Demonetization was done with very clearly-stated strategic purposes. While it may have had an impact where intended, there is obviously a huge impact on day-to-day activities of the common man.
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One place where much of this impact can be seen is the retail sector. India is a high cash transaction economy. Retail transactions in India amount to an estimated Rs 40 lakh crores. 95 per cent of these transactions are estimated to be in cash. Assuming (based on information in circulation) that the value of the currency demonetized is about Rs 14 lakh crores, we can imagine the immediate effect of demonetization on just the retail economy.
However, we will have something to look forward to if we see it as a temporary cost-to-bear in bringing about a major change in the economy. It could encourage a large part of the population to take to non-cash transactions.
To minimize the impact, we need to rapidly enable the following:
- Ensure that all the demonetized currency with the common man is quickly deposited into bank accounts or bank-backed wallets.
- Enable convenient modes of transactions from bank accounts or bank -backed wallets.
- Use technology to enable electronic transactions even for those without smartphones.
- Enable the 15 million-plus retail points across the country to receive electronic payments.
The first step towards this will be to provide bank accounts or bank-backed wallet accounts to every individual in the country and specially to every retail point.
Fintech sector has been pioneering transformation in areas of mobile wallets, Aadhaar transactions and UPI. But the reality is that these initiatives are still in the stage of ideation or pilot.
Quick improvisations are needed to adjust to ground realities so that the products developed by the industry are put to mass use. Above all, the RBI and banks will need to take more steps that enable the Fintech solutions to be implemented without hurdles.
Some urgent initiatives needed in the post demonitization phase:
- The Prime Minister’s Jan Dhan drive has given a great fillip to banking penetration in India. Bank-backed wallets should be usedto fill up the gaps still left in the country. These have great advantage in being really low cost, easy to adopt and can be opened rapidly for the unbanked consumers.
- Consumers will need to be given multiple options in electronic transactions depending on their technology literacy and affordability levels. Unless the entire population is targeted, cash cannot be replaced on a large scale.
- Aadhaar payments need to be encouraged as an alternative to smartphone or card payments. Aadhaar device systems should be subsidised/incentivised if required. Innovations in this space need to be aligned to market realities.
- UPI is a positive step to promote electronic transactions since it eliminates the need for card accepting devices. But even that is currently limited to consumers with smartphones.
- KYC wallet transaction limitsshould be similar to bank account transactions. The more wallet transactions are facilitated, the less the need to draw cash.
- Transaction charges in electronic payments need to be reviewed immediately. Card transaction charges at payment gateways and POS systems, for merchant transactions should be borne by the banks rather than the merchants or consumers. Banks must look at float in the banking system as the revenue opportunity rather than card transaction charges.
- Employers/businesses should be incentivised to pay wages/ make business payments into bank accounts or bank-backed wallets instead of paying cash so that even casual labour is paid electronically.
Moving the whole country to cashless transactions needs a commitment from all stakeholders in the ecosystem. We need to evolve simple, language agnostic, low cost means of payments coupled with incentives if we really want to go cashless.