Chirag Desai

While digitalisation has proceeded, cash has not become unimportant


Rupa Subramanya, writing for the Observer Research Foundation:

Using data on the value of Point of Sale, Debit and Credit Card (PoS) transactions going back to April 2011, the earliest for which data is readily available, and the value of Immediate Payment Systems (IMPS) from September 2012, again the earliest for which data is available, I trace the dynamics of these two important components of digital payments.

As always, Rupa brings in elaborate research and looks at longer-term trends.

On digitalization of the economy:

It’s a no brainer that digitalisation of the economy has been underway well before demonetisation and is sure to continue post-demonetisation.

I raised a similar point about the drop in inflation. Analyses that only look at trends post-demonetization fail in many ways, particularly in understanding how demonetization was an impetus, not a sudden strategic change in the larger picture. To this point:

The crux is that those who claim that digitalisation fell in January by looking at only two or three data points completely miss the fact that this is still more than we would have had if demonetisation hadn’t occurred! The narrative of a sharp rise and then drop in digitalisation is simply misleading and based on poor data analysis. Even a cursory analysis of long term trends shows we’re still above trend, due to demonetisation.

On cash in the economy:

…while digitalisation has proceeded, cash has not become unimportant. It’s necessary to stress that this trend for cash incorporates a couple of months of data following demonetisation. If demonetisation indeed leads to less cash in the economy, we should see this elasticity fall over time.

India has been a predominantly cash economy, and that’s not just a colloquial statement. After all, 1000 and 500 Rupee notes comprised 86% of the denomination in circulation. Even the Government has been focused on the narrative of a ‘less-cash’ economy. While numbers haven’t been revealed yet by the RBI, it does seem that the final cash in circulation number will be far short of the Rs. 15.44 lakh crore that was in circulation on Nov 8.

Rupa also correctly concludes that the foot cannot be lifted off the peddle now, not for quite a while. Read on for a detailed analysis, salivating stuff for the data nerds out there.