One Year Later: How Demonetization Has Impacted India
This month marks the first anniversary of demonetization in India, and it has undoubtedly changed the country forever. When I visit India, I increasingly see micro-transactions conducted via mobile phones. Cash is still used, but I see less and less of it with each visit. We are in the middle of a true paradigm shift – and India is poised to become a global leader in new types of payment acceptance.
Mixed results following demonetization
From a macroeconomic perspective, reports have indicated that the early stages of demonetization have produced mixed results:
- 90% of cash that was in circulation has been returned to the banking system. This (cash) can be loaned out and increase the GDP to burgeoning entrepreneurs.
- More taxes are collected due to higher bank balances, which can lead to a decrease in the tax rate, spurring economic spending.
- Farming and automotive experienced adverse impacts due to a lack of available cash.
Impact of demonetization on payments
Now focusing on payments, the data available supports what I have seen firsthand. The government had set an ambitious target of 25 billion cashless transactions in 2017. While this may not be reached, digital payment transactions are up 53% in terms of value, and up 33% in terms of volume, with volume growing at a rate of 7% each month.
Reserve Bank of India statistics show that the growth in digital payments was uneven. UPI (Unified Payments Interface) grew at a compounded monthly rate of over 100% in the first 6 months following demonetization. Comparing monthly volume in July 2016 and 2017, mobile banking volumes grew at a CAGR of 75%, and IMPS (Immediate Mobile Payments System) grew at 115%. Clearly staggering growth in volume and rapid adoption of these new digital payments.
Card-based payments, by comparison, grew meagerly at less than 5% in the first 6 months. Admittedly, the card payments base dwarfs that of new payment types such as UPI and IMPS, but this gives us a glimpse of what the future may hold.
New payment infrastructure and the network effect
The IMPS and the UPI protocols support instant payments using mobile phones. The early results indicate that the regulation was a catalyst for significant growth of non-traditional digital payments. New payment applications, such as the Bharat Interface for Money (BHIM), have been built on this new infrastructure.
A significant barrier to overcome for new payment types is the lack of a network of consumers, banks, intermediaries and retailers needed to use and accept the new method. However, BHIM has been designed to be different and overcome these network challenges. It eliminates the need for bank applications and intermediary transfers, while allowing anyone with a bank account and smartphone to make a payment. BHIM also allows users with Aadhaar cards to make payments to others with an Aadhaar number. This effectively opens the marketplace to millions of new Aadhaar-enabled bank accounts. Out on the streets, I have witnessed more and more merchants accepting this method of payment. My eyes are not lying – and the network of retailers needed for a new payment type to be successful is growing.
The future of payments in India
India, much like the rest of the world, is facing several ‘mega trends’ in the payments market. Those that will have the most significant impact in India include the shift from customer experience to engagement, trust in digital transactions and new technologies, as well as the longitudinal trend of the blurred lines between commerce and payments.
I will explore these trends in a future post and outline what they mean for India, but I will close by posing a final question: Has demonetization and the new digital infrastructure positioned India as a leader in digital payments?
Given the growing demand and sheer volume of people using these new digital platforms within just one year, it would not surprise me in the least if India emerged as the benchmark for digital payments.
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