Modi's Digital India dream souring? Value of digital transactions recedes

The value of digital transactions nationwide declined marginally (1.5%) to Rs 92.6 lakh crore ($1.4 trillion) in February 2017 from Rs 94 lakh crore in November 2016 ($1.42 trillion), according to representative data (provisional) on electronic payments released by the Reserve Bank of India (RBI).

The data do not cover all transactions across all banks. But, card payments data for four major banks, mobile banking figures for five banks and prepaid payment instruments (PPI, meaning mobile payment gateways such as PayTM and FreeCharge) data for eight non-bank issuers have been considered as representative for analysing trends in payments.

Source: Reserve Bank of India

Digital transactions (volume) had increased 42% from 672 million in November 2016 to 958 million in December 2016 but has since declined 20% in two months to 763 million in February 2017.

This puts in peril the government’s target to achieve 25 billion digital transactions in 2017-18, which translates to at least 2 billion transactions per month. The February 2017 figure of 763 million transactions falls 60% short of the monthly requirement.

“The continuance of that high growth with a further pick up in some components (of digital payments) (sic) from November to January 2017 was a positive fallout of demonetisation. However, the pace of growth moderated somewhat in February 2017,” the RBI noted in its first assessment of demonetisation, Macroeconomic Impact of Demonetisation- A Preliminary Assessment.

Nine of 11 digital platforms show decline

Prime Minister Narendra Modi—whose narrative of development earned Bharatiya Janata Party a landslide mandate in the 2017 Uttar Pradesh assembly polls —changed his demonetisation narrative from black money and fake currency initially to digital/cashless economy later, IndiaSpend reported in December 2017.

Only two payment platforms, Unified Payments Interface (UPI) and Aadhaar Enabled Payments System (AEPS), show a consistent rise in value (in Rupees) and volume (number) of transactions post demonetisation. All other forms have shown a decline–either consistently or in one or two months in the four-month period.

While UPI links mobile applications to a person’s bank account directly, AEPS is an Aadhaar-linked biometric identification system used for direct cash transfers under government schemes.

Source: Reserve Bank of India, National Payments Corporation of India

Note: (1) Figures are negligible, so units have been changed. (2) Card transactions of four banks. (3) PPI issued by 8 non-bank issuers for goods and services transactions only. (4) Mobile Banking figures are taken from 5 banks. The total volume & value of electronic payment systems does not include mobile banking.

“Digital cannot substitute cash. The share of digital among transactions might increase in the long run but cash is affordable,” Rajeswari Sengupta, economics professor, Indira Gandhi Institute of Development Research, told IndiaSpend.

“Digital transactions demand a person to buy a smartphone and spend on data, which incur higher cost per transaction. People naturally prefer cash where the cost is borne by the government.”

Use of online banking using the National Electronic Funds Transfer (NEFT) platform reduced consecutively in January and February 2017, while that of Immediate Payment System (IMPS) increased in December 2016 and January 2017 but declined in February.

“The catalytic push from demonetisation hastened migration towards digital payments in November and December 2016. However, ease in availability of cash by progressive remonetisation impacted the pace of growth of digitalisation in February 2017,” the RBI assessment said.

Debit and credit card transactions for four major banks show little difference between November 2016 and February 2017–205 million swipes transacting Rs 35,200 crore in November 2016 to 212 million swipes transacting Rs 39,200 crore in February 2017.

“As the cash in circulation will settle to a lower normal than the pre-demonetisation levels, digital payments will settle at a higher normal and continue its upward trend as before,” Sangram Singh, head of cards and payments, Axis Bank, told IndiaSpend.

Card transactions improved to 311 million swipes transacting Rs 52,000 crore in December 2016, showing a 50% rise in transactions and 48% rise in value transacted over a month.

But the pace of addition in debit and credit cards has not been matched by an equal focus of point of sale (PoS) terminals.

“..in comparison to the 800 million cards that have been issued as of now, the number of PoS terminals has not been really adequate,” RBI deputy governor R. Gandhi said in a February 2017 speech.

High capital and operational expenses have deterred the expansion of PoS infrastructure, Gandhi said later in his speech.

Cash available with people, which reduced from Rs 17 lakh crore just before the demonetisation announcement to the lowest post-demonetisation level of Rs 7.81 lakh crore ($ 118 billion) on December 9, 2016, increased to Rs 11.74 lakh crore ($ 178 billion) on March 3, 2017, according to Reserve Bank of India (RBI) data.

“Remonetisation is taking place at a very fast pace. We have some way to go but I think we expect that within two to three months, we will reach full currency in circulation,” RBI deputy governor Viral Acharya was quoted in this Mint article on March 6, 2017.

The prime minister had announced the world’s biggest currency swap programme that scrapped 86% of high denomination Indian currency on November 8, 2016.

Source: Weekly Statistical Supplements, Reserve Bank of India; figures in Rs lakh crore

The current level of currency with people matches the November 2013 level of Rs 12 lakh crore ($200 billion at the then prevailing exchange rate of Rs 60 per US$).

(Waghmare is an analyst with IndiaSpend.)