Cash in circulation rises, hindering Modi govt's digital economy push

India's dependency on cash may slow the country's transition to digital payments despite large numbers of internet and mobile phone users.

For many citizens living in rural areas, cash is still the bedrock of daily existence because of a lack of facilities.

Sudhir Shinde, a farmer in Satara district in Maharashtra, says he withdraws more money from his bank than required as the money vending machine in his village has not been operational for months.

"If I need money urgently, I must make a 32 kilometre trip to Satara town, which is not always possible," said the 37-year-old sugarcane farmer Shinde, while buying fertilisers for his winter-sown crops.

"I always keep money in hand assuming family emergencies like hospitalisation or any other such urgent requirements".

Prime Minister Narendra Modi backed a shock ruling in November 2016 to outlaw 86 per cent of cash in circulation to target undeclared "black money" and fight corruption.

The demonetisation got rid of old Rs 500 and Rs 1,000 banknotes and Modi said that would boost the country's digital economy, unearth unaccounted wealth and reduce the use of cash.

But 99.3 per cent of the junked currency is back in the banking system, suggesting that only a miniscule portion was unaccounted illicit money or fake currency notes, and India's addiction to cash is now, perhaps stronger than ever.

Cash wanted

One of the key objectives of the note ban was to discourage the use of cash, but India continues to see a surge in currency in circulation even as economic growth has slowed to a six-year low.

Central bank data shows that since the controversial demonetisation gambit, currency in circulation has grown, rising 17 per cent to Rs 21.1 trillion ($295.7 billion) as of the end of March 2019.

India Currency. Photo: ReutersIndia Currency. Photo: Reuters

The ratio of currency in circulation to GDP has risen to 11.23 per cent as of March 2019 up from 8.69 per cent at the end of March 2017.

To be sure, digital transactions have grown, rising 19.5 per cent in value in 2018/19 and 22.2 per cent in 2017/18, the Reserve Bank of India said in a report.

On whether India's efforts to move to electronic payments has been slow, the central bank noted what it said in a statement last week.

To promote digital payment, the RBI has established "state of the art payment systems that are efficient, convenient, safe, secure and affordable" that has resulted in a rapid growth in retail digital payment systems.

Meanwhile, it will promote the use of e-payments for parking, fuel and toll collection, and has ordered banks not to charge bank customers for online transactions in the National Electronic Funds Transfer (NEFT) system from January 2020.

India currency in circulation to GDP ratio. Photo: ReutersIndia currency in circulation to GDP ratio. Photo: Reuters

Anecdotal evidence, however, suggests people in Asia's third-largest economy prefer cash for various reasons, including to avoid paying higher taxes after a national sales tax was implemented in mid-2017 and higher charges from retailers.

Smaller stores who don't enjoy high volume sales often charge customers extra, to make up for what they must pay the service partners for electronic transactions.

Higher operating costs have also led to a slowdown in opening of new ATMs, which has led to cash hoarding.

India has the fewest ATMs per 100,000 people among BRICS nations, according to the International Monetary Fund.

Banks hobbled with bad debts have struggled to absorb the cost of software and equipment upgrades mandated by the central bank last year, along with higher land costs in the cities.

India's ATM penetration at the lowest among BRICS. Photo: ReutersIndia's ATM penetration at the lowest among BRICS. Photo: Reuters

Other factors such as the country's rural-urban divide have also affected the migration to electronic payments.

"Digital economy has certainly gained momentum in metros, cities and to some extent in semi-urban belts. But it has not spread to rural belts or the informal sector where financial illiteracy is the issue," said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.

"It is difficult to predict when the shift would happen because general education and financial education are different things," she added.

India is the world's second-largest internet and mobile phone market by number of users, trailing only China. However, a survey conducted by social media firm LocalCircles shows a large number of people still prefer cash transactions over digital with an average of 27% people having paid for 50-100% of purchases over the last 12 months without a receipt.

With the start of the goods and services tax (GST), tax on goods such as gold and silver was raised, prompting buyers and sellers to opt for cash transactions.

"Many small jewellers sell gold without receipts and consumers are also happy as they avoid paying 3% GST, which is a huge amount in the case of gold," said a Mumbai-based jeweller, who declined to be identified.

India raised import taxes on gold to 12.5% in July from 10%, which increased margins for gold smugglers. Many small jewellers sell smuggled gold in cash at a discount and pocket the profits, the jeweller said.

Over 80 payments apps face an uphill battle to turn the country cashless

The playing field in rapidly expanding market for digital payments is poised to get more crowded as the country races to catch up with China in squeezing out the use of cash, according to the head of the South Asian nation’s payments network.

That means people will continue to face a bewildering array of payments apps provided by Facebook, Google, Amazon.com and others, in contrast to China where two home-grown technology giants dominate the market.

“India will remain a multiple-player model where the consumer has a choice to continue to use his bank account, and for the last mile can use any app which he sees fit,” said Dilip Asbe, the chief executive officer of National Payments Corp of India. “We give equal opportunities to both small and large players, unlike China,” he added in a recent interview.

Asbe is confident that his country’s open payments platform will eventually allow it to catch up with China, where Ant Financial’s Alipay and Tencent Holdings’ WeChat Pay are omnipresent and have sharply reduced the use of cash for payments in the past five years or so. “China is a target where we have to reach as far as digital payments are concerned,” said Asbe.

The so-called Unified Payments Interface managed by NPCI allows any firm to use an infrastructure linking all the nation’s banks to create new digital payments services quickly and cheaply. It was created three years ago as part of a drive to reduce the use of cash and bring more Indians into the financial system.

It currently houses 87 apps offered by Google, PayTM and other third parties, as well as many of the nation’s lenders. Facebook’s WhatsApp payment service remains in beta mode, pending government approvals.

Despite its open model and the multitude of competitors, India has a long way to go. Some 72 per cent of India’s consumer transactions take place in cash, double the rate in China, according to a March report by Credit Suisse Group.

Many merchants, especially in rural areas, remain unable or unwilling to accept digital transactions due to network connectivity issues and a reluctance to pay charges for what are often low-value transactions.

“As a consumer I do not have the confidence to not withdraw cash, because 70 per cent or 80 per cent of places where I need to spend the money, digital payments are not accepted,” said Navtej Singh, the CEO of digital business at Hitachi Payment Services, which supplies automated teller machines and point-of-sale machines across the country.

In India, digital payments have climbed more than five times since 2015 to 22.4 transactions per person in the year ended March, Reserve Bank of India figures show. That’s still way below China, where cashless transactions per capita totalled 96.7 in 2017, according to an RBI report based on Bank for International Settlements data. Despite Prime Minister Narendra Modi’s shock decision to abolish high-value notes in 2016, cash as a proportion of gross domestic product has actually been rising in the past two years, hitting a three-year high of 11.3 per cent in the year to March 2019. As it seeks to reverse this and move toward its Chinese target, the NPCI is focused on the volume of transactions, rather than the value, Asbe said.

That’s because the key challenge is how to spread digital payments to rural India, where more than half of the country’s 1.3 billion people live and where the value of individual transactions is lower.

Asbe wants to expand the UPI’s user base five-fold over the coming five years, to 500 million people from 100 million at present, or less than 8 per cent of the population. The target would raise the proportion to about 38 per cent, and bring the country closer to China, where WeChat Pay alone has 800 million users.

The wide choice of payments systems and the ease with which Indians can switch between providers should allow the country to move relatively fast toward the goal, said Singh at Hitachi.

But it also makes Asbe’s task more complicated. “The challenges in addressing issues regarding awareness and infrastructure are going to be like fixing a moving train,” he said.

Going beyond digital: Google Pay goes offline to take on Amazon Pay, Paytm

Google showcased an innovation for its mobile payments app Google Pay on Wednesday, wherein merchants at stores can initiate payment requests by punching in a customer’s mobile number on their point-of-sale (POS) terminals.

With this the California-based firm is taking on PhonePe and Paytm in their own home ground and is also challenging its US rival Amazon.

Google also unveiled two other services through which its payments application users can book train tickets and buy gold.

“Digital payments has been a phenomenal story for India,” said Ambarish Kenghe, director, product management, Google Pay, India. “We want to address use cases that are close to our (customer’s) heart.” Unified Payments Interface (UPI) transaction volumes have outpaced all other forms of digital payments including wallets, mobile banking, and credit and debit cards. It has grown 40 times in 18 months, from 17 million transactions in August 2017 to 673 million in February 2019.

Google Pay’s monthly active users have grown three times, from 14 million in March 2018 to 45 million in March 2019. Total money value flowing through Google Pay equals $81 billion at an annualised run-rate level. Google Pay is betting big on this growth and has formed partnerships with payments companies Pine Labs and Innoviti to enable UPI payments across a massive footprint of POS terminals spanning 200,000 stores in over 3,500 cities and towns. “The reality is that hundreds of millions of Indians still go into the stores to buy and transact. We are going to enable thousands of large-format retail stores (transact) through Google Pay,” said Sajith Sivanandan, Business Head, Google Pay, India.

Google said it would start with stores such as Reliance and Vishal Mega Mart, and the company would eventually reach out to smaller towns and villages. Google Pay is already used across 300,000 cities, towns and villages in India and two of every three transaction comes from beyond the metro cities. 

The digital payments space in India is expected to rise fivefold to reach $1 trillion by 2023, and it would be led by the growth in mobile payments, according to a report by financial services company Credit Suisse. Pine Labs said that, through the new collaboration, Google will have access to over 330,000 point-of-sale terminals in over 3,000 towns. Pine Labs’ solutions are used by merchants from sectors such as electronics, food and beverage, fashion, pharmacy, telecom, and airlines. It enables online and offline last-mile retail transactions for over 100 brands.

“We are excited bring the convenience of UPI at POS terminals for Google Pay users through our platform,” said Vicky Bindra, CEO, Pine Labs. The chief executive said that last year over 100 million customers bought products and services from its merchant network. “With Google Pay, we expect to reach many new groups of customers across the country.”

Pine Labs-branded POS terminals in offline stores can be used by merchants to process Google Pay using a secure, two-step process. Merchants can initiate a payment request using a Google Pay user’s mobile number. The user can then authenticate this request via their Google Pay app for the payment to be processed. Both the merchant and customer will get instant notifications on the completion of a transaction.