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Demonetization: Are we ready to move to a ‘Cash-less’ economy?

The recent demonetization of high valued currency notes by the Indian government has created interest in both national as well as international circles with debates ranging from intent to its long-term effects on the economy. While this move will certainly assist in temporarily weeding out some proportion of black money and slow down funding of anti-national activities, it is its effect on ‘cash’ that needs to be closely tracked. Cash currently comprises over 12% of GDP with more than 68% of transactions by value and 95% by volume still being cash based in the country. While a cashless economy certainly sounds like a herculean task given these statistics, the government has been taking major steps in this direction in the last few years.

Financial Inclusion and Access to Internet Key

Several measures have been taken in the last few years to ensure financial inclusion and improve digital connectivity. The Prime Minister’s Jan Dhan Yojana (PMJDY) has added 25.51 crore accounts to date since its launch in mid-2014. Moreover, RuPay debit cards issued with every PMJDY account was aimed to familiarize the poor hitherto unaccustomed to the use of plastic money to give it a try. Efficient use of Aadhar to ease KYC norms have resulted in easing the process of opening bank accounts. The goal of ensuring every household in India holds a bank account seems realistic today as compared to a few years back.

By 2020, India is expected to have 730 million internet users, with 75% of new user growth expected to come from rural areas. While 71% of the estimated 371 million mobile internet users are from urban India currently, the number of mobile internet users from rural areas in 2015 was double that in 2014 and is witnessing unprecedented growth this year.  The Digital India drive is set to provide broadband connectivity to over 250,000 gram panchayats across India and increase adoption of data enabled services.

Revolution in Payment Interface

The recently launched Unified Payment Interface (UPI) effectively taps into smartphones to transfer money between accounts using a virtual payment address (VPA) and eliminates the need to key in account and bank details for every transaction. Mobile wallet providers like Paytm and Mobikwik are targeting a much larger base of smartphone users even as they are standing in long winding queues in front of ATMs enticing them to move away from cash to their products. Mobile wallets are forecasted to witness 60x growth in number of transactions till 2020.

Participation of Key Stakeholders

While this move is inarguably a very expensive and bold experiment by the government with more than 1.28 lakh crore estimated to be the cost of this entire exercise, it will need to be supplemented with many more stringent actions if the country must achieve monetary as well as moral benefits out of it. At the same time, it is very important for all stakeholders including the RBI, banking institutions, businesses as well as the common man to play an active part and do their bit to move towards a more transparent economy.

The government on its part is already working on stringent Benami transaction laws as well as sharing of foreign account information to tighten and monitor flow of money into obvious black money havens of real estate and foreign accounts. Laws to declare gold purchases and track flow of cash into bullion need to be set up soon. Implementing GST soon will pave the way for uniform taxation.  The RBI needs to look at reducing transaction charges on card payments and levy a penalty on cash withdrawals to discourage use of cash (over 90% of debit card transactions currently are cash withdrawals).

Banks will need to play a major role in educating rural India of the advantages of moving to digital payment methods and must gain the trust of their customers through timely and innovative actions. Micro ATMs and deployment of micro-finance circuits to educate villagers would be a good start.

Businesses need to realize the advantages of transparency and build effective auditing mechanisms to ensure clean book keeping. The common man needs to actively adopt digital payments where possible, educate his immediate network on its usage and adopt tax compliance.

Measures of Success

How do we measure the success or failure of this unique exercise? As events unfold in the coming months, it will be important for us to keep track of three major parameters: the government’s sincerity in cleansing the system, people’s ability to adapt to change and ability of law makers to ensure compliance. A few quantifiable measures are listed below:

  1. Deposits in banks due to demonetization by Dec 30 2016.
  2. Number of tax payers in 2016-17 (currently, this number is a dismal 1% of total population).
  3. Year over Year increase in tax collection (both from amnesty measures as well as yearend).
  4. Cash transactions as a percentage of total transactions every year up to 2020.
  5. Total dormant bank accounts by 2020 (currently, 43% of bank accounts are dormant).
  6. mWallet usage every year up to 2020.

The not-so-quantifiable parameters like the government’s intentions will be the topic of many debates to come. For the common man however, this is a golden opportunity to   break away from a cash based economy to a ‘less-cash’ economy to build a much more transparent India for our future generations.

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Source: RBI
Cash withdrawals form over 90% of debit card withdrawals
The rapid rise of m-wallets

References:

  1. Digital Payments 2020: The making of a $500 billion ecosystem in India by Boston Consulting Group & Google
  2. http://www.rupaycard.info/
  3. http://www.thehindu.com/business/Industry/175-million-new-bank-ac-in-india-in-threeyears-world-bank/article7109166.ece
  4. http://www.nasscom.in/sites/default/files/Article_News/PR_NASSCOM_AKAMAI_Ri se%20of%20Internet_17082016.pdf
  5. Future of Digital Content Consumption in India, January 2016, Ernst & Young
  6. http://pmjdy.gov.in/
  7. http://economictimes.indiatimes.com/news/economy/finance/recall-could-cost-a-massive-rs1-28-lakh-crore-says-cmie/articleshow/55608552.cms

Best Place to Source your Products, India or China?

“Low cost country sourcing” has been the tried and tested mantra of the supply chain industry.  It’s no longer just the big boys who are capitalizing on the advantages of low cost labor from preferred manufacturing destinations such as China and India, but even the mom-and-pop businesses have begun to take it up.  Whether you are looking for cost effective suppliers of various products or for a state of the art manufacturer to get your products manufactured, China and India provide  numerous options.

So which of these destinations do you go with?  It makes a lot of sense to start your search for suppliers or manufacturers from these countries by comparing them in the first place. Each of these countries has its own set of advantages and disadvantages, but they  hold on to some similarities at the same time. These similarities are many but can be essentially summarized into a few areas.  One major area is the relatively inexpensive yet well-educated workforces of these two countries.  The other, both are capable of deploying world class manufacturing processes and the two countries are fairly close in terms of factory productivity. This, however, is where the similarities end and differences begin.

Typically what you will encounter when sourcing or manufacturing from India are logistics and labor issues which might hamper timely deliveries. Logistics problems experienced by Indian companies can be attributed to poor infrastructure and power.  Additionally, labor issues may create further delays and  strikes or local political activities may be a cause of extended disruptions.  Also, the rapid growth of the Indian economy over the last two decades has boosted the spending power of the 300 million strong middle class population. This has provided local manufacturers with an expanded domestic market that now competes with orders from outside India’s shores.

China, on the other hand, has invested heavily on state-of-the art infrastructure and power; it boasts of some of the most technologically advanced factories and ports. The China government quickly counters labor disruptions while constantly aligning the need for such tactics with larger nation building goals. This has worked to produce a minimally disruptive labor force. The picture is quite different  across the border, in India. In the world’s largest democracy, labor unions and local political parties play an omnipresent role in setting labor standards, sometimes at the cost of production efficiency or continuity.

On the brighter side, India has a significant advantage over China. This is due to the fact that the Indian exporters have a better understanding of western business processes and culture.  Additionally, India has strived to take greater responsibility for quality whereas China still has the reputation for cheap and low quality products.  India could adopt English as its informal national language due to the British colonial influence.  Majority of the Indian population gets an exposure to the English language from early school years and all domestic businesses are conducted in this language.  China, on the other hand, has only recently made efforts to get its population comfortable with English as a way to respond to the demands of rapid globalization.  The government has rolled out aggressive polices to upgrade the English language skills of its employees while building frameworks to promote English-language education in schools.

Both India and China have their similarities and differences within the global sourcing landscape. These nations continue to be the leading destinations for “low cost country sourcing”. China clearly leads when we consider the condition of its infrastructure and stability of its labor. But India makes up for these with better knowledge of western cultures and English, as well as with its continued attention to quality. As a customer, it is you who needs to  carefully evaluate the production capabilities, quality systems and logistics network of the suppliers in order to be able to make the right “To source or not to source” decision . But remember, the suppliers’ capability to deliver is also dependent on the social and political state of their countries.

Summary:

The comparative discusses low cost sourcing options from India and China, the similarities and differences between the two countries within the global sourcing landscape are analysed.

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