DIGITAL INDIA: HOW FAR DID DEMONETIZATION HELP

Submitted in partial fulfillment of the requirements

for the award of the degree of

Bachelor of Commerce (BCOM)

To

Guru Gobind Singh Indraprastha University, Delhi

Guide: Ms. Neha Mangla

Su
bmitted by:

Sherin Sunny

B.com hons

RollNo.:02390388817

1
 Institute of Innovation in Technology &
Management,
New Delhi – 110058
Batch (2017-2020)

Certificate

I, Mr./Ms. Sherin Sunny, Roll No. 02390388817 certify that the Minor Project

Dissertation (BCOM-112) entitled “DIGITAL INDIA: HOW FAR DID

DEMONETIZATION HELP ” is done by me and it is an authentic work carried out by

me. The matter embodied in this project work has not been submitted earlier for the award

of any degree or diploma to the best of my knowledge and belief.

Signature of the Student:

Date:

Certified that the Minor Project Report/Dissertation (BCOM-112) entitled

“Digital India: How far did demonetization help ”

done by Mr./Ms. Sherin Sunny, Roll No. 02390388817 , is completed under my

guidance.

2
 Signature of the Guide
Date:
Name of the Guide:

ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Ms. Neha Mangla who

gave me the golden opportunity to do this project on the topic “Digital India: How far did

demonetization help”, which also helped me in doing a lot of research and I came to know

about so many new things.

I am really thankful to her.

I am also very thankful to my parents and friends who helped me compile this project within

the limited time frame.

Sherin Sunny

B.com Hons

3
 CONTENTS

S No Topic Page No
1 Certificate (s) 2
2 Acknowledgements 3
3 List of Figures 5
4 Chapter-1: Introduction 6-7
5 Chapter-2: Data Presentation & Analysis 8-34
6 Chapter-3: Summary and Conclusions 35-36
7 References/Bibliography 37

4
Figure No Title Page No

1 Volume of cashless transactions 9

2 Share of payments system 11

3 Power to empowerment 17

4 E wallet business 19

5 Towards a cashless society 34

Chapter-1

5
 Abstract

We are living in arena of technologies and digital world. The digital world is a world where

the best possible use is made of digital technologies. The ‘Digital India’ programme, an

origination of honorable Prime Minister Mr. Narendra Modi, targets to make government

services available to people digitally and enjoy the benefit of the newest information and

technological innovations. It is a programme to prepare India for a knowledge future. The

motive behind the concept is to connect rural areas with high speed internet network and

improving digital literacy. Digital technologies which include cloud computing and mobile

applications transpire as the catalysts for shaping our world.

Keywords:

Digital, Empowered, E-Governance, Internet, Infrastructure, Accountability

Introduction

Digital India is a campaign launched by the Government of India to ensure that Government

services are made available to citizens electronically by improved online infrastructure and

by increasing Internet connectivity or by making the country digitally empowered in the field

of technology. The initiative includes plans to connect rural areas with high-speed

internet networks. Digital India consists of three core components, (a) development of secure

and stable digital infrastructure, (b) delivering government services digitally, and (c)

universal digital literacy.

Today, we can’t imagine our life without technology. In the twenty-first century, one of the

most important technologies is the power of the digitization. The system, which allows

individuals to communicate globally. Digital India is a programme to transform India into a

6
digitally empowered society and knowledge economy. It was launched on 2 July 2015 to

ensure that government services are made available to citizens electronically by improving

online infrastructure and by increasing internet connectivity or by making the country

Digitally empowered in the field of technology.

Digital India is an umbrella programme which covers many departments. This initiative will

ensure that are government services and information are available anywhere, anytime on any

device that are user friendly and secured with Digital India project, the government is ready

for the big programme by connecting every service with e-power. 257 | P a g e The aim of

Digital India to available Digital services in Indian languages. Digital India initiative could

help in achieving the objectives of:

• Education for all.

• Information for all.

• Broadband for all.

• Leadership structure.

CHAPTER-2

Need for digital economy

7
The Digital India programme has been launched with an aim of transforming the country into

a digitally empowered society and knowledge economy. The Digital India would ensure that

Government services are available to citizens electronically. It would also bring in public

accountability through mandated delivery of government’s services electronically; a Unique

ID and e-Pramaan based on authentic and standard based interoperable and integrated

government applications and data basis.

The Digital India programme has been launched with an aim of transforming the country into

a digitally empowered society and knowledge economy. The Digital India would ensure that

Government services are available to citizens electronically. It would also bring in public

accountability through mandated delivery of government’s services electronically; a Unique

ID and e-Pramaan based on authentic and standard based interoperable and integrated

government applications and data basis.

Promotion of Digital India

The Indian government’s 2017-18 budget, which was released today, included a range of

measures supporting the development of a digital economy. In addition, initiatives were

announced to leverage ICT in the areas of tax assessment, education and health. INR 90

billion (USD 1 billion) has been allocated for Urban Rejuvenation Mission & Smart Cities

Mission.

Promoting digital payments

8
The government has been promoting digital payments after banning 86% of Indian currency,

by value, in November 2016 in a bid to crackdown on black money. 

Fig-1 Volume of Cashless Transactions

The focus would be on rural and semi-urban areas, where financial inclusion is itself a

challenge, through post offices, fair price shops and banking correspondents. The government

is targeting a combined total of 25 billion digital transactions for 2017-18 through all digital

channels.

The government will launch two new schemes to promote the usage of BHIM (Bharat

Interface for Money) app for digital payments, namely the Referral Bonus Scheme for

individuals and a Cashback Scheme for merchants. The government might also take steps to

promote and possibly mandate petrol pumps, fertilizer depots, municipalities, Block offices,

road transport offices, universities, colleges, hospitals and other institutions to have facilities

for digital payments, including the BHIM App. A proposal to mandate all Government

receipts through digital means, beyond a prescribed limit, is under consideration.

9
The Government plans to launch Aadhar (a 12 digit unique identity number linked to a

citizen’s basic demographic and biometric information) Pay, a merchant version of Aadhar

Enabled Payment System (AEPS). This will be specifically beneficial for those who do not

have debit cards, mobile wallets and mobile phones.

Banks have targeted to introduce additional 1 million new Point of Sales (PoS) terminals by

March 2017. They will be encouraged to introduce 2 million Aadhar-based PoS by

September 2017.

Miniaturised POS card reader for m-POS, micro ATM standards version 1.5.1, Finger Print

Readers/Scanners and Iris Scanners will be exempted from a range of customs and excise

duties.

The Financial Inclusion Fund (a fund set up with the National Bank for Agriculture and Rural

Development to forward the agenda of financial inclusion of excluded population) will be

strengthened to augment resources for taking up these initiatives.

The government will work towards early implementation of the interim recommendations of

the Committee of Chief Ministers on digital transactions.

The digital payment infrastructure and grievance handling mechanisms shall be strengthened.

The government plans to undertake a comprehensive review of the Payment and Settlement

Systems Act, 2007, following the recommendation made by the Committee on Digital

Payments constituted by Department of Economic Affairs for structural reforms in the

payment ecosystem. As a first step, it is proposed to create a Payments Regulatory Board in

the Reserve Bank of India (the central bank for the country), which will replace the existing

Board for Regulation and Supervision of Payment and Settlement Systems.

10
The budget presented incentives along with restrictions to encourage cashless and limit cash

transactions. Small and medium tax-payers will be provided tax incentives on non-cash

turnover. Charitable trusts will be allowed to accept cash donations only up to INR 2000

(USD 30), down from the current INR 10,000 (USD 148). No transaction above INR 300,000

(USD 4449) would be permitted in cash. The Income Tax Act will be amended. However,

details on how cash transactions will be monitored are not available yet. 

Fig-2 Share of payment methods in India

Internet access

The budget allocated INR 100 billion (USD 1.5 billion) to the BharatNet Project for 2017-18,

targeting high speed broadband connectivity on optical fibre in more than 1,50,000 villages

by the end of the year. A DigiGaon (Digital Village) initiative will be launched to provide

tele-medicine, education and skills through digital technology.

Health and education

11
The government plans to introduce Aadhar based Smart Cards for senior citizens,containing

their health details. A pilot will be implemented in 15 districts during 2017-18.

The government plans to launch the SWAYAM e-learning platform with at least 350 online

courses. This would enable students to virtually attend the courses taught by chosen faculty,

access high quality reading resources, participate in discussion forums, take tests and earn

academic grades. Access to SWAYAM would be widened by linkage with DTH (Direct to

Home) TV channels, dedicated to education.

Taxes

The budget proposes adoption of a strategy called RAPID (Revenue, Accountability, Probity,

Information and Digitisation) to maximise use of Information Technology to remove human

contact with assesses as well as to plug tax avoidance. The government will maximise efforts

for e-assessment in the coming year. There is also focus on utilising data mining capabilities,

both in-house and outsourced.

DEMONETIZATION IN INDIA:2016

On 8 November 2016, the Government of India announced the demonetisation of all Rs.500

and Rs.1000 banknotes of the Mahatma Gandhi Series The government claimed that the

action would curtail the shadow economy and crack down on the use of illicit and counterfeit

12
cash to fund illegal activity and terrorism. The sudden nature of the announcement and the

prolonged cash shortages in the weeks that followed created significant disruption throughout

the economy, threatening economic output

Prime Minister of India Narendra Modi announced the demonetisation in an unscheduled live

televised address at 20:00 Indian Standard Time (IST) on 8 November. In the announcement,

Modi declared that use of all Rs.500 and Rs.1000 banknotes of the Mahatma Gandhi Series

would be invalid past midnight, and announced the issuance of new Rs.500

and Rs.2000 banknotes of the Mahatma Gandhi New Series in exchange for the old

banknotes.

The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the

announcement. In the days following the demonetisation, the country faced severe cash

shortages with severe detrimental effects across the economy. People seeking to exchange

their bank notes had to stand in lengthy queues, and several deaths were linked to the rush to

exchange cash.

Initially, the move received support from several bankers as well as from some international

commentators. The move has also been criticised as poorly planned and unfair, and was met

with protests, litigation, and strikes against the government in several places across India.

Debates also took place concerning the move in both houses of parliament. The move

reduced the country's industrial production and its GDP growth rate.

By the end of August 2017, 99% of the banned currency had been deposited in banks: only

approximately Rs.14,000 crore of the total demonetised currency had been discarded, leading

analysts to state that the effort had failed to remove black money from the economy.

Causes for Demonetization

13
We have seen enough explanations by the Narendra Modi government of the provocation for

the demonetisation bombshell. The first and the foremost justification was that it would

reduce the huge pile-up of black money into a pulp of waste paper. It had also cited

counterfeit currency menace as an equally important urgency. Tagged with it was also the

reason of terrorist funding with counterfeit currency to unleash mayhem in India. At last

came the cashless economy argument. But with almost all the cancelled old currency notes

now set to return to banks, the black money argument appears to be fast petering out. And

with terrorist attacks continuing, the efficacy of demonetisation in containing the menace has

also come into serious questioning. Now remains the cashless economy argument to support

the move.

Over the last one month, the government announced a slew of measures to minimize the

severe inconvenience caused to ordinary citizens, labourers, farmers and other poor sections

across the board. The huge setback caused to the country’s economy due to slowing down of

trades and businesses on the wake of currency crunch is being passed of as temporary. While

many economists of highest stature have dissected the black money argument of the

government to show how the demonetisation move is actually going to end up as a vain bid to

stamp out corruption, most of the supporters and even top leaders from the ruling BJP have

been citing “common people’s support” to the move to drive home its sanctity. Not many

Modi-supporting economists have tried to put out any strong economic calculations and

arguments to rebut the claims made by the critics of demonetisation.

Effect of Demonetization on Digital India

Demonetisation is by far the single greatest positive disruptive move made in India that's

worthy of entering textbooks for a significant reason - it is a move that has affected all

subjects of the nation for better or worse. Better, as the benefits are clear and obvious - it

14
drives the nation towards a cashless economy ensuring transparency, increasing circulation

money in an erstwhile highly transactional economy, improving Direct Benefit Transfers

(DBT), leading to progress, curbing black money and allied illegal activities (including

terrorism). Worse, for a transitory period it disrupts the lives of innocent people, making

them leg around ATMs/banks and wait in serpentine queues. However, sandwiched in

between, demonetization has also given rise to a very positive consequence - an immediate

boost to e-transactions and the realization that the reality of a digital India can actually be

much larger than was imagined.

The buzz around this move on the web is filled with articles, criticles, tweets, blog posts;

most appreciating the move, some blaming its execution that involves making 86 per cent of

the nation's circulating cash illegal followed by the mammoth task of managing the mess that

requires the minting and distribution of INR 14.7 billion in new currency. With 12 per cent

Cash-to-GDP ratio, India is one of the most cash-intensive economies in the world, almost

quadruple in volume compared to other developing countries such as South Africa, Brazil and

Mexico.

So, it's tough to resume normalcy. That said, it's worth the trouble from Digital India’s

perspective.

The digital trigger

Developed countries across the world are thriving on plastic money. Surprisingly, some third-

world countries are also way ahead of India in volumes of e-transactions. While Kenyans

have been paying for goods through mobile phones for a decade now, India is stuck in

15
dealing with 90 per cent of its transactions in cash. People are used to cash transactions and

cash hoarding. Immunity to black money and inertia to change are gripping our economy.

And when nothing is pressing, we don't budge. Jan Dhan Yojana is a standing testimony to

that. The maximum populace didn't care to create bank accounts by paying as little as INR 1.

If not for demonetization, people would have made no effort towards e-transactions.

After demonetisation, villagers, local vendors and farmers are slowly getting used to digital

transactions. Once they get used to it, they will realise mode of advancement and a measure

to fight fraud. Urban India has been in the digital fold for a few years now. Demonetization

has also triggered the upscaling of digital platforms. For example, the surge in e-transactions

led TechProcess, India's largest cash management and payment solutions firm, to scale up its

technology platforms. TechProcess has also tied up with NumberMall, a rural e-commerce

player, to power around 1.5 million kirana shops. This needs a lot of investment in platforms.

Government initiatives such as Aadhar, Jan Dhan Yojana are also encouraging fintech

companies to upgrade themselves so that they can empower cashless transactions on a

massive scale. Firm is now looking at elastic models to deal with the situation.

16
 

17
 Fig-3 Digital India to empower

Bridging the Trust Gap

There's a certain digital divide between rural and urban India. And demonetization will be

instrumental in bridging that gap through an increased number of mobile transactions. People

will increase the use of mobile wallets for more and more transactions. Mobile devices are

fast becoming the gen-next Point of Sale (PoS) machines. Gradually, e-transactions will take

over CoD (Cash on Delivery) option as well. CoD has been a bottleneck. It still remains a

challenge on returns and consolidations, and puts extra pressure on the supply chain. Card

and wallet payments are going to benefit e-commerce the most. Also, through more use of

18
mobile phones, people will develop trust in mobile devices and Internet; something that is

vital for information sharing and financial inclusion. Mobile will not just be a mode of

communication but will become the key mode of transaction between businesses and

consumers. Demonetization will also help banks recover from high dormancy rates (idle bank

accounts), which currently lurk around 43 per cent.

Immediate Effect on Digital Industry

E-Wallets Bagged Big Business

While major ecommerce players suffered a dip in sales as well as order value, e-wallet

companies utilized this opportunity to the fullest and experienced their biggest business boost

yet.

19
 Fig 4- Share of various e-
wallets business in the e-
wallet market

20
Rationale behind demonetisation

The first claim is that demonetisation would plug terror financing. The Prime Minister asked:

“have you ever thought about how these terrorists get their money? Enemies from across the

border run their operations using fake currency notes…Many times, those using fake five

hundred and thousand rupee notes have been caught and many such notes have been seized”

(PMO 2016).

The second claim is that demonetisation would help unearth “black money.” Clearly, the

Prime Minister was referring to black money hoarded in cash; he asked: “which honest

citizen would not be pained by reports of crore worth of currency notes stashed under the

beds of government officers? Or by reports of cash found in gunny bags?” (PMO 2016).

There are two ways in which this is supposed to happen: one, unaccounted cash is not

returned to the banking system due to fear of detection; and two, when unaccounted cash that

enters the banking system is either detected by tax authorities or voluntarily disclosed by the

depositors.

The third claim is that the unearthed black money would expand the fiscal space of the

government. One, when unaccounted cash is not returned to the banking system, the Reserve

Bank of India (RBI) can use the savings to pay the government a dividend. Two, unaccounted

cash that is voluntarily disclosed would be subjected to a 50% tax as per the Taxation Laws

(Second Amendment) Bill, 2016. Unaccounted cash not voluntarily disclosed but detected by

tax authorities would be subjected to a 75% tax. Further, the declarant would have to deposit

25% of the undisclosed income into the Pradhan Mantri Garib Kalyan Deposit Scheme

21
(PMGKDS) 2016, which would be used to finance “programmes of irrigation, housing,

toilets, infrastructure, primary education, primary health, livelihood, etc.”

The fourth claim is that demonetisation would help reduce interest rates in the banking

system. According to Arun Jaitley, Minister of Finance and Corporate Affairs, “banks are

now flushed with funds … and … these low-cost funds are going to be lent at a much lower

rate.”[ii] In his address to the nation on 31 December 2016, the Prime Minister further

claimed that demonetisation would reduce inflation in the economy.

The fifth claim is that demonetisation would help formalise India’s informal economy, reduce

the extent of transactions in cash and help create a “less-cash economy.” In fact, between

November 2016 and December 2016, the slogan of demonetisation has shifted from being an

attack on black money into a facilitator of transformation into digital transactions. A number

of incentives have been offered to induce people to use digital transactions.

Counterfeit Currency

The circulation of counterfeit currency in the economy is a fact. However, there is no

accurate estimate of the quantum of circulation of counterfeit notes. There are two major

sources of data on Fake Indian Currency Notes (FICN): one, the data released by the RBI on

FICN “detected by the banking system;” and two, the data released by the National Crime

Records Bureau (NCRB) on FICN “seized” by the police.

22
  The share of FICN “detected” by banks in the total number of `500 notes in

circulation was 0.000022% in 2013–14, 0.00002% in 2014–15 and 0.000016% in

2015–16. The share of FICN in the total number of `1,000 notes in circulation was

0.000021% in 2013–14, 0.00002% in 2014–15 and 0.00002% in 2015–16 (RBI 2016:

ch 8).[iii]

 The share of FICN seized by police in the total number of `500 notes in circulation

was 0.0037% in 2013, 0.0025% in 2014 and 0.0019% in 2015. The share of FICN

seized in the total number of `1,000 notes in circulation was 0.0038% in 2013,

0.0031% in 2014 and 0.0028% in 2015.

In 2012, the government had entrusted the Indian Statistical Institute (ISI), Kolkata with a

study on counterfeit notes. The results of the study were reported in the written answer to a

question in the Rajya Sabha in August 2015.[v] According to the answer, “the face value of

FICN in circulation was found to be about `400 crore” and “the value remained constant for

the last 4 years.” Media reports also quoted the ISI study as concluding that “the existing

systems of seizure and detection are enough to flush out the quantum of FICN being

infused.”[vi]

Thus, it is unclear if the quantum of FICN is significant to warrant overarching measures like

demonetisation.

23
Black Money

A crucial assumption in the demonetisation exercise is that “black money” is hoarded as cash.

Such a view is not just narrow, but also serves to defeat the larger purpose of preventing

illegal creation and storage of unaccounted money. To begin with, it is necessary to

distinguish between three concepts: “black economy,” “black money,” and what we may

refer to as “black cash.”

The term “black economy” may simply refer to a broad set of economic activities that

generate production and income flows that are under-reported or unreported or result from

economic illegality. A portion of incomes generated in the black economy, when saved, adds

to the stock of black wealth or, what we may call, “black money.” Because savings that

financed the acquisition of black money were themselves undisclosed, black money has been

defined officially as “assets or resources that have neither been reported to the public

authorities at the time of their generation nor disclosed at any point of time during their

possession” (GoI 2012a).

A part of the black money is held as “black cash.” According to estimates in the National

Institute of Public Finance and Policy (NIPFP) (1985), cash was a “very significant” form of

holding black money in only less than 7% of the cases. The prominent forms of holding black

money were: (a) under-valued commercial and residential real estate; (b) under-valued stocks

in business; (c) benami financial investment; (d) gold, silver, diamonds and other precious

metals; and (e) undisclosed holdings of foreign assets. More recently, open economy policies,

free-trade arrangements and financial liberalisation policies have expanded the scope for

holding black money in newer forms.

24
 

However, the very concept of black money is nebulous (NIPFP 1985). This is because the

same person who earns black income also typically generates income in white. He may

choose to declare his savings by claiming them to be a portion of his legitimate income.

There may, in other words, be black incomes but little or no black savings! No wonder then

that economists are not very fond of estimating the size of black money. In fact, we are not

sure if there could be any realistic estimate of black money in India. A commonly cited

estimate puts the size of the “black economy” between 19% and 21% of the gross domestic

product (GDP) (NIPFP 1985). Some other estimates note higher shares. According to Kumar

(2016), the size of the black economy amounted to about 62% of GDP in 2012.

The problem, however, is that transaction balances used for generating black income need not

be undeclared or illegal. For example, a firm can declare cash in its balance sheet and then

use it to procure inputs at inflated prices from an associated firm that operates from a low tax

jurisdiction. The profits can then be ploughed back into the firm, say, via the foreign

investment route. The expansion of liabilities that results may, at least temporarily, cause the

firm to hold even larger amounts of cash. In this case, there is nothing illegal about the

original holdings of cash or their subsequent augmentation. In fact, since transaction balances

are held legally as cash, they could well be held as deposits. The example, therefore, shows

that bank deposits can also finance black activities. This, of course, goes against the very

grain of what Gutmann suggests and what the current Indian government would have us

believe.

25
In the example we constructed above, black incomes are generated in the country but

received in a foreign land. But are not incomes from corruption (and many other forms of

illegalities) received as cash within the country. Would not demonetisation reduce these to

worthless pieces of paper? It would, but only to the extent that the recipients of such incomes

were foolish enough to continue to hold them as illicit cash. They could, in the first place,

choose to consume these incomes. But even when such incomes are saved, they need not be

held as cash. The savings can take the form of land, gold/bullions or financial shares.

Besides, there are ways to launder illicit cash. For example, “bill masters” may be engaged to

sell fake bills to those firms that wish to inflate their expenses (GoI 2012b). Illicit cash can

then be shown as a receipt for sales that never took place and, in this manner, made perfectly

legitimate.

Thus, only a small section, which stores cash in large amounts either for future use or as

revolving cash in business/trade transactions, is adversely affected by demonetisation. As we

explained above, even here, a big portion of cash might actually be legal or made legal

through myriad innovative ways. The assessment by I G Patel, the then Governor of the RBI,

of the demonetisation scheme of 1978 is as true for 2016 as it was for 1978:

such an exercise seldom produces striking results. Most people who accept illegal

gratification or are otherwise the recipients of black money do not keep their ill-gotten

earnings in the form of currency for long. The idea that black money or wealth is held

in the form of notes tucked away in suit cases or pillow cases is naïve. And in any case,

even those who are caught napping – or waiting – will have the chance to convert the

notes through paid agents as some provision has to be made to convert at par notes

26
 tendered in small amounts for which explanations cannot be reasonably sought (Patel

2002: 159).

In sum, no significant unearthing of illegal cash may be expected by demonetisation, even if

it might halt or slow down illegal cash-based operations for a while.

Fiscal Space

In the days soon after 8 November, the buzz in policy circles was that demonetisation would

extinguish close to `3 lakh crore of RBI’s currency liabilities. The enlarged net worth of the

RBI, it was hoped, could then be transferred to the government in the form of a special

dividend. The legal permissibility of such a transfer was a matter of speculation for almost a

month after the announcement. However, two points may be noted in this context. First, the

transfer of extinguished currency as dividend to the government was ruled out by the RBI

itself. Urjit Patel, the RBI Governor, clarified on 7 December that “the withdrawal of legal

tender characteristic status does not extinguish any of the RBI balance sheets ... They are still

the liability of the RBI.” Secondly, as on 10 December, an amount of `12.44 lakh crore in the

old series of notes had already entered the banking system. The public had time till 30

December to deposit old notes with banks, and they could continue to submit old notes to the

RBI until around March 2017. In other words, there is likely to be very little money left with

the RBI to extinguish.

Given that the dividend route is closed, the government would bank on the second version of

the Income Disclosure Scheme (IDS) to improve tax collections and enlarge the kitty of the

27
PMGKDS 2016. However, one wonders why such a scheme could not have been announced

without demonetisation. Perhaps, demonetisation has armed the government with evidence on

big ticket deposits that it can use to confront tax evaders. Yet, why would anyone deposit a

large sum into a bank after 8 November and invite scrutiny from tax authorities? According

to news reports, people may have split their large hoard of cash into smaller parcels before

converting them into deposits. The tax authorities now have the unenviable task of

establishing the trail from the original hoard of cash to multiple small-ticket deposits in the

millions of accounts spread across tens of thousands of bank branches.

What is likely to be the net revenue gain from demonetisation? As an illustration, let us

assume that `1.6 lakh crore are voluntarily disclosed (which is more than two and a half times

the amount disclosed in the first income disclosure scheme). A 50% tax on this amount would

result in an addition of `80,000 crore to government’s tax kitty. Besides, declarants are

supposed to provide an interest-free loan equal to one-fourth of the disclosed amount to the

government for a period of four years. Assuming a 6% interest rate on borrowings, the

government would then save `2,400 crore in each of the next four years. The present

discounted value of this income stream comes to `8,430 crore. The total revenue gain is then

`88,430 crore.

However, the government would also lose money. It will end up spending about `17,000

crore on printing and distributing currency, and conservatively, another `6,000 crore as the

interest cost (explained later) of managing the excess liquidity with banks. Let us assume that

2% of the nominal GDP is shaved off due to demand contraction; instead of growing at, say,

11.5% per annum, the nominal GDP would grow at 9.5% per annum. Taking the nominal

28
GDP (at market prices) of `135 lakh crore in 2015–16 and a tax-to-GDP ratio of 17%, the

combined loss of tax revenue to the centre and the states due to economic contraction would

amount to `45,900 crore.[vii] The total loss of revenues due to demonetisation would then be

about `68,900 crore. This does not include the compensation that government may have to

provide for toll operators (about `922 crore, as per estimates in the media) and the loss of

revenue from the sops announced on digital payments. The net revenue gain to the

government would then be `19,530 crore. Even if we are generous and assume that the

government actually gains `40,000 crore from the entire exercise, it would still work out to

just 1.3% of the combined revenue receipts of central and state governments in 2015–16.

In other words, it is hard to think of demonetisation as a game changer for government

finances.

Interest Rates and Inflation

According to Arun Jaitley, and a few media commentators, demonetisation would expand

credit supply and reduce interest rates in the economy. Such a claim betrays an incorrect

understanding, not only of India’s credit markets, but even more worryingly, of the process of

demonetisation itself.

Before dealing with this issue in detail, we need to, right at the outset, dispel a claim made by

the Prime Minister in his 31 December 2016 address. He had said: “the excess of cash was

fuelling inflation and black-marketing. It was denying the poor, their due. Lack of cash

causes difficulty, but excess of cash is even more troublesome.” What may drive inflation,

besides a sustained escalation of costs, is an excess of demand over supply. Demand, of

course, is backed by access to a means of payment, which may be held as cash or deposits. It

is thus conceptually erroneous to claim that a mere conversion of cash into deposits will

29
deprive economic agents of the means of payments to demand commodities. As a matter of

fact, after 8 November 2016, the poor, who are underserved by banks and mostly receive and

make payments in cash, were forced to spend less due to the denial of their rightful cash. The

“success” in controlling prices, in other words, was achieved by squeezing the consumption

budget of the poor.

The claim that demonetisation would result in lower interest rates can be rationalised through

a simple money multiplier process. Suppose `10 of cash in the hands of the public is

converted into deposits. Let us further assume that out of every `10 that banks issue as

deposits, they are required to hold `1 as cash reserve. As a result, banks will now have `9

worth of “excess cash,” which they lend to public and, which, assuming that the public is

discouraged from holding cash, returns as deposits. The cycle would then start afresh:

deposits will increase by `9, cash reserves by `0.90 and loans by `8.10. When all is said and

done, deposits, reserves and loans would have increased by `100, `10 and `90 respectively.

Another way to understand this process is to simply assume that the banks hold no more than

their required reserves by crediting `90 to the deposit account of their borrowers. Of course,

such an expansion of credit cannot come without a reduction in its price and demonetisation

has raised hopes that the interest rate on loans may fall in the near future.

There is, however, a fly in the ointment. What we are witnessing in India today is not a

permanent conversion of currency into deposits but a temporary measure that would last only

till the limits on withdrawals exist. Once the convertibility of deposits into cash is restored,

the multiplier process sketched above would start working in the reverse direction. As

deposits worth `10 are converted into cash, the banks, now holding less cash than they are

required to, would be compelled to extinguish loans worth `90 (and the corresponding sums

30
in the deposit accounts of their borrowers) from their balance sheets. Any increase in credit

on account of demonetisation would therefore be completely temporary.

There is more. The textbook money multiplier mechanism assumes that banks fix the overall

quantity of credit and its price is determined in the marketplace. In the real world, just the

opposite happens: banks fix the price of credit and its quantity is determined in the

marketplace by the activities of borrowers. To borrow terminology developed by Polish

economist Michal Kalecki, the quantity of bank credit is demand-determined whereas its

price is cost-determined. Commercial banks can always expand their lendable resources by

borrowing funds from the RBI at the repo rate fixed by the latter. The repo rate, in turn, sets

the floor for lending rates to various bank borrowers.[x] It is only when the stock of eligible

securities with banks, which the RBI requires as collateral in repo transactions, begins to run

thin that one can realistically talk in terms of a quantity constraint on their credit-creating

capacity.

Surely, there was no quantity constraint for Indian banks before demonetisation. As on 28

October 2016, the stock of government and other approved securities with banks stood at

`28,956 billion; this was about 29% of the demand and time liabilities issued to the non-bank

public, a figure well in excess of the 20.75% Statutory Liquidity Ratio (SLR) that the banks

are required to maintain.[xi] There was no constraint on the credit-creating capacity of banks

to begin with, and the finance minister’s claim that demonetisation would result in an

expansion of credit appears grossly exaggerated.

Since the RBI acts as a price fixer in money markets, it seeks to mop up the enlarged cash

reserves of banks either by activating its reverse repo window or through the outright sale of

government securities.[xii]Between 30 November 2016 and 6 December 2016 alone, the RBI

31
had mopped up more than `4 lakh crore from the commercial banking system.[xiii] The

impact of expanded deposit base would, therefore, be not so much to enlarge credit to private

borrowers as to shift the ownership of Government securities (G-Secs) and Tresury bills (T-

Bills) from the RBI’s balance sheet to that of the banks.

It is hard, then, to see how interest rates in the banking system would fall due to

demonetisation; any decline in interest rates would only be transient.

On the other hand, excess liquidity situation, while doing little to improve credit supply, will

actually have adverse fiscal implications. This is because the RBI, a public institution whose

profits are transferred to the central government budget, will lose its income earning assets to

commercial banks. Moreover, to the extent that market stabilisation bonds are used to mop up

excess reserves from the banking system, interest payments will have to be made directly

from the central government budget. The exact magnitude of these costs is anybody’s guess

at the moment. But if `12 lakh crore is mopped up by the RBI for a period of just one month,

assuming an annual interest rate of 6% paid over 12 equal monthly instalments, the total

interest outgo of the central government would be about `6,000 crore.

 Less-cash Economy

Given the inordinate delay in the printing of new currency, the government has begun a

campaign for less-cash banking. It is argued that less-cash banking would formalise a large

share of India’s informal economy by bringing more firms into the tax net.

A higher share of cash in total payments does not necessarily indicate a larger shadow

economy. According to a Deutsche Bank’s study in 2016,

32
 

surveys and estimations for different countries show that a high share of cash in total

payments does not always indicate a large shadow sector: Germany and Austria are

cash-intensive countries with relatively small shadow economies. In Sweden, cash

payments have become rare but the country still has a mid-sized shadow economy.

However, in many cases the degree of cash usage and the size of the shadow economy

do seem to be related: Spain, Italy and Greece are characterized by intense cash usage

and large shadow economies while countries with relatively low cash usage tend to

show low levels of shadow activity (Anglo-Saxon countries as well as Switzerland, the

Netherlands or France). Given these diverse findings, it becomes clear that cash is

scarcely the reason for conducting shadow activities (Mai 2016:  7–8, emphasis added).

Similar, again, is the relationship between corruption and cash. There are cash-intensive

countries with lower perceived corruption and less cash-intensive countries with higher

perceived corruption. The “corruption perception index” of Transparency

International represents the perceived level of public sector corruption on a scale of 0 (highly

corrupt) to 100 (very clean). In 2015, the index was higher for many economies with higher

currency–GDP ratios (75 for Japan and Hong Kong; 86 for Switzerland; 81 for Germany; 76

for Austria) and lower for many economies with lower currency–GDP ratios (44 for South

Africa; 38 for Brazil; 35 for Mexico; 36 for Indonesia).

There are also many reasons why cash is preferred by firms, particularly small and micro-

enterprises. Transaction costs in cash transactions are low; in particular, costs of book-

keeping are minimised by relying on cash. The use of digital transactions is expensive as each

33
transaction invites a 2%–3% tax. Cash transactions may also be convenient because of the

immediacy of realisation without delays of bank transfers. In many cases, informal credit is

available to small and microenterprises only as cash, and needs to be repaid too as cash. In

other words, forcefully formalising a fragile informal sector may actually end up eliminating

the minuscule margins on which these firms survive.

Finally, cash leaves no trail, while digital payments leave a trail. For this reason, the potential

for state surveillance, violation of privacy and abuse of civil liberties rise significantly with

the replacement of cash payments with digital payments. New sources of metadata on

everyday transactions of citizens are emerging; big data analytics is increasingly becoming

big business. Such personal data of citizens turn into commodities in the grey markets,

resulting in a breakdown of trust between the state and its citizens. While strong laws on

privacy and cyber-security exist in many Western economies, Indian legal system is marked

by the absence of such legal safeguards. The introduction of Aadhaar, and its expansion into

the Orwellian idea of India Stack and the JAM (Jan Dhan–Aadhaar–Mobile) trinity, present

new threats to the freedoms of Indian people that have not been adequately appreciated in the

public discourse on cashless transactions.

34
Fig-5 India towards a cashless society

35
 CHAPTER-3

CONCLUSION

India would become a very powerful digitally connected world. This would lead to a good

architecture for electronic delivery of service. The Digital India project provides a huge

opportunity to use the latest technology to redefine the paradigms of service delivery. A

digitally connected India can help in improving social and economic condition of people

living in rural areas through development of non-agricultural economic activities apart from

providing access to education, health and financial services. However, it is important to note

that ICT alone cannot directly lead to overall development of the nation. The overall growth

and development can be realized through supporting and enhancing elements such as literacy,

basic infrastructure, overall business environment, regulatory environment, etc. Further,

Security should be the most important area at all level of operation for the digitally

empowered knowledge economy of the country.

Demonetisation has certainly paved the way to cashless but it will take a much longer time to

be total cashless. This may, in fact, take a few years.

To put it in perspective, as of March 2016 RBI had estimated that India has a total of 24.5

million credit cards and 661.8 million debit cards in operation, all steadily rising; with

Indians preferring debit to credit cards. Conversely, in terms of usage, debit card transactions

at the point of sale (PoS) terminals accounted for only 12 per cent of volume and 6 per cent

of the value of transactions. The average number of card transactions per inhabitant is

amongst the lowest in the world at 6.7.

36
Limitations of the study

 Limited Applicability

Finding data to suit a specific project is very cumbersome. Collection and use of secondary data

requires a lot of handwork on the part of researcher. The secondary data may have three types of

variations. Which may hinder their use for the project at hand: (i) units of measurement may be

different, (ii) definitions and data classes may be different, data may be outdated (obsolete). To tackle

these difficulties. The researcher has to make necessary alteration in secondary data to make these

really suitable for use in the problem at hand.

 Doubtful Accuracy

It is difficult to find data do needed accuracy. Often, the available data are distantly related with the

research problem at hand. It is difficult to determine their accuracy for the present project. Moreover.

Some secondary data may be wrongly collected or fabricated by the research agencies who originally

collected them. Such data cannot be used for the present research project as their use would distort the

research results.

To know the accuracy and reliability, an evaluation of the available data must be arrived out.

Suggestions

I believe that the success of startups riding this wave can be attributed to various

technological advancements in Cloud, Big Data, and AI. Clearly, the vision of Digital India is

not short-term and requires considerable investment and a sustained push to create better

infrastructure and development of talent to support this transformation. If we can combine the

efforts in government policy and innovation that young Indians are creating today, India will

leapfrog the technologies of yesterday and emerge as the engine of global growth.

37
BIBLIOGRAPHY/REFERENCES

1. Introduction to digital India - https://en.wikipedia.org/wiki/Digital_India

2. Digital india: barriers & remedies -http://data.conferenceworld.in/ICRISMET/P256-

261.pdf

3. Digital India Programme: Importance And Impact - http://iasscore.in/national-

issues/digital-india-programme-importance-and-impact

4. Measures for promotion of Digital India- https://www.opengovasia.com/articles/7331-

measures-for-promoting-digital-economy-in-indian-governments-2017-18-budget

5. History of Digital India- https://en.wikipedia.org/wiki/Digital_India#History

6. Cash crunched economy- http://indianexpress.com/article/blogs/demonetisation-narendra-

modi-government-cashless-economy-cash-crunch-reasons-and-excuses-that-seem-more-

like-afterthoughts-4420233/

7. Demonetisation- https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

8. Effects of Demonetisation- http://businessworld.in/article/Demonetisation-And-Its-Positive-

Effects-On-Digital-India/09-02-2017-112700/

9. Rationale behind demonetisation- http://www.epw.in/journal/2016/53/web-

exclusives/economic-rationale-%E2%80%98demonetisation%E2%80%99.html

10. Pros and Cons of GST-http://businessworld.in/article/Pros-And-Cons-Of-Demonetisation-

For-The-Digital-Economy/07-12-2016-109343/

38
39