Demonetization took India forward by 3 years – SBI

The demonetization of currency notes late last year has doubled the number of card transactions and helped push India’s payment digitisation by three years, State Bank of India said in a note.

“Even after seven months post demonetization, the transaction value is quite large and approximately double of what it had been corresponding month last year. If demonetization had not happened, it would have taken 3-years more for credit plus debit cards transactions on PoS terminals to reach the current level of Rs 700 billion,” said a report by the bank authored by the bank’s Group Chief Economic Adviser Saumya Kanti Ghosh.

“Demonetization has brought the nation at least 3 years ahead in digital payments,” he added.

The surprise withdrawal of 500- and 1000-rupee notes had created a severe currency crunch in the India’s economy in November and December last year, forcing a largely cash-based economy to make use of digital modes of payment, such as mobile phones and plastic.

The demonetization move has since been heavily criticized for failing to unearth the large amount of ‘black money’ or illicit income as promised. However, as a side-effect, the move did give a big push to both card payments as well as a mobile payment platform known as UPI or Unified Payments Interface, arguably the most advanced such system on its scale.

Usage of debit and credit cards was increasing at around 25% per year, but thanks to the demonetization, they have doubled in the last one year, according to SBI.

Since the currency quashing move, banks installed 1.2 mln extra point of sale terminals, also known as swipe machines.

Besides plastic, similar trends were observed in case of usage of wallets, prepaid cards, paper vouchers and mobile banking, SBI said.

Prepaid instruments such as wallets had transactions worth Rs 107 billion in May 2017 compared to Rs 51 billion in Nov’16, the note said.

Ghosh said usage of digital payment mechanisms will also bring down price inflation.

“We estimated a simple regression model by taking headline CPI inflation as dependent variable and credit + debit cards transactions on PoS terminals in Rs billion as independent variable,” he said, adding that the estimated model proved to be “statistically significant”.

“The results indicate an increase in Rs 100 billion transaction by credit + debit cards at PoS terminals will lead to around 1.1% decline in CPI inflation, ceteris paribus.

“Combined with a structural change in food inflation regime that we are witnessing India is well poised for a favourable growth inflation mix in the coming years,” the note added.