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Financial Planning

Modi’s ‘plastic surgery’ spells new contours for banked population

20 March 2017
Are we ready to go cashless yet? Here’s how the initiative has fared
 

Among the rash of memes flooding the Internet post-demonetization was an image of Prime Minister Narendra Modi in sequined gown and coiffured hair, quipping foolishly, “If they don’t have paper, let them use plastic.”  

Though the reference was hard to miss, the cartoon was nevertheless captioned ‘Modi Antoinette’.

The artist clearly sees Prime Minister Modi as being cast in the same mould as Marie Antoinette, the 18th century French Queen believed to have peevishly said her subjects eat cake if they could not afford bread.

The charge against Prime Minister Modi seems to be that while envisioning a digital economy for India, he was as removed from the poor as Marie Antoinette was from her subjects more than 200 years ago.

The reference to “paper” in the cartoon symbolises how a vast section of the population, including the cartoonist, views Prime Minister Modi’s drive for a digital economy – with derision.

 

But what, perhaps, is being unkindly glossed over is that the demonetization campaign is more than a professed war on shadow economy – variously estimated at 23-75 per cent of the GDP.

 

The demonetization drive is about integrating more people into the formal economic grid of the country – the banking system.

 

Genesis of Plastic

 

On November 8, Prime Minister Modi scrapped the 500 and 1,000-rupee notes as legal tenders on the plea that undeclared money was mostly parked in these two high denomination notes.

 

A Tuft University survey had earlier found these two denominations constituted 86 per cent of India’s liquid cash.  Thus, in one fell swoop, Modi extinguished more than four-fifth of the total currency notes incirculation. Even as the official machinery struggled to make good this yawning deficit, chaos spread like a tsunami across socio-economic groups – mainly because India is a cash-intensive economy, with 90 per cent of all transactions taking place in paper money, much of which vanished overnight.

To help banks grapple with a money crunch, the central bank put a cap on withdrawals and the amount of extinguished notes one could exchange, but confusion continued to prevail as people still could not make sense of the situation.

Related: The 500-1000 rupee note demonetization decoded in India [Infographic]

In villages, people bartered stocks of grains for non-food essentials such as toothpaste.

The government’s defence

The thrust for a cashless system was most-markedly seen in an article that the Prime Minister wrote on LinkedIn – popular among salaried professionals who use credit and debit cards – 22 days after his November 8 announcement.

“Over the last three weeks, I have made a strong appeal for increased cashless transactions,” PM Modi wrote. “Large volumes of liquid cash are a big source of corruption and black money.”

He also defended demonetization, saying he had recced Uttar Pradesh, Karnataka, Goa and Punjab to gauge the impact of his announcement, and the feedback vindicated the decision.

“Wherever I went, I asked people: should corruption and black money be eliminated? Should the poor, neo-middle and middle class get their due? The answer I got everywhere was a resounding yes!” he said.

Then turning to the youth – a segment more likely to be tech-savvy and tuned-in to the concept of a digital economy – PM Modi urged his “young friends to lead the change and inspire others to turn towards cashless transactions.” According to him, that would set the strong foundations of an India where there is no place for corruption and black money.

“Today we live in an era of mobile banking and mobile wallets. Ordering food, buying and selling furniture, ordering a taxi...all of this and lot more is possible through your mobiles,” PM Modi wrote.

Transition Blues- is India ready for the transition?

This question relating to readiness, both infrastructural and attitudinal, is at the centre of a raging debate now.

The Reserve Bank of India reckons India needs 20 million PoS (Point-of-Sale) machines to reach the BRICS nations average, but only has 1.2 million. Banks have placed orders for a million units, but that still leaves a shortfall of nearly 18 million. 

There is also the issue of connectivity in the semi-urban and rural belts, says the National Institute of Public Finance and Policy, a research organisation under the federal finance ministry, in a working paper on the impact of demonetization.

“In many parts of the economy, there is limited and intermittent supply of electricity as well as mobile connectivity,” the study says. “In these areas, it would be difficult to expect people to shift to electronic medium of exchange.”

Having said this, the digital payment segment has revenue potential of its own. In October 2013, global consultancy EY (formerly Ernst & Young) said India’s PoS-related services sector to swell to a Rs 16-billion market size annually by 2018.

Many experts seem to be apprehensive about this transition stating that the entire country is not ready for this transition.

In an interview later, the paper’s author Dr Kavita Rao, says while a vegetable vendor would likely shift to swipe machines quickly, the consumer would take longer. “Will a daily wage worker receive wages through PayTM and make purchases on PayTM? Will he learn that in three months?” 

Her contention: In India, currencies have different colours to help people comprehend the value of a note. But PayTM involves the printed word, which means one needs to know how to read – difficult for India’s vast non-literate population.

Others argue, however, that maybe this radical change is the price we pay for the greater cause which is bringing more people under the formal baking grid of the nation.

Unbanked challenge

A World Bank paper titled The Global Findex Database 2014 – Measuring Financial Inclusion around the World, says three countries – India, China and Indonesia – account for 38 per cent of the world’s adult unbanked population.

Of this, India accounted for 21 per cent, compared to China’s 12.

It was to tackle such a scenario that PM Modi launched the Pradhan Mantri Jan Dhan Yojana programme in 2014 – a financial inclusion initiative to ensure every Indian household had a bank account.

Going by a report that PwC released the next year, the programme prima facie was a success; India’s unbanked population more than halved from 557 million in 2011 to 233 million in 2015, claimed the report.

Moreover, the biggest decline – of 182 million – occurred in 2014, indicating that the fall was a direct denouement of PM Modi’s initiative.

The problem was, nearly 40 per cent of the new accounts had zero balance. According to a World Bank report the spike in bank accounts was as much as 125 million new accounts by the end of January 2015.

As a point of comparison with the above data, the same World Bank report quoted a 2013 survey that found fewer than 400 million people had a bank account.

However, it said that could perhaps because many new account holders may not yet have had an opportunity to use their accounts – “especially since the accounts were not set up for an explicit purpose, such as to receive wages or government transfer payments.”

Moreover, the World Bank explained, “Only 39 percent of all account holders in India own a debit or automated teller machine (ATM) card, and using a bank account might be inconvenient and time-consuming if every transaction requires using a bank teller.”

The Road Ahead

That is precisely the primary goal of demonetization – document all financial transactions that sustain economic relationships, and bring the informal sector under the banking system.

This is also needed given that India has a cash-centric informal economy, which is responsible for roughly 45 per cent of the GDP and 80 per cent of employment.

Documentation will help expand the banking footprint, as it involves recording of all commercial transactions, which will allow banks to target this forgotten segment.

For this we need to start talking a lot more to the part of the population that is not very open to this transition and start convincing them. We also need infrastructure, that will keep up with these developments.

Closing thoughts

Big moves such as this take time to show their true colours. It might have seemed like a chaotic attempt to control the economy, while in reality, the promise of a bright, financially inclusive, and cashless future devoid of black money and corruption, quietly shines in the background.

 
 
 

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