Surprise demonetisation targeted the use of cash as black money

  • Indian Government demonetises Rs 500 and Rs 1,000 notes 

  • State Bank of India waives merchant fees for Rupay debit cards 

  • Latest initiative in long term campaign against black money 

  • Accusations of theatrics in the approach 

  • Gaming industry reported to be badly affected 

Sources: ZeeNews; Money Control; The Wire; GLaws

 

Summary: The dramatic removal from circulation of two widely used cash notes has had significant social impact, but is generally believed to be a political success. There has been an immediate negative impact on some merchant sectors, such as gambling. More time is needed to see if the expected boost to electronic payments materialises.

 

 

Point of View

India’s Prime Minister Narendra Modi announced on 8 November that effective from midnight, Rs 1000 and Rs 500 were no longer legal tender. These had to be changed for new Rs 500 and Rs 2,000 bills at banks or post offices. Exchanges were monitored, with any large amounts of cash questioned.

 

The move caused significant disruption across the country, although it appears to have some public support. Over 90% of the 500,000 people who downloaded the prime minister’s app approved. Some academics and economists have questioned the approach, accusing Modi of being dramatic, since they estimate that only 6% of black money is held in cash.

 

According to reports, the notes accounted for about 86% of India’s currency, and about 78% of financial transactions are done in cash. Although bank account and debit card penetration (53%, 39% respectively) is relatively low, efforts have been made to promote the use of electronic payments. National debit system, Rupay, has waived merchant fees and Modi is promoting non-bank mobile payments. With  the Indian government’s “Payments Bank” initiative, the growth in mobile payments is expected to be significant.

 

Specific merchant sectors and industries have been particularly affected. For example, the gaming industry is said to have been “paralysed” by demonetisation as it relies on cash. The gambling market in India is fragmented, with its regulation controlled on a state basis. Some commentators contend that demonetisation may benefit legitimate operators in the long run.

 

 

Implications

Demonetisation of a significant proportion of bank notes, in a predominantly cash based market, was a bold initiative, with the politics of the approach as questionable? as the economic need to address black money. A more considered approach may have been to have waited for Rupay and the mobile payments schemes from the Payment Banks to become more established, although early demonetisation may act as a spur for these as well.

 

Over time the success of the approach will be weighed against the social cost. It would be interesting to see if it can be applied to other markets with more widely used electronic payments. In Australia, perhaps, the closest we have to date is when Citibank announced it was not accepting cash in bank branches.

 

 

The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members.

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