How cash still remains the king, despite govt's digital India push

One fateful evening, when people were retiring for the day, waiting for the supper to be served, all TV channels made a sudden and startling announcement that the PM, Narendra Modi, would speak to the nation at a 30-minute notice at 8 PM; it was November 8, 2016. Speculation fever went sky high across the nation. People positioned themselves before their TV sets and waited with a bated breath. Country came to a halt, every minute being counted. What this could be? Was India attacked by Pakistan and the country was going to war? Nuclear explosion had already happened. What else?

Prime Minister began talking at the appointed time about the economic situation and its challenges and the evils of black money and corruption. A few Pundits then made a wild guess that it could be demonetisation and that is what it turned out to be minutes later. The life of high value currency notes of Rs 500 and Rs 1000 as legal tenders was no more than four hours. Spine chilling shock waves were felt by the cross section of population, every individual being affected. It was the biggest monetary gambit India had ever seen. India survived this earth shattering experience since the intentions were noble and people in general believed in the Prime Minister. He had taken pains to explain in detail the rationale of his move and also warned the common man of the hardships in the offing. People were made to understand the broader goals. His message that it was aimed at long term benefits was well taken. While hardships galore in the days ahead, transition was still achieved peacefully. Other countries attempting similar efforts around the same time had faced riots and loot and even reversal of the decision.

While it was planned shrouded in complete secrecy, banks led by SBI played a humongous role in taking on the responsibility without delay and delivering on the challenges. All ATMs were physically required to be re-configured to meet the shape, size and features of new Rs 500 and Rs 2,000 notes that replaced the old Ones. Banks were also required to accept, count and check the entire lot of around R 16 lakh crore of currency notes in circulation within a short period of time. At the same time, stocks of new currency notes were to be distributed far and wide at lightening speed to bring down the suffering. Logistics nightmare was managed without the glass of even one ATM being broken.

But were the intended goals achieved? The expectation that about 20 per cent of the cash in circulation would not be deposited back into banks was belied. About 3.04 lakh persons deposited Rs 10 lakh and more in cash. The Income Tax Department conducted searches in 900 groups during the period November, 2016, to Match, 2017, leading to seizure of Rs 900 crore and admission of undisclosed income of Rs 7,961 crore. During the same period, 8239 surveys were conducted leading to undisclosed income of Rs 6,745 crore.

This extraordinary move surely left people thinking about the futility of using wads of cash for high value transactions and as a way to wealth. More people now want to do property deals all in white. High value gold and vehicle purchase transactions are any way reported to Income Tax authority.

There was a bonus benefit too. With constraints on cash transactions during the transition period, people started doing digital transactions in greater number. This habit remained ingrained in many new digital customers even after the return of cash era. The average daily digital transactions in India, now is around 150 million, up from 8.6 million in 2015. Old stock of fake notes also became useless.

But the era of corruption and black money is still not over. People at the ground level continue to face corruption and the need to provide speed money at many places to get the work done still exists. Lust for easy money is deep ingrained and it will take time to recover from this disease. Good thing is that there is greater awareness in this regard and the Prime Minister is very determined in his intention to eradicate corruption. The way cases against the kinds of Vijaya Mallya, Mehul Chokshi, and Nirav Modi are being followed up displays the intent and sends a strong message. Though, unfortunately, the cash era has returned with vengeance. When demonetisation happened, the cash in circulation was estimated to be around R 16 lakh crore. At the end of July, 2021, it had inched up to R 28.39 lakh crore. If we look at the currency notes as a percentage of GDP, the situation is no different. From 12 per cent of the GDP in FY16, currency had slumped to 8 per cent in FY17. Generally, in the years immediate prior to demonetisation, this figure used to be around 12 per cent. We have ended FY21 at 14.6 per cent. If we look at these numbers and ask whether the cash is still the king, the answer is that the cash has become the emperor.

There are reasons for such increase in cash circulation. Unlike digital payments, cash has a dual role. It not only enables payments, it is a store of value also. When there is crisis, cash in circulation has increased across nations as people want to have both liquidity and security. Due to lockdowns and lower economic activities on account of the pandemic, there has also been a decline in cash velocity and the resultant limited mobility required an increase in the cash inventory at aggregate. Higher cash storage can also be attributed to withdrawal of benefit payouts and subsidies from Jandhan accounts, better agriculture output and farm gate receipts.

If we have to curb the black money and corruption and also increase the digital transactions further, more hard measures are needed. There should be a check on cash holding by individuals and businesses. Guidelines may be worked out for such limits and every tax return should mention actual cash holding at the end of the financial year. One should get concession for card transactions and there should be charges for cash transactions, also to defray the cost of handling cash. Small vendors should be guided and encouraged to accept payments for sales through electronic modes. With a view to encourage more of electronic transactions, check-books should be abolished in, say, five years' time.

Gold is one major reason for black money. It is not easy to take away the love for gold from the hearts of Indians, but paper gold should be encouraged in a big way, educating people that purpose of investment is equally served with paper gold, other than satisfying the jewellery needs, and it is also safer and easier to manage.

Funding of political parties should come under the purview of RTI as a part of electoral reforms. The exemption of tax on agriculture income for large farmers should be done away with, leaving small and marginal farmers untouched. PAN should be completely merged with Aadhaar to have a uniform number. All property records should be digitised and mandatorily linked with Aadhaar.

Some of these measures could be politically sensitive, even explosive. But a strong government with a long term vision should work towards making the cash completely redundant, and that too not in distant future.

[The author is a former MD of SBBJ

(SBI Group)]