Why a note in hand is worth two in the account
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Behavioural economics suggests people are willing to forego future gains if they see clear but smaller immediate gains. If only the government had taken a leaf out of this subject before demonetizing high-value currency notes. With 86% of their cash snatched away in one swell swoop, Indians didn’t feel compelled to go digital. Instead, they tightened the hold on their wallets because they felt poorer.
For all the vows to go digital and the chest-thumping in the fintech space, data from the Reserve Bank of India (RBI) shows that the total value of all non-cash transactions in December was just 10% higher, compared with the average during the period between April and October. The performance of non-cash channels during the two demonetization months of November and December has been anything but impressive, as shown in the chart. The volume of transactions fell 7% in November from the previous month although in December, transactions rose 24%.
Yes, the data shows an uptick in the volume of all non-cash channels, but compare that with the previous year averages and there is nothing to rejoice about. The average volume of all digital transactions had grown 30% in 2015-16 and 20% in 2014-15. Digging into some details reveals that the biggest jump in transaction volume was seen in mobile wallets which rose 54% in December from the previous month. Paper clearing, or cheques, saw the next biggest rise of 49%, with transactions amounting to Rs6.8 trillion in December.
This means Indians have been going digital slowly over the past few years. It would be unfair to write off the impact of demonetization as transaction volume in mobile banking and wallets have grown exponentially. But with cash being infused through printing of currency notes, it would be interesting to see whether the volumes hold up.