As Cash In Circulation is Back to Pre-Noteban Levels, There's a Question Mark on Demonetisation

Shrinking investment opportunities and government crackdown on cash transactions have led to a surge in gold smuggling using instruments like bearer draft, rendering ineffectual the fight against illegally earned money.

Top-level sources say that the government’s push to curb large cash transactions has led to a surge in gold smuggling. Credit: Reuters

New Delhi: Currency in circulation has nearly returned to pre-demonetisation levels in February, raising questions over the justification for the Narendra Modi government’s note ban, which was touted as a game-changer in the fight against black money and a move towards a cashless economy.

As per data compiled by the Reserve Bank of India, total currency in circulation stood at Rs 17.82 lakh crore as on February 23, which is 99.17% of the pre-noteban levels of Rs 17.97 lakh crore reported on November 4, 2016.

While the goal of a cashless economy has proved elusive, the country is reaping unintended consequences of the ill-thought-out move.

Top-level sources say that the government’s push to curb large cash transactions has led to a surge in gold smuggling while spurring the usage of financial instruments like bearer draft, rendering ineffectual the fight against illegally earned money.

Why people continue to prefer cash over digital payments despite the government’s unrelenting push to promote cashless transactions remains an intriguing question.

One reason, economists point out, is that the Indian economy is not vertically integrated, with supply chain highly compartmentalised.

Lack of infrastructure like smartphones, internet connectivity and point of sale (PoS) machines, necessary for carrying out digital transactions, is another reason why people prefer cash transactions.

Moreover, people like incentives policy and do not want to be forced to use digital instruments for transactions. In the wake of demonetisation, people switched to digital payments as an alternative to cash which was in short supply. But when cash supply again became sufficient, digital transactions came down.

“Digital literacy levels are not uniform across the country and across various strata of society. Further, infrastructure to enable digital transactions is inadequate, especially in rural areas and small towns. Moreover, incentives are needed to encourage people to shift to digital transactions,” said Sacchidananda Mukherjee, Associate Professor at the National Institute of Public Finance and Policy (NIPFP).

Mukherjee further said, “We are a very specialised and segregated economy, with a traditional supply chain that is fragmented and long.”

For example, he pointed out, production of a traditional saree involves at least 7-8 entities, with small value addition at each stage. So, this business can be done only through cash transactions, the NIPFP economist said. The same is the case with the jewellery industry.

Mukherjee, however, appreciated the government’s decision to exempt digital payments of up to Rs 2,000  from transaction charges.

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Last December, as per a proposal approved by the Union cabinet, the government will bear the merchant discount rate (MDR) charges on transactions of up to Rs 2,000 made through debit cards, BHIM UPI or Aadhaar-enabled payment systems. The sops are meant to promote digital transactions.

Meanwhile, because of shrinking investment opportunities and government crackdown on cash transactions, gold has emerged as a favoured investment option. India’s gold imports rose by a whopping 71.52% to $3.39 billion in December from a year ago.

Hit hard by three disruptive developments – demonetisation, Real Estate (Regulation and Development) Act (RERA) and Goods and Services Tax (GST) – which followed in quick succession, the real estate industry is down in the dumps. Property prices have fallen across regions. So, the sector is no longer lucrative for investors, economists said.

The government crackdown on large cash transactions, use of Aadhaar as the sole KYC requirement for bank accounts and the flurry of bank scams have dented public confidence in the country’s banking system, forcing people to invest in the yellow metal, explained economists.

With the yellow metal in great demand, smugglers are having a good time. With 13% duty on import and availability of gold at 4-5% lower prices in the Dubai market, smuggling of the yellow metal has emerged as a lucrative business with 17-18% returns on investment, sources said.

Traders are also using bearer draft instrument as a substitute for cash, sources added. Another reason that seems to be driving up usage of cash is the pick-up in economic activity.

“As the economy grows, it needs more cash for transactions,” said Arun Goyal, a noted trade expert.

RBI data show that since January, currency in circulation has risen by nearly Rs 89,000 crore, while growth in various types of digital transactions has slowed down.

India has over 300 million smartphone users and about 500 million people have regular internet access. However, experts say that digital payments systems are inadequately developed for universal accessibility and are dependent upon certain infrastructure.

The SMS-based payments system developed by the government is still inadequate, as evidenced by its low usage. The conventional digital payment is still done through a smartphone and relies entirely upon the internet.

In the Union Budget 2017-18, finance minister Arun Jaitley had set a target of 25 billion digital transactions as part of the government’s hard push to digitise the economy. However, that target is set to be missed by a large margin.

Between April 1 and January 28, only about 14.8 billion digital transactions were undertaken across the country, as per data compiled by the ministry of electronics and IT (MeitY). These include bank-to-bank electronic money transfers, digital wallet payments, Aadhaar-based and electronic toll payments.

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