De-digitisation of India

At the checkout counter of a hypermarket in Mumbai on April 16.

SO it is official: cash use is back in almost full force in the Indian economy. Cash withdrawals from ATMs, a reasonable if incomplete proxy for the use of cash in the economy, are nearly back to the level of just before the demonetisation shock of November 8, 2016. Reserve Bank of India (RBI) data on the use of debit and credit cards to withdraw money from ATMs show that such withdrawals, which had collapsed to Rs.850 billion in December 2016 largely because of the sheer unavailability of cash in the machines, amounted to Rs.2.27 trillion in July 2017, only slightly below the Rs.2.55 trillion withdrawals recorded for October 2016.

It is worth noting that this reliance on cash is back despite the fact that the RBI is yet to remonetise the economy fully: currency with the public on September 15, 2017, was still 11 per cent below the level of a year earlier. It cannot simply be assumed (as was done in Economic Survey 2016-17 Volume II) that this reflects a lower demand for currency from the public since there is no evidence that it is not supply-constrained. Rather, the aggressive return to the use of cash suggests that it is only the lack of supply that has constrained people from using it in payments and exchange settlement.

Indeed, it is likely that if the RBI does fully remonetise, then cash use will increase further since the economy is still growing, and therefore the volume and value of total transactions must increase. What is surprising is that digital payments have not increased more along with economic growth. In fact, digital payments, which peaked dramatically in December 2016, are also back to the levels broadly seen in September-October 2016 despite the many incentives provided for such payments through official policy. This makes it apparent that demonetisation failed on this front as well in addition to its spectacular failure to flush out “black money” from the system as banks got back almost all the banned notes. Digitisation of the economy by forcing a comprehensive shift to a cashless, electronic means of payment was declared to be one of the primary goals of that expensive and economically damaging exercise. Now such a coercive process seems untenable: the shift to cashlessness cannot be forced upon people, especially in the absence of other enabling and supporting conditions.

Of course, some digital payments, such as debit card use at point of sale, are increasing, albeit relatively slowly and probably at the same rate that they were increasing before demonetisation. The total amount involved in mobile wallet transactions has also increased, from Rs.33 billion in October 2016 to Rs.69 billion in July 2017, but this is still lower than the Rs.84 billion recorded in January 2017. This suggests that the convenience of mobile wallets may have been overplayed, especially in relation to the costs imposed upon transactors to ensure some returns to e-wallet providers.

So what is it that makes cash use so central to economic activity in India and makes even the enforced digitisation of transactions so difficult and so transient? One obvious answer is the sheer inadequacy of the infrastructure and connectivity required for electronic payments. The basic banking infrastructure is far from providing universal access despite the claims of the Jan Dhan Yojana; the cyber infrastructure for adequate point-of-sale (POS) machines is still massively below requirement; and the most basic issues of lack of connectivity and frequent breakdowns of Internet communications and mobile telephony services continue to plague would-be users. These problems are greater in underserved and far-flung rural areas with difficult geographies, but they are also very much present in urban areas, including the largest metros.

All this should have been apparent to anyone when the move was announced and indeed when they were pointed out repeatedly by several observers. But the enthusiasm with which various officials rushed to prove their loyalty to the cause, such that villages and sometimes entire districts and even States were declared “cashless” in a few weeks, served to obscure that reality. As it happens, most of those “cashless” localities were never anything near that, and most of them have reverted to almost complete cash use for daily transactions. For example, Dhasai was proudly declared to be the first cashless village in Maharashtra, but within a few months it was apparent that lack of continuous electricity supply (with frequent and extended power cuts) and poor mobile and landline connectivity, with networks unavailable for as long as a week at times, meant that the few POS machines in the village were effectively dysfunctional. Similarly, the government of Goa had declared that the State would become fully cashless by December 31, 2016, but nine months later, the use of cash is not only extensive across the State, but in many situations it is the only option.

There are, of course, other concerns with digital transactions: the lack of privacy and enhanced possibilities of surveillance; the risks of being exposed to identity theft and other cybercrime; the possible compromising of personal data leading to financial loss because of very poor cybersecurity laws and systems in India; and so on. But it is also likely that the biggest factors holding back digitisation are the lack of infrastructure and connectivity, and these are issues that can only be dealt with slowly and systematically, not through grandiose announcements and threats.

GST troubles

Many in the government appeared to believe that the introduction of the Goods and Services Tax (GST) would be one more force pushing people towards digital transactions. The trail of transactions required to claim refunds on the GST would, they felt, make producers, suppliers, traders and other business people opt for electronic transactions as they were easier to monitor and calculate and for filing returns. But the GST itself is plagued with massive design flaws and shoddy implementation, which has even acted as an incentive for people to rely more on cash transactions. The multiplicity of rates, the complexity of the system, the confusion about different categories, the costs and sheer difficulties in filing online returns have all meant that small businesses in particular have in some cases reverted to cash. Even in megacities such as New Delhi, consumers can testify to the fact that the “ kaccha bill” of items written on a piece of paper has made a comeback in a big way.

The failure of this attempt at digitisation is the result of what now appears to be a basic flaw in the approach of the Central government to policy: a cart-before-horse attitude that does not take into account the wider context, underlying factors and supportive and enabling conditions that must be met for any policy measure to succeed. That is why there is a Swachh Bharat Abhiyan in which people are rushing around building basic toilets to fulfil targets without first addressing the problem of water supply for these toilets or taking into consideration the implications for workers who must be the backbone of any proper sanitation system. The “Make in India” programme is floundering with no significant increase in private investment because the essential requirements such as good transport infrastructure and amenities were not first taken care of. Most declared “Smart Cities” are turning out to be anything but that because the planning and painstaking effort required to create properly functioning urban models are simply absent.

As long as the government is focussed on optics and flamboyant announcements rather than on actual delivery and meeting its own promises, such a state of affairs will continue. It remains to be seen whether the government’s admittedly expert media management and public relations wizardry will continue to be as effective in that future context.