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| February 10, 2017 |
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Impact 
At times people do certain things out of compulsion. And you would agree, anything that is done due to compulsion may be ephemeral.
Data on digital payment transactions released by RBI speaks volumes about the ground realities. The total volume of electronic transactions was down 9.1% in January 2017 on month-on-month basis while in value terms the transactions were down 6.8%.
Take for example the roadside eateries and vegetable vendors accepting digital payments through mobile wallets post demonetisation. But now it seems that was nothing more than a temporary arrangement to retain the customer.
Now, not all of them have been refusing to settle transactions by non-cash means, but a few have been hesitating to go digital for sure.
Digitalisation—has enthusiasm fizzled out?
| | Month-on-Month change | | Dec-16 | Jan-17 | | Volume | Value | Volume | Value | | Mobile Banking | -2.9% | 9.7% | -7.6% | -11.7% | | Debit/Credit Card Payments | 51.3% | 48.2% | -14.6% | -7.9% | | Unified Payment Interface (UPI) | 583.5% | 673.5% | 111.4% | 136.9% | Data as on February 9, 2017
(Source: Electronic Payment System, representative data, RBI)
It’s been observed as the remonetisation exercise is nearing completion, the tendency among citizens to use electronic payment systems has reached a plateau. Until December 18, 2016, the RBI had infused new currency worth about Rs 5 lakh crore, as per the finance ministry estimates. The pace of infusion has drastically improved since then. By mid-January, the RBI had supplied new currency worth Rs 6.78 lakh crore, taking the total money in circulation to Rs 9.10 lakh crore.
Before demonetisation came into effect, the money in circulation was around Rs 17.50 lakh crore. It means, the currency in circulation still stands at 52.0% or thereabouts.
Interestingly, in its sixth bi-monthly monetary policy for 2016-17 the RBI announced that there won’t be any weekly cash withdrawal limit on individuals and businesses from March 13, 2016, onwards.
Is RBI cautiously reducing the money in circulation?
The Government has been promoting digitalisation in a big way. There is a possibility that, in consultation with the Government, the RBI might be working towards readjusting the currency supply. It remains crucial to see by what percentage the monetary base of India dips vis-à-vis pre-demonetisation levels. Only time can tell.
For the moment, it’s safe to assume the currency in circulation is not returning to the pre-demonetisation level. And there are reasons to believe so.
In the Budget 2017-18, the Government has set a target to achieve 2,500 crore digital transactions for FY 2017-18. For the month of January 2017, the total transactions through the electronic payment systems were 87.04 crore. Even at this rate, surpassing 1050 crore transactions in a year would be a challenge, unless people adapt to digital payments faster than expected.
Lower currency base would always compel individuals and businesses to go digital. And you would agree, anything that is done due to compulsion may be ephemeral.
It would be unfair to blame an individual businessman or a merchant or a trader if he/she refuses to accept payments through digital wallets. It’s not about individuals, it’s about the entire industry or a value chain working on a cash basis.
It’s true “old habits die hard”, but when it’s the question of survival, let’s hope habits will die their natural death, not businesses.
Clearly, digitalisation is a way forward.
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Impact
Post demonetisation, NITI Aayog had appointed a 13-member committee led by Mr Chandrababu Naidu, Chief Minister of Andhra Pradesh, seeking a roadmap to transform the cash-dominated economy into a cashless economy. Among all the recommendations the panel put forward, two stood out—Introduction of Banking Cash Transaction Tax (BCTT) for cash withdrawals above Rs 50,000, and an upper limit on using cash in any transaction.
Mr Naidu was confident that most of the recommendations of the committee would be accepted by the Government.
Budget 2017-18 proved him right. The Government offered a big support to developing cashless platforms. Although it refrained from introducing BCTT, it accepted the suggestion of the committee to restrict the use of cash in large value transactions.
The Government set a cash transaction limit of Rs 3 lakh. Above this, anyone accepting payments will be liable to pay a hefty penalty, equal to the entire amount received in cash .For example, a person buying a car worth Rs 5 lakh in an all-cash deal, the seller will have to pay a penalty of Rs 5 lakh. The Finance Bill, 2017 has proposed to introduce a new Section 269ST under The Income-Tax Act, 1961 to curb the generation and circulation of black money.
The aforesaid Section provides that, no person shall receive an amount of three lakh rupees or more
- In aggregate from an individual in a day;
- In respect to a single transaction; or
- Transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account
Where will no restriction be applicable?
- Government,
- Any banking company,
- Post office
- Savings bank or co-operative bank
However, the restrictions won’t apply if the receiver succeeds to prove that, “there were good and sufficient reasons”, for not following the restrictions imposed under Section 269ST.
As per the current set of rules quoting PAN number in any transaction involving cash over Rs 2 lakh. The Government hasn’t proposed any change there.
Imposing restrictions on using cash in high-value transactions is a good move, but the threshold of Rs 3 lakh may make it slightly ineffective. If only 3.7 crore people file tax returns for whom the limit is set so high at Rs 3 lakh?
The Government must reconsider the reducing threshold limit. It seems jewellers, luxury brands, housing, and automobile companies have made their case strong enough to discourage the Government from imposing stricter measures. Ultimately, if sales of these businesses fall, not only will corporate tax collections be lower, there might be some reparations on the economic growth as well.
Nonetheless, the Government will have to take tough decisions if it’s serious about making India a cashless economy.
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Impact
In the 2017 budget speech, finance minister, Mr Arun Jaitley revealed these startling facts
- Only 3.7 crore individuals in India filed income tax returns in 2015-16
- Close to 99 lakh people were below taxable income.
- Out of these, only 24 lakh people declared income above Rs 10 lakh, reported earnings above Rs 50 lakh were only 1.72 lakh.
- In last 5 years, automobile companies have sold 1.25 crore cars.
- In 2015, nearly 2 crore people travelled abroad for the purpose of business and tourism.
The data above highlighted that there are many tax evaders in India.
The Government expects demonetisation to bring in some significant long-term benefits that include:
- Lower corruption;
- Increase in digitalisation;
- Transparency;
- Formalisation of the economy, and eventually
- Flow of domestic savings into productive sectors of the economy (through banking channels).
All this is expected to make the GDP growth more tangible, transparent and better. Post-demonetisation, the Government is hopeful to identify tax evaders and shore up the tax revenues.
Post demonetisation, the open secret in the Income Tax Department (ITD) is, they have a large volume of data that needs to be decoded, processed, scrutinised with high-end data analytics and acted upon, but insufficient numbers in skilled human resources.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
At the sixth and final bi-monthly monetary policy review of the Financial Year (FY) 2016-17, the RBI surprised trackers of the policy action by holding rates unchanged at 6.25%. The reverse repo rate under the Liquidity Adjustment Facility (LAF) also remains unchanged at 5.75%. And the marginal standing facility (MSF) rate and the Bank Rate stayed at 6.75% as well.
The RBI moved its monetary policy stance from ‘accommodative’ to ‘neutral’.
It seems its policy approach has clearly shifted from being largely reactive to being more proactive.
And there are reasons to believe so…
In the run up to this policy review, the big event of the Union Budget 2017-18 was out of its way, and the Government had hinted at honouring the target of 3% on fiscal deficit, recommended by the FRBM Review Committee for the next 3 years. Retail inflation for Q3, FY 2016-17 averaged at 3.8% while for the first 9 months of FY 2016-17 averaged 4.9%. On the other hand, the food inflation stayed at 2.2% on an average in Q3, FY2016-17 while that for the period between April-December it averaged 5.2%. The Economic Survey 2016-17 had also shown confidence in RBI’s ability to contain inflation at 5.0% by the end of FY 2016-17.
On this backdrop, many economists and capital market participants were hoping for a 25bps (Basis Points) rate cut. Although a few had expected the RBI to maintain status quo taking a conservative step, no one might have guessed that it would change its stance to ‘neutral’.
Moreover, the 6-member Monetary Policy Committee has unanimously voted for the policy decisions.
To know more about the monetary policy action and its impact, click here.
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If you hold a savings account with HDFC Bank, you must take a note of this news: the bank has recently introduced a cap on cash transactions.
As per the circular issued by the bank, only 4 cash transactions in a month would be allowed for free. After that, every transaction would attract a fee of Rs 150 which excludes cess and taxes. The bank has also imposed an upper limit of Rs 2 lakh p.m. on cash withdrawals through its branch and ATM networks. This is a cumulative limit. This means, if you withdraw Rs 2 lakh in the first 2 weeks of a month, every withdrawal after that would cost you Rs 5 per thousand, subject to the minimum of Rs 150. Non-home branches will have a per day limit of Rs 25,000.
If other banks follow in the footsteps of HDFC Bank, the volume of cash transactions may go down, as withdrawing cash would cost you more. It remains to be seen how these initiatives help in the national goal of going digital.
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Sterilization: Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. Sterilization most frequently involves the purchase or sale of financial assets by a central bank, and is designed to offset the effect of foreign exchange intervention. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the foreign exchange market.
(Source: Investopedia)
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Quote: "The most important quality for an investor is temperament, not intellect.
"- Warren Buffett
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