India’s Demonetization Experiment Fails to Demonetize: Cash Comes Full Circle

Lambert here: Jerri-Lynn was all over Modi’s demonetization debacle from its inception; see especially here, here, and here, all from 2016. (See also Clive on cash and the lessons of history.) Jerri-Lynn concluded:

Demonetization in India has been a debacle, and there is no end to the problems that it has created currently in sight. The best that can be said about it is that it might deter political leaders in other countries think long and hard before initiating similarly ill-conceived, premature efforts to try and nudge transactions away from cash and toward cashless payment systems.

Too bad Indians, and especially working class Indians, had to be the sacrificial lambs in this ill-conceived and poorly executed scheme.

By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, India. Cross-posted from Triple Crisis.

So it’s official: cash use is back in almost full force in the Indian economy. Cash withdrawals from ATM machines – 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 8 November 2016. RBI data on use of debit and credit cards to withdraw money from ATMs show that such withdrawals, which had collapsed to only Rs 850 billion in December 2016 largely because of the sheer unavailability of cash with such 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 15 September 2017 was still 11 per cent below its level of a year earlier. It cannot simply be assumed (as was done in the Economic Survey 2016-17 Volume II) that this reflects lower demand from currency by the public, since there is no evidence that it is not supply-constrained. Rather, the aggressive return of cash use suggests that it has only been the lack of supply of cash 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 more surprising is that total digital payments have not increased more along with economic growth. In fact such 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 the spectacular failure of not being able to flush out “black money” from the system since almost all the banned notes were returned to banks. The aim of digitisation of the economy by forcing a comprehensive shift to cashless electronic means of payment was declared to be one of the primary goals of that expensive and economically damaging exercise. But now it seems that such a coercive process was untenable: the shift to cashlessness cannot be forced upon people, especially in the absence of other enabling and supporting conditions.

Of course, it is true that 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 the demonetisation move. 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 amount of Rs 84 billion recorded in January 2017. This suggests that the supposed convenience of mobile wallets may have been overplayed, especially in relation to the costs imposed upon transactors because of the need to ensure some returns to such 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 machines is still massively below requirement; the most basic issues of lack of connectivity and frequent breakdown of internet communications and mobile telephony services continue to plague would-be users. These problems are clearly greater in underserved and far-flung rural areas with difficult geography, but they are also very much present in urban areas, including our largest metros.

All this should have been apparent to anyone when the move was announced, and indeed was 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, the village of Dhasai in Maharashtra was proudly declared to be the first cashless village in that state, 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, such that sometimes networks are unavailable for as long as a week at a time, meant that the few Point of Sale machines in the village were effectively dysfunctional. Similarly, the government of Goa had declared that the state would become fully cashless by 31 December 2016 – but nine months later, the use of cash is not only extensive across the state, but in many situations it is the only available option for would-be purchasers.

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 cyber security laws and systems in India, and so on. But it is also likely that the biggest factor holding back digitisation is 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.

Many in the government appeared to believe that the introduction of the Goods and Services Tax would be one more force pushing people towards digital transactions. The argument was that the trail of transactions required to claim refunds on GST would make it preferable for producers, suppliers, traders and other businessmen to move to electronic transactions that would be easier to monitor and calculate, and would also make the filing of returns easier. But the GST itself is plagued with massive design flaws and very shoddy implementation, which has even acted as an incentive to rely more on cash transactions. The multiplicity of rates, the complexity of the system, the widespread confusion about different categories, the costs and sheer difficulties in even filing online returns, have all meant that small businesses in particular have reverted to cash. Even in big megacities like 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 this central government towards much 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 we have a Swachh Bharat Abhiyan in which people are rushing around building basic toilets to fulfil targets, without 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. That is why 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 are not first taken care of. That is why 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 is simply absent.

As long as the government is focussed on optics and flamboyant announcements rather than actual delivery and meeting of 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.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Adam1

    It just shows the pure ignorance of oversimplifying how the works and how people live.

    We live in the world where the vast majority of the working class are liquidity constrained and their cash flow is regularly out of sync with their daily living needs.

    This creates issues for the working class as well as the businesses they have to deal with regularly. Despite common social myths, checks and electronic payments don’t instantaneously move money around leaving the possibility bouncing, over-drafting or being uncollectible. This is a huge reason why merchants and landlords in poor communities frequently don’t accept checks. There is just too much risk for them to carry and electronic transactions can be perceived as being expensive. Likewise electronic transaction can authorize on one dollar amount and clear/post on another mount creating expensive overdraft risks for consumers. Beyond the payment system risks for both merchants and consumers, because of the liquidity constraints and timing of payments many working class people are chronically late payers. When you are late on a bunch of payments all the time, telling someone the check is in the mail isn’t good enough. You get more comfort and assurance arriving at the business and paying in cash in person. You know the electricity wont be turned off tomorrow because you saw the agent post your payment to your account.

    The people assuming all of this real world behavioral stuff away comfortably live in a setting where there payments are rarely late; they have sufficient credit and liquidity to make payments without concern for the costs of an error. Most of the world doesn’t have nor is offered these luxuries but yet the elite so accustom to them assumes everyone is capable of transacting just like they do.

    1. Jim Haygood

      The truly elite pride themselves on never carrying means of payment on their esteemed persons (cash is dirty, you know, and plastic cards are déclassé).

      They have CPAs and foundation donors and Secret Service bodyguards to handle vulgar matters of commerce and payment on their renowned behalves.

      *lights up a Cuban cigar with an ironed and UV-irradiated Franklin*

  2. Disturbed Voter

    India was influenced by British and Soviet socialism. Two failures where idealism exceeds realism. Also India lacks discipline relative to China … so China has pulled ahead. So does it matter in the big picture if they have marginal digitization or not?

    1. hemeantwell

      India was influenced by British and Soviet socialism. Two failures where idealism exceeds realism

      The Soviet system aimed at centralized coordination of accelerated industrialization. While there was for a time a significant state sector, British socialism was largely about redistribution of resources generated by a capitalist system. Would you please explain how India having been influenced by these two markedly different systems is relevant to understanding their current demonetisation effort?

  3. Medon

    #Modi’s idiotic scheme MUST have been aided and abetted by the US #Fed partially to disrupt the physical delivery #Gold market in India

  4. lyman alpha blob

    It would be interesting to know if in some places in India, people just ran tabs or IOUs until cash was available for payment of bills again. I suspect that if this experiment were to run long enough and go to extremes, people would start trading these IOUs rather than being forced into electronic payments, in essence creating an alternate currency and hoisting the government on its own petard.

  5. Mike

    One of my coworkers was vacationing in India when the demonetization dropped. He told me a crazy saga of desperately trying to find cash because even the tourism infrastructure wasn’t ready for cashless transactions. He joked, “Modi wanted me to to know how it feels to be poor.”

  6. Desai

    There is only one minor missing detail in this otherwise very astute article. That is that it fails to recognize “language barrier” as obstacle in digital payments and all kinds of e-commerce. Unlike China or Japan , English is default language of internet in India while people who can understand English are in a small minority. Small retailers have repeatedly denied to accept payments from digital wallets because retailers themselves are unable to use wallet because they are exclusively in English. Now couple it with the fact that India still has illiteracy rate of 20 to 25%, which is mostly concentrated in rural villages, and this whole “cashless village ” thing looks phoney.

    1. Joel

      Thank you for this insight.

      Why are they only in English? You would think the potential market would be huge even if it meant translating into 1000 languages?

  7. John

    When demonetization began, the 2000 rupees notes they started printing were supposedly a stopgap measure to keep things going until there were enough 1000 rupee notes in circulation. To give you an idea, you can’t pay for transportation or groceries with 500 rupee notes. In a big city, you can use them at restaurants, but anywhere else, you’re going to struggle to find someone that can give you change. The 1000 rupee notes, the largest denomination before demonetization, were much worse.

    Now all of the ATMs just give you 2000 rupee notes, and pretty much the only places that will take them are banks and expensive restaurants. I have yet to see a 1000 rupee note.

    Demonetization was a huge debacle, but I don’t understand why it isn’t viewed as such in India. People that didn’t like Modhi to begin with complained about it, but no one else seems to acknowledge that it was a giant disaster.

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