On the night of Nov. 9, 2016, a surprise announcement by India’s Prime Minister Narendra Modi demonetized 500 and 1,000-rupee bank notes, essentially removing from circulation 86 percent of the country’s currency (in a heavily cash-reliant society).
The campaign, as Modi dubbed it, was a war on black money — some $2 trillion of which was estimated to be stashed abroad — and an attempt to set India and its 1.3 billion citizens on track for a cashless future, hopefully putting an end to the country’s parallel underground economy.
Six months later, however, data from Reserve Bank of India (RBI) shows that a cashless future remains a long way off.
In March 2017, total withdrawals amounted to $35.2 billion, a 0.6 percent increase over the same period in 2016. While the growth was miniscule compared to the 11.4 percent noted in March 2015, cash usage shows no signs of slowing down.
“Things are changing, but not really at the pace one would expect,” said Nirupama Soundararajan, an economist at Pahle India, a New Delhi-based political research think tank, who believes that the slow rate of change is also reflective of India’s struggle to adopt digital banking services.
PYMNTS caught up with Soundararajan to gauge the state of cash in India and to discuss how demonetization has affected overall cash usage.
Demonetization and the rise in cash usage
India has long been a cash economy. Until November last year, nearly 95 percent of transactions were conducted in cash, with nearly 90 percent of merchants unable to accept any other form of payment.
With demonetization, however, the country experienced a massive cash crunch.
With the surprise demonetization annoucment, ATMs weren’t stocked sufficiently and consumer withdrawals were limited by transaction amount and frequency, Soundararajan said. It was only in March this year when RBI lifted the cash withdrawal limits, she added.
After the slump observed in November and December, the spike in cash usage in March, as Soundararajan views it, is a response to immediately going back to doing something that consumers were denied previously.
On the other hand, this spike could also be due to a new population of Indians gaining access to cash, or an increase in availability of cash driving up spending, she said.
And it will be several months before numbers can be analyzed again to reach a conclusion re: the increase in cash usage, Soundararajan said— adding that, for a country the size of India, it can be difficult to quickly amass data and then work the numbers.
Digital payments, making inroads?
Demonetization may not yet be making a significant dent on overall Indian cash usage, but it did give digital payments a jump start.
A month after demonetization, daily transaction volume from digital wallets such as Oxigen, Paytm and MobiKwik reportedly went up by 271 percent from 1.7 million to 6.3 million.
Even so, March data from RBI poured cold water on proponents of digital payment.
The volume of overall digital transactions, which had increased by 42 percent from 672 million in November to 958 million in December 2016, declined by 20 percent to 763 million in February 2017.
That is, demonetization led to a sudden increase in use of digital payments in November and December of last year, but then with an increasing availability of cash in spring 2017 digital payments usage again declined in February 2017, the RBI noted.
Still, Soundararajan and others are optimistic about the future of digital payments in India, pointing to the fact that many small vendors who have begun accepting non-cash payments since demonetization.
In India, service providers ranging from seamstresses to rickshaw drivers have all moved to accepting payments thru Paytm, a digital payments platform, she said. “The [anecdotal] evidence of that is much stronger.”
Despite this anecdotal evidence, however, a significant hurdle impeding the growth of digital payments in India is Indian consumers’ lack of interest in using mobile for online banking, Soundararajan said. About 66 percent of Indian consumers use mobile internet connectivity primarily to access social networking sites, with 46 percent using it for entertainment websites, according to a 2016 Pahle India study.
“[Indians] are perfectly comfortable using their phone to stream videos, to download entertainment apps and watch YouTube,” she said. “However, the movement leading up to adoption of mobile banking has been very, very slow. Largely, it is a trust issue.”
Under RBI’s current mandate, Indian consumers can be partially liable for bearing the cost of fraud if they fail to report it within three days of occurrence, so fraud concerns have a real potential impact on Indian consumers’ day-to-day lives and their ability to make ends meet.
To top that off, fraud settlements are often painfully drawn out processes, leading consumers to mistrust their financial institutions, Soundararajan said.
The focus for the digital payments industry needs to be on not just touting the benefits of these services, but also on educating consumers about their security, she added.
Meanwhile, for consumers, continuing to use cash keeps their security and trust woes at bay.
Future of cash
In India, the growth of digital payments remains bogged down by old regulations, which weren’t cut out to support the recent growth of FinTech firms. For digital payments to grow, Soundararajan said, regulations will have to be reworked.
Thankfully, the Indian government seems to be moving in that direction. In February, Finance Minister Arun Jaitley called for the creation of a Payments Regulatory Board under RBI, as well as an overhaul of the Payment and Settlements Act of 2007.
Still, in India, even the loosening of regulations may do little to erode the country’s love for cash, Soundararajan said. “I don’t think India will ever become a cashless society,” she said.
If anything, Soundararajan believes, cash usage is bound to increase as more people gain access to financial services. And, as the spending power of middle class improves, there will be a spike in cash usage firstly, perhaps followed by an increase in digital or card-based payments usage, she added.
The findings of the PYMNTS Global Cash Index™ corroborate this argument. Total use of cash in India is estimated to grow at a 11.9 percent CAGR through 2020.
With cash continuing to make strides, it will remain the most-used payment method in India for the foreseeable future.
To download the analysis, please click below…
About the Index
The PYMNTS.com Global Cash Index™, a Cardtronics collaboration, focuses on the use of cash for making payments and as a payment method that equally plays a role with cards, checks, direct debit and other methods of settling up between consumers and businesses. Unlike most reported estimates of cash, our proprietary data analysis focuses on the use of cash for making payments rather than hoarding.