Without Cash, Indians Go Digital

19.04.2017 • India

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By Vivek Kaul – Vivek Kaul’s Diary (India) –

I have been closely tracking the increase in currency in circulation and the volume of digital payments being made by Indians, for some time now.

The idea is to check if people are “increasingly” moving towards digital modes of payment in the aftermath of demonetisation. Having more and more people go digital has emerged as one of the motives for demonetisation.

I use the word increasingly because even without demonetisation, people have been moving towards digital modes of payment over the years at a pretty good rate.

Look at Table 1. It shows the volume of digital transactions happening in India over the last few months. This table has been reproduced from a report titled Macroeconomic Impact of Demonetisation: A Preliminary Assessment, authored by the Reserve Bank of India and published on March 10, 2017. The table had data until February 2017, I have updated it for March 2017 as well.

Table 1: Number of digital transactions.

Volume (in Crore) Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
National Electronic Funds Transfer 12.3 16.6 16.4 14.8 18.7
Cheque Truncation System 8.7 13 11.8 10 11.9
Immediate Payment Service 3.6 5.3 6.2 6 6.7
Unified Payment Interface 0.03 0.2 0.42 0.42 0.62
Unstructured Supplementary Service Data 0 0.01 0.03 0.02 0.02
Debit and Credit Card Usage at Point of Sales 20.6 31.1 26.6 21.2 23
Prepaid Payment Instrument 5.9 8.8 8.7 7.8 9
Total 51.1 75.0 70.2 60.2 69.9

Source: Reserve Bank of India
Between February 2017 and March 2017, the total number of digital transactions has jumped by around 16 per cent to 69.9 crore. There are two reasons for it. One is the fact that the rate of increase in currency circulation has gone down dramatically during the month of March 2017.

This is something I had discussed last week. Take a look at Figure 1. It plots the rate at which currency circulation has been increasing week on week since January 6, 2017.

Figure 1:

Due to reasons which only the government or the RBI can explain, the rate of increase in currency circulation has been slowing during the course of March. What does this mean? The currency in circulation as on March 3, 2017, was at Rs 11,98,412 crore. This increased to Rs 12,45,819 crore as on March 10, 2017. This meant a jump of Rs 47,407 crore or around 4 per cent (Rs 47,407 crore crore divided by Rs 11,98,412 crore). This jump of 4 per cent is referred to as the rate of increase in currency circulation.

For the week ending March 30, 2017, the currency in circulation increased by just 1.7 per cent. Hence, even though the currency in circulation is going up, the rate at which it is going up has slowed down dramatically. For the week ending January 13, 2017, it had grown by 5.9 per cent.

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This slow growth of currency in circulation wasn’t enough to satiate the demand of the public and to a large extent explains why ATMs have generally been running dry. And this to some extent explains the increase in digital transactions.

Take a look at debit and credit card usage at point of sale terminals in Table 1. After falling dramatically in between January and February 2017, they have jumped up again by 8.5 per cent during the course of March. This is a good indicator of the fact that the shortage of currency forced people to use digital money.

Over and above this, there is a seasonality factor as well. March is the last month of the financial year and digital payments seem to go up during the course of the month, as people pay their taxes (advance income tax and service tax) as well as settle business payments between them.

Take a look at Table 2. It shows the digital payments made between November 2015 and April 2016. It shows that the digital payments showed a jump between February 2016 and March 2016.

Table 2:

Volume (in Crore) Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16
National Electronic Funds Transfer 10 12 11.9 11 12.9 11.2
Cheque Truncation System 7.1 8.2 7.8 8.4 8.8 7.9
Immediate Payment Service 1.9 2.1 2.3 2.4 2.6 2.7
Debit and Credit Card Usage at Point of Sales 16.6 17.8 18 17.2 18.5 19.1
Prepaid Payment Instrument 6.3 6.9 6.5 6.5 7.2 6.9
Total 41.9 47 46.5 45.5 50 47.8

Source: Reserve Bank of India
In Table 2, I have ignored Unified Payment Interface as well as Unstructured Supplementary Service Data, given that the numbers are very small and do not have any overall impact. As can be seen from Table 2, the total number of digital transactions in March 2016, went up by around 9.9 per cent to 50 crore, in comparison to February 2016.

Between February 2017 and March 2017, the jump was at 15 per cent (ignoring Unified Payment Interface as well as Unstructured Supplementary Service Data). As explained earlier, a part of this jump is because of shortage of cash, something that the government wants and a part of this jump is simple seasonality as people make their tax payments and settle their year-end business payments.

As can be seen from Table 2, in April 2016, the total number of digital transactions fell by around 4.4 per cent. Given this, once April 2017, data comes out, we will get a much clearer trend on the impact of demonetisation and shortage of cash on digital payments.

Dear Reader, keep watching this space.

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