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Is Digital India Also Made in China?

Dec 27, 2016

In this issue:
» Have We made the Fake Currency Issue a Mountain Out of a Molehill?
» E-Commerce Firms Struggle...
» ...and more!
00:00
Ankit Shah, Research analyst

Last evening, I was booking train tickets for my in-laws. The moment I opened the IRCTC website, a message popped up on my screen. Here's an excerpt...

  • Government of India is encouraging people to move towards a Cashless Economy.

    The advantages to citizens of a country in a Cashless Economy are:

  • Cash need not be carried to avail goods and services. Risk of carrying currency notes and loss of hard earned money can be avoided.
  • Extra payment on account of non-availability of change is avoided resulting in payment of what is actually due to be paid. Transaction costs are likely to be reduced.

Are these really big advantages for the citizens of India?

Let me fill the gaps in the government's message.

The government says that the risk of carrying currency notes and loss of hard earned money can be avoided by digital transactions. But the government does not talk about the hassles involved in digital transactions.

My personal experience...

In the last one month, there were two instances in two separate restaurants where the point of sale (PoS) machine refused to work. In one case, it was due to poor internet connectivity. The other one just hung up.

The government says that extra payment on account of non-availability of change is avoided.

This is true but does the government not know about convenience fees, transaction charges, services charges, etc? Users and vendors have to pay this over and above the actual cost. Didn't the government itself impose these charges? Aren't these also 'extra payments'?

We can easily avoid all this with cash.

At this point, let me admit that I am a big fan of the 'digital economy'. I think it's revolutionary to have the digital platforms for making many of your daily economic transactions. It's time-saving and super easy. Personally, I love the idea of a digital economy.

What raises my apprehension is this stubborn push towards a 'cashless economy'.

My colleague Kunal Thanvi rightly questioned this in yesterday issue:

  • Is India ready for this transition?

    Consider this:
  • Only 15% of India's one billion wireless subscribers have a broadband connection
  • Around six lakh villages do not have adequate mobile or internet connectivity
  • India has only around 15.1 lakh point of sales machines
  • These are disturbing points that stand in way of India's digitisation.

The big point that many backers of Digital India miss is that the 'Digital' aspect of Digital India is less India and more China.

We already have 'Made in China' written over most of the electronic gadgets you use.

But it's not just smartphones, even mobile wallets companies - vehicles of Prime Minister Modi's Digital India dream - seem to be made in China. Chinese e-commerce behemoth Alibaba has over 40% stake in Paytm.

In a recent issue of The Vivek Kaul Letter, Vivek highlighted the dangers of Paytm as a private monopoly.

So what is the hidden story behind Digital India that no one wants to talk about?

The answer: The global war on cash.

We wrote about this in detail in The Inner Circle issue on 14 November. Here's what's going on.

  • Speaking at an event in Northern Ireland last year, Andy Haldane, the chief economist of the Bank of England, announced that, "Perhaps central bank money is ripe for its own great technological leap forward."

What technological leap forward was he talking about? He spoke about governments around the world abolishing paper currency and then said,

  • "One interesting solution would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily."

This is the grand plan. Force people to stop saving and spend whatever they earn. This along with negative interest rates will fuel a worldwide economic boom... or so it is hoped.

I believe this is dangerous and I don't know how this will play out. But there is no doubt in my mind that Digital India and demonetisation are related to the global war on cash.

This may not have been a huge worry if not for the Chinese firms. They do worry me. Many Chinese technology firms are directly or indirectly backed by the Chinese government. They are aware of the global war on cash and want to cash in on it.

Are we offering them a free ride?

03:15

It's no secret that political parties are a kind of black hole to black money. Much of these donations to political parties, being below the limit of Rs 20,000, happen in cash and remain unaccountable (one must note that political parties are currently not required to publicly disclose contributions of up to Rs 20,000).

So while you and I need to show an identity proof while depositing our old Rs 500 and Rs 1,000 notes into a bank account, political parties can continue to receive donations of up to Rs 20,000 in cash. And they need not declare who gave those donations.

Not to mention that almost three fourths of the cash donations are by corporates, making 1,866 political parties a perfect breeding ground for crony capitalism.

Will Mr Modi close the loophole allowing political parties to launder black money?

We are not so sure. After all, there is a huge conflict of interest here.

But then why leave this to political parties when there is a scope that we as citizens of India can put an end to this discrimination and anomaly.

My colleague Vivek Kaul is on a mission to get us EQUAL RIGHTS.

Vivek has initiated a petition to the President of India to request him to set things right.

Thousands have already signed the petition.

He needs 25,000 signatures before 6th of January to kick this off. Already, over 5,000 people have signed.

In case you haven't, it's time to do your bit now.

Sign the petition, and become an agent of change.

03:45 Chart of the Day

While the future of digital India is unknown, there is one thing that everyone seems to be sure of; the end to the menace of fake currency notes. Fake i.e. counterfeit currency was responsible for innumerable illegal activities in India. It is certainly good that demonetisation has put the brakes on it.

However, no one seemed to have an estimate about the size of this problem. One might have assumed that the government would have a good idea about it. After all the Prime Minister himself cited fake currency as one of the major reasons for the sudden demonetisation announcement.

Now we finally have some data to talk about. The numbers show that fake currency is a tiny fraction of the total banknotes in circulation.

Fake Currency: Mountain or Molehill?


Data released by the home ministry in an answer to a Lok Sabha question, shows that government agencies seized counterfeit currency worth Rs 1,551 million between 1 January 2013 and 30 September 2016. This is a mere 0.01% of the amount of currency demonetised. It is even lower if we consider the total currency in circulation of about Rs 17 trillion as on 30 September 2016.

Of course, the total amount of fake currency would be much larger than the amount seized. But even if it was a 100 times larger, it would still be about 1% of the total amount demonetised.

But the news is worse than this. A study by Indian Statistical Institute in association with the National Investigative Agency shows that the face value of the fake currency in circulation was only Rs 4,000 million at any point of time in the past four years.

This begs the question; did the media and the government make a mountain out of a molehill?

04:30

Digital India was given a boost by a flood of easy money that flowed in from the developed world, especially the US. This drove valuations of Indian start-ups to insane levels. We had warned of this bubble last year.

And we were right.

India's start-ups are in big trouble these days. As per an article in The Financial Express, Investments in start-ups declined significantly in volume (by 28%) and value (by 44%) in 2016.

It's not just the reduction in funding that's proving to be a problem. Venture capitalists (VCs) are making smaller bets than before. The deal sizes have become smaller as early-stage funding has dominated and late stage funding has taken a backseat.

In 2015, US$ 2.606 billion had been pumped in. The number is US$ 1.452 billion in 2016. VCs are clearly sitting on the sidelines and are being selective in making investments. So selective in fact, that in the December quarter of 2016, the number of deals has fallen almost 50% YoY!

2016 will surely go down as turning point for India's start-ups. What about 2017? We believe, start-ups run by competent people with sound business models that promise profits and not just revenue, will continue to receive funding. However, most start-ups will struggle.

04:45

Meanwhile, after opening the day on a flat note, the Indian share markets continued to trade above the dotted line. With the exception of the realty Sector, all sectoral indices were trading in the green at the time of writing. Stocks in the FMCG Sector and the Metals Sector leading the gains.

The BSE Sensex was trading up 138 points (up 0.5%) and the NSE Nifty was trading 41 points (up 0.5%). The BSE Mid Cap index was trading up by 1%, and the BSE Small Cap index was trading up by 0.8%.

04:55 Today's Investing Mantra

"Cash combined with courage in a time of crisis is priceless." - Warren Buffett.

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "Is Digital India Also Made in China?". Click here!

11 Responses to "Is Digital India Also Made in China?"

Hari Sharma

Dec 28, 2016

I thought one of the major advantages of digital transactions is transparency and accountability. I hope you agree that most real estate transactions happen in black to a certain proportion of the transaction, which becomes unaccountable. Assuming that only a little percentage of the population is paying income tax, what is happening to all that cash with the people not paying tax. In digital transactions isn't most of that money also is being accounted for. I thought as a progressive measure you must encourage all your customers to follow digital transactions and probably can give some advise on that, rather than just saying " Iam a fan", and criticising what the government is doing.

Like (1)

vidyesh kulkarni

Dec 28, 2016

The digitalisation is though needed, too optimistic and ill-planned.
The demonetisation step required top most secrecy but same is not applicable to digita]ization. The digitalisation should have been a planned policy and roll out.
Just check the preparedness of Govt. by answering the following
For current very high and urgent demand of PoS machines, how many PSU banks are ready with inventory of machines? Are they in process of procuring machines? Or merchants should only rely on services offered by the private e-wallet players?

Was there in provision in last year's railway budget to equip booking windows with card reading machines?

What about cyber security and laws? Are there any provisions in this budget to setup courts for Cyber Laws?

The public awareness and education is another aspect. All the investors in share markets must be aware how much efforts SEBI is putting behind for investors' education.

Where is budget for awareness and education program?

Like (1)

R.Thurumurthy

Dec 28, 2016

About Andy Haldane, The Global War on Cash and India's Demonetization : "Force people to stop saving and spend whatever they earn. This along with negative interest rates will fuel a worldwide economic boom"... Yes, the leaping flames of consumerism could be licking India's doors right now and a cashless or less-cash Indian economy could be dry tinder. Indians, like people anywhere, could be easy fodder for the rapacious economic engines of many countries, including its own. However, there is an outside chance that Nature would box our collective ears so hard, if she is not doing so already, that we would be forced to see our stupid, stupid economic ways and mend ourselves or else....
What kind of economics is this, I ask, whose free play threatens the existence of life itself on a millennial scale and likely leaves a scorched earth literally in its wake? Has not that wheel chair bound wonder of a mind called Stephen Hawking warned us recently that in a thousand years if not earlier AI and robotics could wipe us out? Unsaid by him is the tacit admission of the pathetic reality that the exploitation of all technological innovations is value-agnostic and the "idolatry of money", as the Reverend Pope Francis said recently, underpins all models of techno-economic growth. That, in sum, is the Devil we had better address, instead of tinkering around mental constructs of Economics. How long are we going to say "In God We Trust"....but we are cool with the Devil?

Like (1)

evaman

Dec 28, 2016

Cash encourages black money ! There must be better methods to monitor and control them.
It takes a year for your money left in the bank to earn 2.5% post tax, but you could loose it all in a flick of a moment, in just one transaction if you choose digital. Digital appears to be an innovative way to move money from one hand into the other effortlessly without adequate value additions, but only black money would qualifies to be illegal.
Those who argue in favour either dont understand value of others money or perhaps beneficiaries of this revolution.
Payment methods must be left to the choice of the individuals based on their preferences and conveniences, not thrusted upon in some guise.

Like (1)

Rajendra Modak

Dec 28, 2016

I read the article wrote by Ankit Shah. On the first reading, I though I was reading something written by a person who is not educated.What Ankit is trying to say is that cash is better to digital. Well Ankit, you must be joking. The whole world is moving towards cashless economy and India is trying to do the same. Yes there are problems like poor internet speeds, initial problems with point of sale machines. But with demonetisation we are working our way towards cashless society. He is referring to 15% Indians only having internet facilities. Well at the time of independence, we had literacy rate of less then 30%. Various Governments worked on schemes to make our people literate and here we are today where almost 90% people are literate.
Somewhere we have to start our steps towards cashless society. If Ankit is does not know the benefits of cashless society, he can search the internet and find hundreds of sites which can educate him.
What is surprising is a site which is supposed to be run by educated individuals is allowing novice like Ankit Shah to write. I expect the website to check the educational level of the individual writers before they are allowed to write on the website.

Like (1)

R Tayal

Dec 27, 2016

It seems in your keen-ness to rubbish "demonetization" any which way, you are unwittingly jettisoning two of your own maxims. One, falling for confirmation bias in looking at data selectively in order to belittle the impact of fake currency. Do you seriously believe that the fake currency in the economy is only to the extent of seizures by government agencies? I am equally sure you are not ignorant of the nefarious purposes for which fake currency is used, with disastrous consequences for the nation. So however small,the absolute amount of such currency is a very poor statistic in that context.
Secondly, your bias in demonizing "demonetization" is only marginally better than the TRP hungry media, belying your claim of "Unbiased opinions on investing in India". Since when did you become myopic or quarterly results focused? I am sure you are aware of the renowned economist Raja Chellaiah's view that government's policies would never be dictated by stock markets. Demonetization's best benefits will be qualitative rather than quantitative.
It's nobody's case that demonetization doesn't have its drawbacks, but then which policy has only advantages? Without belittling the difficulties faced by many, I wish to ask how many can undertake an organization wide exercise even a fraction of the magnitude of this, and execute it flawlessly. My corporate experience of over 30 years tells me even the largest global corporations can't.

Like (1)

R.Thirumurthy

Dec 27, 2016

Digital Penetration : India is on the cusp of a digital revolution. All the major telecom companies are gearing up to fully utilize the opportunities ahead. It is not unreasonable to foresee about 60% digital penetration in 3 to 5 years, making use of cloud computing, AI in IT and any other innovation we may develop.
China and India's digital growth : We are sister civilizations for centuries. Hostilities are just a blip in our shared history. As two of the most populous nations on the face of the earth it makes eminent sense for us to complement each other and cooperate with each other. The evidence that the contrary is likely to happen needs fresh and close examination. We may also note that the growth of China and India to what they are today on the world scene is probably less militaristic and less predatory than the growth trajectory of almost all major powers, barring some exceptions. In sum, while India should evolve a strong and secure digital architecture, needless paranoia about China could be counterproductive.

Like (1)

Tejaswi

Dec 27, 2016

Of late I see too many pessimistic reporting/ 'analysis' on either demonetization or digital payment. This gives no better detail than the avg news anchors of 24x7 news channels. I see no merit in these arguments. It doesn't take a economist or Financial analyst to say that cash economy encourages black economy. If the people who have the ability and the wherewithal to use digital and encourage others, we may save the cash for the people who need it most. The digital security is known to all will remain irrespective of the demonetization. So why not use time for better analysis on how to embrace digital payment or how to plug loop holes in digital security.

Like (1)

evaman

Dec 27, 2016

The same IRCTC would well do much more to make these digital transitions more reliable and less scary.
Our poor infrastructure and hurriedly done apps add to these owes. Just recently, in my erst to give these 'go digital' mantras a filip, I hastily chose their android app to do my booking. As true followers of Murphy's law, predictably the app failed just after it obediently debited my bank account with the needed amount and reasonably soon enough before it could tell the server that it completed the transfer leaving the transaction in a limbo.
With nothing much to do, the contact info either non reachable or guaranteed to give a standard, non comforting, unconcerned response I was left but with no choice but to pray that the transferred amount gets noticed and faithfully credited back in what you in your mind deem as reasonably soon.

In the meantime, with your booking unfinished, but the money set aside gone atleast for a reasonable while, you need to find new or additional source of funds to initiate another attempt. This time my prayers were more loud and credible, so as not to repeat this saga.

Why cant less scary methods such as blocking the amount, completing the transaction or purchase and then withdrawing it be thought about?

Like (11)

gaurinder rana

Dec 27, 2016

you guys have gone nuts. hell bound to prove demonitisation decision is devil/hell or you are not be
paid being mouthpiece. please be considerate to common man

Like (1)
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