Developed By: iNFOTYKE
Technology must reach last mile for its success
Firm appraisal of Demonetisation effect will take time
By Nilanjan Banik
Considering 30 December as the deadline for exchanging old 500 and 1000 rupees notes, we are halfway through the days of demonetisation. Those in favour of demonetisation say this is a great move to unearth black money. Black money is disproportionately cornered by the rich and corrupt politicians. This demonetisation move will in fact bring back a smile in the face of the poor.
In fact, recent estimate suggests increase in income inequality – gap between the top 10 percentile and the poorest 50 percentile of the population – has been on the rise since 1995. The richest 1 per cent of the Indian population control 53 per cent of the country’s wealth. Going by India Development Survey Report, India is more unequal in comparison to Russia, the US, China, and Brazil. The inequality is aggravated by the fact that the costs of healthcare and education – the two basic necessities of life – has grown faster than the growth in per capita income.
Therefore the proponents have their points. Quite contrary, the critics argue that demonetisation move is not going to affect the rich and powerful, as they know a way out. It is troublesome for the common man, especially when 90 per cent of all transactions are paid in cash. The brunt is more on those associated with the informal sector where 85 per cent of the workers are paid in cash and accounts for 80 per cent of all jobs.
Notwithstanding the above critique, there is no doubt that the move creates a tremendous impetus towards greater financial inclusion. Demonetisation has operationalized the Jan-Dhan bank accounts, with around INR 64,000 crore deposits, based on recent statistics. It may be recalled that the Pradhan Mantri Jan-Dhan Yojana (PMJDY) was launched in 2014 to achieve greater financial inclusion, and has increased the bank account penetration from 35 per cent to 53 per cent during last three years. But around 74 per cent of these new accounts remained non-operational with zero balances.
Financial exclusion imposes a very high cost on people. 98 per cent of the people use non-banking channels such as hawala, and pay exorbitant costs to remit or receive money from their family member living in other countries. A survey of Indian migrant workers shows average commissions of 4.6 per cent when transferring money through informal routes, whereas money transfer in a formal banking system comes with little or no cost. Similarly, a meagre 10 per cent of Indians avail loans from banks. A person who is economically poor and does not have a bank account must access micro-finance – many times at usuriously high rates of 50 per cent or more; store his money in form of cash, livestock, or jewellery. The value of cash withers with inflation, jewellery runs the risk of theft, and livestock is perishable. All these adversely affect flow of income, and hence affect consumption smoothening. A study involving households in Kenya found people availing M-PESA service (banking through mobile, and the service is provided by Vodafone) are better equipped to absorb negative income shocks arising from poor health, crop failures, and job loss. Statistically comparable the household not availing M¬PESA service are likely to experience a 6 – 10 per cent reduction in consumption in response to similar income related shocks.
How well these inflows will be utilized towards economic growth, remains to be seen. Access to formal banking will increase saving rates, which will enable capital investment in sectors such as roads, ports, and railways. India needs to invest over USD 400 billion in infrastructure. As capital is scarce, a perfect capital market will ensure a higher return for each additional dollar of saving invested for building India’s infrastructure. Importantly, access to banking will increase the productivity of the MSME sector, and aid the Make in India initiative. It is worth noting that only 5 per cent of the MSMEs have access to institutional finance, underscoring their need for financial inclusion, and to drive India’s inclusive growth agenda.
People are reluctant to try new things unless these become necessary. The demonetisation will nudge a larger number of individuals to lessen their dependence on cash transactions and resort to digital modes. Downloading of Paytm wallet (a mobile ecommerce company with a user base of over 150 million users) has tripled since 9th November. The earlier attempt of Reserve Bank of India granting permission to 11 Indian companies such as India Post, Reliance Industries, Airtel, Vodafone, etc. to venture into payment banking space came with limited success.
On its part the government needs to facilitate this transition into digital economy. The year on year growth rate of registered Internet users in India stands at an impressive 32 per cent. India has the second largest Internet user base in the world with more than 350 million users, after China with more than 600 million Internet users and the US with an estimated 279 million users.
For a populous country like India future strategy for financial inclusion will call for technology to reach the bottom of the pyramid. To facilitate use of Internet and digital transaction, the government can consider forming a Digital Sevak Dal – a network of young people to educate and support the Indian public in cities and rural areas to a cashless economy. Given the large unemployment, and that it requires minimal investment in education, the initiative can create large positive spin-offs. The Ministry of Telecommunication can join hands with Ministry of Road Transport and Highways, and facilitate laying of fiber cables to achieve greater digital inclusion. The initiative can pay for itself, since bringing people on digital banking platform will prevent leakages from subsidies. A study by McKinsey finds online payment of social benefits can save USD 22 billion per year. (IPA Service)