Five years after demonetization, India is rising from the ashes

Pundits still argue that the unpopular policies achieved little; nevertheless, credit has to be given where credit is due.

On 8th November 2016, when India’s Prime Minister Narendra Modi announced the demonetization of Rs 500 and Rs 1000 currency notes, the policy shook and surprised the nation.

This was not the first time that India had demonetization: high denomination notes had stopped being legal tender in two earlier instances.

However, the purpose of such moves was the same: to cull black money and break the grip of corruption and terrorism. It was also described as a policy to boost digital payments. However, the policy had very different stated targets.

So, what has changed in country’s economy in those five years, and how have digital payments picked up in the nation?

Two macroeconomic effects

The demonetization has resulted in two economic achievements. Notes in circulation are on the rise, while the volume of digital payments has risen over the years, pandemic notwithstanding.

In terms of the currency in circulation, by 29 Oct 2021, it was at a record high of Rs 29.17 lakh crore (US$390bn) after five years, which is 14.5% of GDP, the highest since independence.

However, this rise has since slowed down, and digital payments levels are constantly growing due to greater adoption of cashless payment modes. In 2020, the country was ranked first in number of digital payment transactions, ahead of China, South Korea, Thailand and UK.

However, paper-based payments continued to have a considerable share of 61.4% in India. Still, digital payments are expected to account for a 71.7% share of all the payments in India by 2025, led by Paytm, PhonePe, Pine Labs, Razorpay, BharatPe and others.

Banks, merchants and intermediaries across the payment ecosystem are responding rapidly, and have prioritized the shift to digital. In 2020, the mobile wallet adoption rose to a high of 46%, up from 40.6% in 2019 and 18.9% in 2018.

Positive outcomes

A push to digitalization being the main purpose of demonetization, cashless transactions led to an increase in direct tax collections.

According to one report, the first month the 2016 demonetization witnessed a surge of 271% in digital payments. In the same period the number of mobile wallet transactions increased from 17 lakhs to 63 lakhs.

Official data points towards a jump in digital payments through different modes, especially with the government and the banking regulator’s attempt to make India a cashless economy. These modes were in the form of plastic cards, net banking, e-banking, e-wallets, Unified Payments Interface (UPI) and others.

National Payments Corporation of India’s (NPCI) UPI is fast emerging as a major medium of payment in the country. As of October 2021, UPI transactions stood at over Rs 7.71 lakh crore or over US$100bn, and a total of 421 crore transactions were done through UPI in the same month.

The coming together of payment technologies and banking systems has created a versatile ecosystem for customers in the payments space. But there was one challenge: luring the informal sector comprising the unbanked sector.

The Modi government addressed this through its Pradhan Mantri Jan Dhan Yojana financial inclusion program. Coupled with payment system digitization and the Jan Dhan-Aadhar-Mobile trinity in the past six years, the country has managed to weather even the recent pandemic chaos. Additionally, along with UPI, new-age digital payment modes like Aadhar-enabled Payment System (AePS) and Bharat Bill Payment System (BBPS) have played a crucial role in the economy, and ensured seamless cash transfers to beneficiaries under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) welfare scheme. According to official data on 13 Apr 2020, over 320m beneficiaries were given cash support through direct benefit transfer amounting to a total of Rs 29,352 crore, which was part of the Rs 1.7tn PMGKY package.

Digital vulnerabilities

As India’s dependence on digital payment systems deepens, vulnerabilities are also rising in tandem.

In 2020, nearly 2.9 lakh cybersecurity incidents linked to digital banking were reported, comprising identity spoofing, malware injection, DDoS and Man in the Middle attacks.

According to Rajesh Maurya, Regional Vice President (India & SAARC), Fortinet: “Vulnerabilities lurking in payment applications, mobile phones and POS systems can become entryways into customer accounts and even broader financial networks. In addition to risks with physical payment devices, there are a myriad cyber risks extending across the entire mobile payment process. Making a mobile payment involves a mobile device; a merchant; a POS system; financial institutions that process those payments for merchants; and organizations that issue these cards to the consumer. Inadequate security measures at any of these stages can put cardholder data at risk.”

In a cash-based economy like India, apprehensions will prevail around digital payments. Hence to enhance convenience and leave no room for doubt in the minds of potential users, biometric security and digital identities will play a crucial role. However, there is still space for the fintech players and the government to work towards the betterment of the segment to become a truly digital nation.

Opined PaySprint’s CEO and co-founder, S Anand: “With UP transactions crossing US$100bn in a month, 2022 looks very promising for digital payments in India. All digital solutions are safe and secure. The majority of fraud incidents have been incidental and happen only when customers share login IDs, passwords or OTP: otherwise you will never have such vast acceptance as usage of digital payments in India.”