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India: more notes returned than expected and digital payments decline in value

by Guillaume Lepecq | Jan 06, 2017

indiantextiles_smallJust two months ago, on 8 November 2016, Indian Prime Minister Modi announced the demonetisation of the two highest denominations representing 84% of the value of currency in circulation. This is the world’s largest monetary exchange, surpassing the euro changeover in 2002, both in terms of volumes of notes involved and the timing. In India, 23 billion notes were taken out of circulation whereas in Europe, 15 billion notes were introduced. The euro changeover included a period of dual circulation of the legacy currencies and euros of up to two months[1]. In India, the legal tender status was withdrawn overnight, but people had until 30 December to exchange their old banknotes, exclusively at bank branches and post offices. The ECB has produced an excellent evaluation of the 2002 cash changeover, which gives an idea of the scope of the challenges and the level of preparation involved .

One of the strongest motivations of the decision to demonetise was to combat corruption by targeting unaccounted money. The government had allowed citizens to deposit their large denomination notes with their banks, provided they could prove that it is from an accounted source and that they can provide identification. Crucially, there was also a weekly limit of Rs 20,000 on the amount of withdrawals that can be made from the bank. The rationale was that holders of black money would be extremely wary of depositing their money in bank accounts, which can leave a trail for income tax authorities.

However, according to the Financial Times, the latest data from the Reserve Bank of India, show that «over Rs14tn out of the Rs15.5tn that was scrapped has now successfully been deposited despite stringent checks for untaxed income — far more than the Rs10tn that the government initially predicted.» Bloomberg reports that Rs14.97 trillion or $220 billion were received by banks as of December 30. The government had initially estimated that approximately Rs5 trillion would not be repatriated.

Even more surprising, the cash crisis did not benefit digital payments. On the contrary, « the total value of non-cash payments declined 12% in December compared to the average of April to October. » according to Bloomberg. Several factors explain this. High-value transactions declined and the most plausible reason « could be that businesses have taken a hit post demonetisation. » says Manju Agarwal, Deputy Managing Director at State Bank of India. Moreover, payment card transactions declined by a whopping 79%, compared to the average of previous months. The majority of card transactions in India are actually ATM withdrawals.

 



[1] Some countries including the Netherlands, Ireland and France opted for a six--week dual circulation period.

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