Cashless Economy Still a Fantasy for IndiaBy
Modi says currency clamp down an opportunity to go digital
Risk people will return to cash once crisis abates: analyst
After first selling India’s cash ban as a strike against corruption, Prime Minister Narendra Modi has since pushed a tantalizing side benefit.
The move to eradicate 500 rupee ($7.3) and 1,000 rupee notes, representing 86 percent of currency in circulation, would also force hundreds of millions of cash-dependent Indians to use more online payments and bank accounts. That could be a key growth driver in years to come, boosting tax receipts as the black economy is turned white and increasing bank deposits that can be used for lending.
“There is no reason we cannot move towards a cashless India,” Modi said Nov. 27, reinforcing Finance Minister Arun Jaitley’s earlier assertion that the cash ban “will take India towards a cashless economy."
But on the streets in New Delhi, it’s not quite turning out that way.
Deepak Kumar, a 22-year-old security guard who earns 7,500 rupees a month, tried to open an account with a New Delhi branch of the State Bank of India after receiving his salary in old notes. The bank refused, telling him to return in January, he said.
“They said we’re only looking after our customers, we don’t have time to add new customers,” Kumar said, adding he wouldn’t try to open an bank account again. “This cashless thing is good for big people, but for small people like us, it doesn’t mean anything."
Such anecdotes are fueling doubts the demonetization move will lead to a substantial shift to online or mobile payments, particularly among the vast population of poor Indians who lack the necessary bank accounts.
Problem is, while e-commerce is booming, India remains one of the most cash-dependent countries in the world.
Just over half of the nation’s adults have bank accounts, a precursor to using digital payments. Roughly 98 percent of all transactions are in cash, with 11 percent of consumers using a debit card in 2015, while most retailers don’t accept cards.
In the days after Modi’s Nov. 8 announcement, digital payment companies such as Paytm Mobile Solutions Pvt. Ltd. lauded the move in newspaper ads and said digital payments usage was up. But most new customers will likely be wealthier urbanites, said Saksham Khosla, a research analyst at the Carnegie Endowment for International Peace India.
“I’m very doubtful that this will lead to any meaningful financial inclusion," Khosla said. "It does seem a little tacked on. They’re trying to find more and more uses for demonetization than may have originally been intended."
Part of the problem is the poor penetration of banks in India’s villages -- there are only 18 ATMs per 100,000 citizens in India, according to the World Bank, compared to 129 in Brazil. Additionally, just 22 percent of Indians use the Internet “at least occasionally” and only 17 percent have a smartphone, according to a Pew Research Center report.
Although some rural Indians without access to financial services might be left behind, there has been anecdotal evidence that the use of digital payments has been increasing, said Shilan Shah, Singapore-based India economist at Capital Economics.
"It’s clearly going to have some kind of impact, even if it’s smaller than some of these companies and even the government are saying," Shah said.
Under the government’s demonetization program, old notes could only be exchanged for new ones by bank tellers and large sums had to be deposited into accounts. Following the announcement, even as Modi’s administration encouraged digital transactions, millions of Indians stood in long bank queues to obtain physical notes.
The chaos meant that citizens who wanted to sign up for bank accounts were turned away by harried tellers or told come back after December. By then, the urgency to use digital payments may have dissipated.
There weren’t enough staff to help people open new accounts, said one branch manager of a large state-owned bank in Jharkhand, who declined to be named as he’s not authorized to speak to the media. All the cash counters that were open were involved with depositing or withdrawing money, he said.
The government has made patchy progress on financial inclusion since 2014, helping the poor open 256 million bank accounts. However, 23 percent of these remain empty, according to the government, revealing an overwhelming preference for cash.
Mukesh Sadana, an expert on digital payments in India who worked with ICICI Bank Ltd., said demonetization may prompt more people to use digital payments but those gains won’t last.
“Most people are using these as a temporary measure and an alternative to overcome an abnormal situation,” Sadana said. “They are likely to revert to cash because of the same reasons for which they had not signed up or used these until now -- primarily, charges and fear of surveillance and disclosure of actual transactions.”
— With assistance by Anirban Nag, and Bibhudatta Pradhan