Does demonetization rhyme with cashless society?

Does demonetization rhyme with cashless-society?

As a member of the Indian Diaspora, my parents have always made sure that we visit our home country at least once every year since we were kids so we don’t lose contact with the family. The usual Diaspora motto that is « going back to the roots » has been my parents’ favourite. When I went back to India last summer, in August 2017, I was appalled to see how credit cards and online payments had become such a huge thing in a small city in the North called Rajkot. My family over there who used to be so dependent on cash and have huge amounts of cash had now transferred to buying products online and use the credit card at the vegetable market. This new shift in the consumer pattern was rampant and sudden. My last trip before this one was at the beginning of 2016 and I can for sure say that something had really changed. After a few discussions with family and friends, I soon realized that the much-talked-about economic measure – demonetization – was the reason behind this sudden new wave of a cashless society. Since then I have been actually thinking about the link between this policy and the change in consumer behaviour, and also to a larger extent, I have been wondering how single government policy could have huge impacts on thinking patterns? Maybe it is this constant link between psychology and finance that makes economics so interesting.

So, what actually is demonetization? It is the act of changing an existing currency in another form. In November 2016, the Indian government takes the step to demonetize the Rs.500 and Rs. 1000. These two biggest notes used to account for 80% of the currency supply. The government‘s main objectives of note ban were to eradicate counterfeit currency, resist tax evasion, destroy the black money and terrorist financing activities, and to encourage the country towards the cashless economy. As an active member of the diaspora, I regularly follow news about the Indian economy and be it on social media or legitimate sources of news, I somehow feel like demonetization has been receiving a lot of flak from everyone. Indeed, the way the government pursued this policy had severe consequences on the economy. The logistics issues given the short time soon turned into a slowdown in consumer spending that also affected the GDP growth. This move received even more criticism when roughly 99% of the “black money” found its way back into the banking system. However, in response to all these “short-term” problems, the government always stressed on the fact that turning the Indian society into a cashless one was one of the main advantages on the long term. Indeed, India compared to its competitors (China, Brazil) is an economy still based on cash.

In between all this criticism, it is, however, important to notice that while the supply of cash is back to normal today, the biggest change has occurred in the way people now pay for goods and services. Indeed, one of the main goals of this policy was to encourage non-cash payments, including cards, prepaid instruments and NFC payments. After some research, it is not difficult to say that before November 2015 digital payments were growing, but in a really modest way and this policy gave it a huge boost. The increasing use of cashless payments has also paved the way for interesting trends in consumer behaviour. Many small retailers, vegetable vendors have started accepting cards and using wallet based payments for small and big transactions. There has been a real increase in cashless transactions, through cards and prepaid instruments. Debit card usage has increased tremendously—where debit cards used to contribute to 57% of card transactions, they currently account for 75-80%. According to the figures, we observed that the peak transaction time for credit cards used to be 7-9 pm on weekdays, it has now stretched from 1 pm to 10 pm. Moreover, the average debit transaction size has reduced from ₹2500 to ₹1200 as people started using debit cards for smaller transactions. Other forms of payment have also seen a significant increase. According to recent RBI data, the use of debit cards at POS has increased by 67%, compared to October.

...