetisation is taking place at a very fast pace. We have some way to go, but I think we expect that within two to three months we will reach full currency in circulation. It will be slightly lower, but it is in that ballpark (number).”

What Acharya was basically saying was that by May 2017, the currency in circulation will come to a level around what prevailed before demonetisation rendered Rs 500 and Rs 1,000 notes useless. This is something we have maintained from the very beginning, even though we have been ridiculed about it more than once, as we have gone along. (You can read the pieces here and here).

In fact, if the Modi government is to be believed there was never any problem because of demonetisation. In fact, the finance minister Arun Jaitley, said in early February: “At no point of time, not for a single day, was the currency inadequate.” Around the same time the economic affairs secretary Shaktikanta Das, who reports to Jaitley, said something along similar lines when he said that the remonetisation process was complete. Remonetisation essentially refers to the process of printing money and pumping it into the financial system.

We live in Mumbai and not in Delhi. And we don’t know Das. But if we did, we would have definitely asked him, if the remonetisation was almost complete in February, why is the RBI deputy governor, who knows a thing or two about such things, saying that remonetisation will be completed only in May 2017.

Now let’s get back to look at what Acharya is saying. Take a look at Figure 1. It shows the currency in circulation every week, through late January 2016 to March 10, 2017, the latest data point that is available.

Figure 1Figure 1

What does Figure 1 show us? It shows us that the currency in circulation fell dramatically in the aftermath of demonetisation. This is not surprising given that more than 86 per cent of the currency in circulation was rendered useless overnight. And it has been rising since early January 2017, as the RBI prints and pumps more new currency into the financial system. The average increase in currency in circulation per week since January 6, 2017, has been Rs 38,645 crore.

At this pace of increase, over a period of 10 weeks, i.e. two and a half months (the average of two to three months that Acharya said), the total currency in circulation by May 19, 2017 (10 weeks after March 10, 2017), will stand at Rs 16.32 lakh crore (Rs 12.46 lakh crore as on March 10, 2017 + Rs 3.86 lakh crore added over the 10 week period). If we go for the full three months, then the total currency in circulation as on June 2, 2017(12 weeks after March 10, 2017) will stand at Rs 17.10 lakh crore.

The currency in circulation before demonetisation was announced stood at Rs 17.98 lakh crore (as on November 4, 2016). If we end up with a currency in circulation of Rs 17.10 lakh crore after remonetisation is complete, the total currency in circulation would have fallen by around 4.9 per cent. If we end up at Rs 16.32 lakh crore, then the currency in circulation would have fallen by around 9.2 per cent.

If the currency in circulation is expected to come down by around 5-9 per cent, then what was the point in disrupting the economy in such a big way, is a question worth asking. Of course, the way things are these days, we won’t get answers. All we will be told is that in the long term, demonetisation will be beneficial.

Further, in this age of relentless media, people have forgotten by now that going digital wasn’t on the original list of aims of demonetisation. It was subtly introduced only once the original aims of tackling black money and fake notes, went out of the window.

What does Acharya’s comment and our analysis accompanying it, tell us? It tells us, something we have been saying recently, that Indians are going back to cash. The brief spurt in digital transactions has been reverted and this shall become more and more obvious as we go along. It also means that the RBI will have to print and remonetise a greater portion of the demonetised currency. If it does not do that then there is the risk of not enough currency going around in the economy and that will have an impact on the total number of economic transactions.

The RBI of course recognises this. It recognises the fact that an adequate amount of currency is needed in the economy. It also recognises that digital transactions despite all the hype around them haven’t really taken off. In this scenario, more and more new currency will have to be introduced into the economy.

Having said that the RBI, under the new dispensation of Urjit Patel, can’t say this in a very direct way. Nevertheless, sometimes we do have to read between the lines to understand the real message behind what is being said.

The column originally appeared in Equitymaster on March 21, 2017.

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).