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The ongoing media and political circus after the ban on Rs 500 and Rs 1,000 notes once again raises questions about how well the policymakers understand the plight of the poor, digitally-challenged who are uninitiated to the banking system. After the tepid response to the Income Declaration Scheme 2016, there was an eagerness to show results in the war on black money. Currency in circulation outside of banking system was declared the villain and a co-conspirator of terrorists. Large denomination notes were eliminated in a midnight encounter. Some termed it surgical strike. And just like citizens in border villages had to bear brunt of Pakistani firing after the Army action, the common man had to bear collateral damage in this case. The series of addendums to the initial announcement by Prime Minister Narendra Modi show that it wasn't a well thought-out plan. If the government can now declare that cash deposits exceeding Rs 2.5 lakh deposited in a bank account or exchanged by a person will attract punitive action then what was the rush to put the common man to inconvenience?
This when considered along with other actions by the Modi government to decrease cash transactions shows a lack of empathy for the less-privileged. The hurried mission to replace cash with new modes of payments, such as electronic cards, mobile money, and internet-based payments, could be causing financial exclusion for those who prefer or are only able to pay in cash. This was found in a study commissioned by the European Foundation for Financial Inclusion (EUFFI) on the impact of new payment systems on financial exclusion in the UK, France, Italy, Poland, and Sweden.
The report is of interest to India for three main reasons: the Indian government’s focus on promoting direct electronic transfer of social benefits & decreasing cash dealings, the Reserve Bank of India’s emphasis on financial inclusion when granting new bank licences and Indian banks expanding their use of electronic payments and non-branch interaction with customers. The five European nations of the study are smaller than India in size and population, but they’re ahead technologically and in financial services market development. Nonetheless, millions of their citizens are restricted from having a bank account and hence do not have access to many new payment technologies. Also, significant populations are unable to perform transactions using the new technologies or would prefer to use traditional methods. If the new payment systems can be so disruptive in Europe, India has miles to go before electronic payments can become the norm here.
The Modi government has drawn praise abroad for its reforms and financial inclusion push. As of March 2016, 21.3 crore new accounts have been opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY) in less than two years. But about 29% of PMJDY accounts have zero balance. The limited infrastructure supports for these accounts make them less attractive for daily usage by customers. This is in addition to the two global barriers of financial illiteracy and limited consumer awareness.
For financial inclusion, access to basic banking services must be complemented by the right to use traditional means of payment, such as cash, if that’s the customer’s desired payment
form. The EUFFI study found that cash is often the only means of payment for those at risk of exclusion, but shows it is becoming harder or more expensive to pay in cash. On the other side of this, many merchants still aren’t able or don’t want to accept cards. An example of this shared in the report is unsuccessful asylum seekers in the UK who can get financial support from the government only in the form of plastic payment cards. These cards are credited weekly, and enabled to purchase essential goods from a restricted subset of shops. This inability to pay in cash results in hostile behaviour towards asylum seekers in some shops and supermarkets.
Proponents of electronic payments in India need to ask whether such a system could result in similar harassment here. What’s more, there are many beneficiaries in India who did not have bank accounts prior to PMJDY. These people may not be savvy in writing cheques, filling out deposit forms, and using ATMs and debit cards. The plight of the common man by the sudden ban on Rs 500 and Rs 1,000 notes, when many already had bank accounts, adds weight to it being a slow and steady process. It is better that the phasing out of cash is orderly even if delayed, rather than hurried that will put the poor at inconvenience.
The EUFFI study had also revealed the plight of disadvantaged population groups, such as migrants, low-income individuals, those who are over-indebted, the elderly, and persons with disabilities. These groups often face difficulties in using new payment systems because they are not designed in a way that’s accessible, or they are denied access to the new systems because of factors which include lack of digital literacy, income, residential status, and mobility. In India, there are populations which face similar problems. Those who are illiterate and lower-income individuals are especially handicapped. They were the main victims of this poorly planned exercise of replacing high denomination notes. Like the surgical strike the ban is mere tokenism and is not going to wipe out terrorism. In fact, the introduction of Rs 2,000 notes will be a blessing in disguise for the corrupt and terrorists.
Majority of Indians use only cash in daily transactions. A mere 10-15 percent of them have used any kind of non-cash payment instrument, compared with 40 percent in China. According to the RBI, the long term annual growth rate of currency circulation has gone up from around 12 percent during 1971-81 to 14 percent during 1981-91 and nearly 15 per cent in the last decade. As of 2014, India’s ratio of currency in circulation outside of banks to GDP was 11.1 percent, higher than other emerging economies like Russia, Mexico, and Brazil. Hence such abrupt disruptions of cash transactions can derail lives of millions without concomitant measurable benefits. It is a case of bureaucrats rushing in where angels fear to tread. Modi beware of neem hakims selling panacea for Indian economy's ills!
(The author is a senior business journalist who is mentoring start-ups & digital media ventures. His twitter handle is @misrashutosh)