Demonetisation was a shock for a nation that used to work with pillow money.
November 8 has become one of the historical days in the life of the present Indian generation. The announcement of Prime Minister Narendra Modi on November 8, stating that notes of Rs 500 and Rs 1,000 would be discontinued as legal tender, was unexpected and disruptive. The impact was huge mainly because these two currency notes which accounted for 85 per cent of the currency in circulation. It was much higher than the 2001 figure which stood at 26 per cent. There are different perspectives to this rise in high-volume notes:
• Currency issuance depends on economic growth. India has grown substantially in the 1995-2010 period, as has been welldocumented. The pillars of this growth have been demographics, infrastructure and international outsourcing opportunities.
• Growth has resulted in higher income, consumption, savings and investment. For an economy as unbanked as India, a good part of this would be in cash. A PricewaterhouseCoopers 2015 estimate stated that of all financial transactions in India, 98 per cent are cash-based in terms of volume. In value terms, these are 68 per cent.
• India has a large and varied manufacturing base. The GDP growth has percolated to pretty much all sectors. The size of the cashbased business segment varies across the different industries. A large amount of the investment in real estate, a sector with substantial growth from 2005-2015, happens in cash. Auto sector is also a sector which attracts cash.
• India’s individual tax incidence is extremely low, with only three crore taxpayers in a population of 130 crore. The omnipresent unaccounted wealth (black money) would largely be in highdenomination notes.
• Lastly, the economics. It is estimated that printing ten notes of Rs 100 each involves a cost of Rs 14.10, while cost of printing a Rs 1, 000 note is only Rs 3.15.
Understand value of digitisation via financial inclusion
To get the perspective and value of digitisation, let us first deconstruct the term financial inclusion.
• Individuals, families and businesses need a system providing secure financial services through products and technologies, which offer convenient access, ease of use and affordability.
• This access – into the system that will provide these products – is what is called financial inclusion.
• The front-end of this inclusion is a transaction account, with a financial intermediary like a bank that would give benefits and also help access different credit and risk management products. Financial inclusion is vital for India. In 2011, PwC estimated unbanked Indian populationat55.7crore.PostPradhanMantriJan-DhanYojana (PMJDY), these figures have fallen tremendous. By 2015, the unbanked population estimate had come down to 23.3 crore. As of February 2017, official estimated figure of total PMJDY accounts is 27.39 crore. While non-PMJDY bank account penetration is difficult to calculate, an estimate today isthat 80-85 per cent of relevant Indian population who cannowaccess the banking system through an account. At the primary level, financial inclusion gets the unbanked population into the system and serves other purposes:
• Bank deposits provide a greater level of security of savings.
• A bank account is a proven magnet for creating the habit of regular savings. For long, banking system has been a good proven method to use retail cash flows to build assets, be it through fixed deposits or loans for a home and/or a business.
• Once a family unit gets into the banking system and builds a discipline of regular transactions, it automatically gets access to bank credit. This credit, at an annual cost of 12-18 per cent, is generally on much easier terms than the unofficial borrowing system, which normally runs at a cost of 24-28 per cent annually.
•The sheer presence of an individual account enables linkages directly, be it subsidies, grants, government payments (pensions, refunds) or product-related payments (insurance policy claims, transactions of financial securities).
McKinsey gives a different viewpoint to financial inclusion by taking into account the user perspective.
Conventionally, people who have an account with a bank/ financial institution are considered financially included. That defination leaves us with a poor picture. A McKinsey study done across 15 developing economics discovered that across these economies, two billion individuals and 200 million SMEs did not have a formal finance account. A more accurate (and disappointing) perspective would be to take the number of account holders using to meet financial needs. The study showed that, of all eligible population, 50 per cent has an account. Of this, regular users are around 30 per cent.
Regular savers are around 20 per cent and those who have borrowed from a bank/ institution are just around 10 per cent. The last two transactions define financial inclusion at its core. The implications of being underserviced are massive. McKinsey estimates that there is a $2 trillion deficit across the SME businesses which cannot access credit and who in turn borrow from the informal market at higher rates, and work on low margins and diminished profits. Other disadvantages of a cash-based economy are given below:
• From an economy perspective, capital formation at lower levels is hit. Cash income by and large is unaccounted for, and out of the tax net.
• A recent report by Visa puts the cost of cash as 1.7 per cent of GDP. Cost of cash here represents both the cost to create storage infrastructure and time spent in maintenance of cash, plus the time and cost of transactions and movement of cash. It is in this context that digitisation becomes very important.