On November 8th, Prime Minister Narendra Modi announced that, effective from 12 am on the 9th, all currency of Rs 500 and Rs 1,000 denominations would no longer be considered as legal tender. The will instead be circulating new Rs 500 and Rs 2000 notes. The PM made an impassioned appeal to citizens to accept the hardship ahead and support the move for the good of the nation.
India is a highly cash-intensive economy. The value of notes and coins in circulation as a percentage of GDP is 12.04%.
The RBI has strongly encouraged citizens to adopt electronic payments to manage expenses (FAQs here).
The PM sighted two major reasons for the move:
However, analysts and economists have pointed out that this is a well-planned ‘Surgical Strike on Cash’, which could lead to a significant evolution of India to a less cash-dependent country.
Let’s examine the ‘why’ a less cash dependency for India is beneficial and why this time is absolutely right to go for the jugular and cause widespread change
From a study The Countries That Would Profit Most from a Cashless World
From The Countries That Would Profit Most from a Cashless World, two key takeaways help accentuate the necessity to disrupt status quo in India.
A) The cost of cash to consumers, based on average transit time and cash access costs is high
The Cost of Cash in India is a widely researched and debated subject. This report by MasterCard’s Center for Growth, offers detailed insights into costs, risks, habits, and how households access cash.
Some mind boggling facts to ponder over
Data from a Right to Information answer by the RBI in 2012 shows it costs
The demonetization move (removing the old notes and replacing them with the new ₹500 and ₹2,000 notes) will incur the exchequer a total of at least ₹12,000 crore. This figure is likely to go up since additional security measures, which the new notes are set to have, will only add to the cost of printing.
For example - the residents of Delhi together spend 6 million hours and ₹9.1 crores (US $1.5 million) to obtain cash. Hyderabad, which is smaller, spends 1.7 million hours and ₹3.2 crores (US $0.5 million) to do the same, which corresponds to fees and transport costs about twice as high as Delhi on a per capita basis
B) India falls into a group of countries that needs to improve their level of digital readiness and become more “digitally inclusive” before they can realize value from going cashless. Hence, it has the potential but just not yet¸ while U.S., Netherlands, Japan, Germany, France, Belgium, Spain, Czech Republic, China and Brazil have the greatest potential for unlocking value by policy and innovation led migration to a cashless society.
From, the Cost of Cash in India Report, the current outlook on Digital Inclusion is
Most Indians currently lack the means to use non-cash payments, even if they want to.
The growth in value of ATM transactions has far outpaced the growth in the value of card payment transactions.
Despite its prowess in the telecommunications field, India has been left behind by its peers in mobile payments.
This highlights tremendous opportunity areas for Digital Payments Players to work with others to solve known challenges in Digital Readiness and ride on the momentum offered by the Demonetization announcement by the Government of India
In conclusion, while great barriers to digital payments adoption will exist (habituated use of cash, lack of financial literacy associated with using payment instruments such as plastic debit/credit cards and mobile wallets, fragmented payment ecosystem with too many me too’s driving customer acquisition with deals not differentiated value proposition) the time is ripe for the players in Digital Payments to finally cease the opportunity towards a #DigitalIndia and make India a leading player and disruptor in this space.
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