Cashless India is coming sooner than everyone thinks. This time its going to be leapfrogging conventional wisdom.
With this broad policy move for taking away Rs. 500 and Rs. 1000 bill, Modi government is trying to accomplish three major things:
1) Black Money: Most people who avoid the taxes and keep bills that are of high denominations. So with this policy move they have to bring that money into the Bank (for a deposit, which means bringing it into account).
2) Reducing Corruption: The bribes and parallel economy mostly works in cash. So by taking away these high denominations, the friction cost of doing the transactions has increased dramatically. Thereby decreasing these instances.
3) Digitizing financial systems: Most illicit transactions in India are cash transactions and were also used by state and non-state actors for funding. Digitized financial systems keep track of all transactions, which makes it easier to track the source and flow of funds.
The short run challenges:
1) Indian economy can’t sustain with the lower denominations of Rs 100 as a max bill ($1.5 apx). So the government introduced a higher bill of Rs 2000 ($30 apx), making it viable for higher value of transactions, but its not easy to put a new bill into circulation.
2) There will be a decrease in personal consumption spending. Lavish weddings, high property values, travel sector etc, will take a direct hit as the spending power is decreased (at least for the short run). It would probably affect India’s GDP in the short run.
3) India will face a cultural upheaval and maybe even a back lash. There will be a normalization of society where the “cash rich” upper middle class will have to manage their public persona in some way or decrease it level of influence, while the lower middle class will see themselves equating to the to them. The upsetting this apple cart will affect the cultural dispositions and will affect the way Indians live their lives.
So I believe this move will force the hand of Indian’s to move towards digitization and cultural shift in a big way. Adoption of Online payments and other related systems will increase dramatically. Leapfrogging years of stagnation, into a fintech world that is progressive and interconnected. Organic changes in Financial systems would have taken time and would have to go through major declines. With this move, the downturn will be hard but the upturn will be quick. Get ready for digital revolution in India!
About the Author
Vineet Katial is the founding director of Sky7 Ventures and the Owner of VistaMoney. This veteran businessman and investor is a founding member of TIE Detroit Angels and is on numerous boards for start-ups and charitable organisations. Mr. Katial has over 30 years of excellent professional experience. He played a significant role in the accomplishments of the organisations he previously worked for. He was a member of the group that established one of India’s earliest call centres, which is today among the biggest in the world. An enthusiastic businessman, he has consistently provided advice, knowledge, and experience to new firms.
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