In an earlier post, I had stuck my neck out and said we'll become cashless, with higher tax compliance and a correspondingly higher estimate of GDP. With slightly better data available now, let us revisit these. To begin with, I'm disappointed with the currency being flooded back in to the system. As per latest figures, currency in circulation has now reached 12.6 trillion - 79% of 8th November value, or 70% if we remove secular trend to accommodate increasing economic activity every year. Its better than 16 trillion, but not where our peers keep their currency levels.
Now, did the shock in currency levels change the habits of people? RBI has been meticulously gathering data on digital transactions and publishes them as Payment System Indicators here and as ad-hoc report here. The trends are very interesting.
The charts above show how the digital transactions are growing compared to a year ago. Before demonetization, there was a healthy growth of 20-25% in both volume and value of transactions. This hinted that more and more people and organizations were adopting payments through traceable methods - online or cheque.
However, barring a spike in November 2016, the total value of digital transactions have slowed down significantly ! In last 2 months, they have grown at just about 10% - far less than the historical average. The number of transactions, on the other hand, have increased slightly to about 30% in last 2-3 months. Digging deeper, data shows that the increase in volume has come from retail transactions - NEFT / Card transactions / UPI; whereas B2B transactions (RTGS and cheques) have stagnated.
Adjoining chart shows that RTGS, popular among high value B2B transactions, has an average transaction value of a lakh. The businesses have adopted this for quite some time now, as the bubble has barely moved in last year and a half. Cheques, NEFT and other instruments used by individuals have an average size of about 50,000 - 70,000. Here, while cheques aren't moving much, electronic transfers have showed upward movement along with an increase in bubble size. Plastic money is used for purchases worth a few thousands each swipe and shows higher value per transaction. PrePaid Instruments like PayTM are used for transactions worth a few hundreds, and UPI (not shown in chart) has entered the market to in the same space as plastic money and PPI. Thus, the increase in volume of transactions is caused by slightly greater number of retail transactions, that are too small to bring about a growth in the value of transactions.
A stagnation in B2B digital transactions - RTGS and cheques could mean two things - 1) organized sector has not grown, or 2) businesses have found ways to absorb the taxes of their channel partners. Both should cause worry to the government. Stagnant organized sector is a worry, esp in times of firming commodity prices, low headroom for monetary action and protectionism from various countries. The second possibility of businesses purposefully suppressing RTGS transactions is even more complicated. Till December 31st, 2016; there could have been instances of cash being used in place of RTGS or cheques. After January 1st, currency sales could not have happened. Then what else could the businesses have used in place of RTGS to send / receive money? Credit ? Promissory notes? Parallel currency ?
Of course, all the data is still preliminary, and real picture may be different. Even reputed organizations like Niti Aayog have goofed up while understanding what is going on in this mayhem. But on other fronts, the numbers for tax collection have not jumped as anticipated, and there are reports of them having fallen Year on Year. So, I'm not sure if we'll have a growth in reported GDP this quarter. In fact, it appears that the demonetization of November 2016 has not given any great push to digital transactions either, as was believed some time back. That makes one wonder why would any investor want to quote a high valuation for PayTm ? Maybe the investors know something which I don't !
Now, did the shock in currency levels change the habits of people? RBI has been meticulously gathering data on digital transactions and publishes them as Payment System Indicators here and as ad-hoc report here. The trends are very interesting.
The charts above show how the digital transactions are growing compared to a year ago. Before demonetization, there was a healthy growth of 20-25% in both volume and value of transactions. This hinted that more and more people and organizations were adopting payments through traceable methods - online or cheque.
However, barring a spike in November 2016, the total value of digital transactions have slowed down significantly ! In last 2 months, they have grown at just about 10% - far less than the historical average. The number of transactions, on the other hand, have increased slightly to about 30% in last 2-3 months. Digging deeper, data shows that the increase in volume has come from retail transactions - NEFT / Card transactions / UPI; whereas B2B transactions (RTGS and cheques) have stagnated.
Adjoining chart shows that RTGS, popular among high value B2B transactions, has an average transaction value of a lakh. The businesses have adopted this for quite some time now, as the bubble has barely moved in last year and a half. Cheques, NEFT and other instruments used by individuals have an average size of about 50,000 - 70,000. Here, while cheques aren't moving much, electronic transfers have showed upward movement along with an increase in bubble size. Plastic money is used for purchases worth a few thousands each swipe and shows higher value per transaction. PrePaid Instruments like PayTM are used for transactions worth a few hundreds, and UPI (not shown in chart) has entered the market to in the same space as plastic money and PPI. Thus, the increase in volume of transactions is caused by slightly greater number of retail transactions, that are too small to bring about a growth in the value of transactions.A stagnation in B2B digital transactions - RTGS and cheques could mean two things - 1) organized sector has not grown, or 2) businesses have found ways to absorb the taxes of their channel partners. Both should cause worry to the government. Stagnant organized sector is a worry, esp in times of firming commodity prices, low headroom for monetary action and protectionism from various countries. The second possibility of businesses purposefully suppressing RTGS transactions is even more complicated. Till December 31st, 2016; there could have been instances of cash being used in place of RTGS or cheques. After January 1st, currency sales could not have happened. Then what else could the businesses have used in place of RTGS to send / receive money? Credit ? Promissory notes? Parallel currency ?
Of course, all the data is still preliminary, and real picture may be different. Even reputed organizations like Niti Aayog have goofed up while understanding what is going on in this mayhem. But on other fronts, the numbers for tax collection have not jumped as anticipated, and there are reports of them having fallen Year on Year. So, I'm not sure if we'll have a growth in reported GDP this quarter. In fact, it appears that the demonetization of November 2016 has not given any great push to digital transactions either, as was believed some time back. That makes one wonder why would any investor want to quote a high valuation for PayTm ? Maybe the investors know something which I don't !
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