For many decades, India has been a cash-driven economy that frequently facilitated the generation of unaccounted money through unreported deals and transactions. This black money or parallel economy hurt the overall economy, created inflation and resulted in just 1% of the people paying income tax.
All this is changing now. And fast. From street vendors to temple priests, a large number of Indians are embracing what promises to be a new financial architecture with widespread adoption of digital finance or smartphone-based payments and financial services.
Widespread adoption of digital finance or smartphone-based payments and financial services can increase the GDPs of all emerging economies by 6%—or a total of $3.7 trillion—by 2025.
Real estate giants and jewellery dealers are reporting a slowdown in high-value transactions after the government's decision to demonetise high value notes. Nearly 86% of cash in the world's seventh largest economy needs to be replaced.
So we have large queues of people outside ATMS as well at banks where they clutch wads of old ₹500 and ₹1000 currency notes to exchange them with new valid ones. But there is no stopping for millions of small shop-owners across the country—from Rishikesh to Dharuheda to Indore to Jamshedpur—from adopting digital wallets and serving their daily customers.
Even bankers are encouraging people to move from hard cash to electronic transactions. The massive inflow of old ₹500 and ₹1000 currency note deposits in banks will eventually benefit the people with softer interest rates on loans.
Very soon, India could see significant expansion of a cashless economy and a deepening of the digital footprint of consumers. This will in turn facilitate more accurate evaluations of creditworthiness of loan applicants and enable instant credit decisions by banks and other lenders.
According to consulting major McKinsey & Co, widespread adoption of digital finance or smartphone-based payments and financial services can increase the GDPs of all emerging economies by 6%—or a total of $3.7 trillion—by 2025. This is the equivalent of adding an economy the size of Germany to the world and could create up to 95 million new jobs across all sectors. The report says India could add as much as 10 to 12%.
On a global level, there is an acceleration of disruption taking place in the global financial services industry, with more capital than ever being invested in startups and established ventures that are creating new financial products and solutions. Over the last two years, India too has seen a surge in fin-tech startup investments as more services have become digital payments-friendly than ever before.
A smartphone boom—fuelled by affordable 4G smartphones that aggressive Chinese vendors have flooded the country with—has added impetus. Telecom operators are adding their spectrum resources to expand services.
As the world witnesses a decade of disruptive innovation, India's moment is here and now.
As the government prepares for more tough measures on currency management and steps to prevent the build-up of black money again, many experts believe that the move to ban is positive for investment and will result in disinflation. All temple trusts have been asked to deposit donations in banks for increasing the circulation of small currency, desperately needed after the scrapping of high-value bank notes. (Interestingly, though, temples and gurudwaras have also started accepting offerings by devotees through mobile wallets!)
From next year, the Goods and Services Tax (GST) can also be effective in curbing the generation of black money. Efficient transaction tracking (of purchases and sales) under the GST will ensure that no transaction goes unreported and this could limit the generation of black money.
The size of this shadow economy is estimated to be as much as 20% of India's entire GDP. Demonetisation is part of a wider project to draw Indians into the formal economy and to get them to start paying taxes they owe.
As the world witnesses a decade of disruptive innovation, India's moment is here and now. Digital technologies offer conveniences such as ease of use. Secure login, ease of transaction and ease of access are structurally embedded into the architecture. New offerings from mobile wallet companies are poised to change the way India transacts. I am confident that wallets will add immense value to Indian retailers and users—and benefit our economy.
The writer is co-Founder of MobiKwik.