Demonetisation: Small firms see jump in cashless transactions; a silver lining?

On Thursday, a survey conducted by rating agency Crisil showed that micro, small and medium enterprises (MSMEs) in Tier-II cities and hinterland are shifting big way to cashless transactions, hinting at a ‘structural change’ in their operations. About 41 percent of MSMEs surveyed by Crisil said their clients have already shifted to cheque or electronic payment since the demonetisation, it said.

The agency covered 1,100 MSMEs between November 24 and December 24. Crisil’s managing director and chief executive officer, Ashu Suyash believes ‘a move to ‘less-cash’ transactions will eventually transform business models in the MSME sector.’

Bank debit and credit cards are photographed in this illustration picture at an office in Frankfurt, Germany, March 17, 2016. REUTERS/Kai Pfaffenbach - RTSB1YU


Not just MSMEs, there is an overall upward trend in the cashless transactions. According to an Indiaspend report ( read here), cashless payments in October 2016 rose 22 percent, compared with October 2015, indicating that Indians have been steadily more accepting of various digital payments modes since last year.

Similarly, money transfers using mobile banking and immediate payment system (IMPS)–wherein money is transferred instantly using text messaging or online banking–showed the highest increase in over 12 months ending October 2016. Mobile banking transactions grew 175 per cent, while money transacted using mobile banking grew 369% from October to October, the IndiaSpend analysis showed citing Reserve Bank of India (RBI) data.

The Modi government has rolled out a slew of initiatives to encourage people shift to digital transactions in early December. This include (read here) discounts on purchase of fuel and insurance products through digital modes, lucky draws for those who have migrated to cashless transactions and some changes at the government’s operations such as paying the wages to employees only through electronic mode (see the table below to see the progress on digital transactions).


Besides the digital push, the other obvious benefit of the demonetisation will come when more number of people being brought into the tax net. Almost 97 per cent of the total demonetized currency (about Rs 15.4 lakh crore) has already returned to bank counters.

Though this is a blow to the anticipations that some amount of black money will perish outside, the positive side of this is that almost all cash in circulation is now traceable to the source hence taxmen can a) dig out the illegal cash entered the banking system investigating suspicious bank account entries b) nudge more number of people to pay direct tax that’ll improve the tax to GDP ratio in the long-term. To be sure, this is a major task given the physical constraints of the tax department and size of the operation.

Some optimistic views have begun to come in. One of them is from Anand Mahindra, chairman and managing director of Mahindra Group, country’s leading SUV manufacturer, who said in a series of tweets, on Thursday, that there are signs of the economy adjusting to the ‘new normal’ citing the resilience at the tail end of the month. “December '16 auto & tractor retail sales showed resilience at the tail-end of the month, which augurs well for the economy. Even more interesting, our December Construction Equipment sales were up sharply; Evidence of Govt. infra spending gaining ground (Sic),” said Mahindra.

Mahindra’s words gives hope of a revival post the short-term pain. But, to know whether this indicates the beginning of a sustainable revival after the November slowdown, one needs to wait for a more data in the approaching months.

As a matter of fact, the demonetisation resulted cash-crunch is sure to inflict pain on the economy in the short-term, the signs of which is already visible. The Crisil survey, mentioned above, also talks about short-term jitters on the economy. Overall, growth estimates for FY 2017, which was expected at 15-20 per cent before demonetisation, is now seen at 6-8 percent, it said.

“Those affected the most are from the traditional sectors with high reliance on cash transactions such as textiles, agricultural products, steel, consumer durables, construction and automobiles. Unorganised players (less than 10 employees) are expected to struggle more than their organised counterparts, with 37 percent of them likely to report negative revenue growth in the second half compared with a quarter of organized players,” Crisil said.

But, despite the short-term pain, as many as 41 percent of the MSMEs expect to do better in the second half of this fiscal, while 29 per cent expect de-growth, the Crisil report says.

The Modi government will do well by pushing its infrastructure spending aggressively to get the economy back on track at the earliest. Union finance minister, Arun Jaitley’s budget speech slated for 1 February will be awaited keenly for cues on government’s vision and roadmap on infrastructure push and any short-term stimulus the government is planning in the form of tax reductions to small entrepreneurs and individuals to stimulate demand.

For now, the jump in non-cash transactions of MSMEs is a silver lining in the demonetisation cloud.

Published Date: Jan 06, 2017 17:02 PM | Updated Date: Jan 06, 2017 18:37 PM

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