Digital disruption that is transforming India’s fight against Black money
The discussion on the fight against Black money has been ossified today. It always eventually boils down to the argument over the success or failure of De-monetisation. But, we are in the 5th year since de-monetisation and there is sense in taking stock of things, because the government unlike most of us has continued its attack on Black money. And more importantly, the nation and the financial eco-system is no longer the same what was back in 2010 or even back in 2016. Come 2025, the various factors that are in play will make harder for black money transactions and reduce its share in the overall share of economy.
In India, there are two types of black money — one is generated through legitimate means where the money is hidden to avoid paying taxes. This would be the typical doctor, accountant hiding his/her income via fees, a trader showing lesser sales to avoid paying taxes. The other is generated through illegal means such as corruption, illegal trade in drugs, prostitution, etc. It is important to note corruption accounts only for 20% of black money in circulation with a majority (65%) black money primarily due to tax evasion of legitimate business activities. The illegal black money benefits from the existence of legitimate income black money in many ways. The larger share of black money in circulation makes it easy to hide, to transact, to source and supply black money. This ease of circulation is what actually might prompt the corrupt in India to indulge in the same so brazenly. Hence first step is to attack the creation of black money by legitimate means.
GST Story
And thats where GST comes to picture, GST in its vary nature is an inter-linked tax system and any break in flow across the value chain immediately shows up. Take the e-invoicing, government is looking at making it mandatory for all business to business deals. With this, the government has a record of every sale from the manufacturer to the last retailer. Remember in the olden times, your electronics retailer would provide you with options to a bill with tax and a bill without tax, now the same would be difficult because the wholesaler who distributes the TV has to provide e-invoice with the retailer details. And the manufacturer the same with the wholesaler. Hence unless there is a complete parallel distribution in place, government will know the exact no of TVs, refrigerators and washing machine supplied to your neighbourhood retailer. It becomes very hard for the retailer to hide sales as incoming of goods will stop matching with the outbound sales.
And once the retailers starts billing and providing GST invoice, the GST system is interlinked to income tax system. The government can calculate the profit earned by the retailer on each sale (as it knows the price the wholesaler supplied) and can estimate the income earned. Any under-reporting by the retailer will be immediately flagged. This will result in the move towards formalisation and taxation. Of course professional service providers are not impacted by this, but government is looking at AI based solutions to catch them as well. Thus GST will reduce the major source (65%) of black money from being created in the first place and also reduce its circulation.
Additionally GST tools will also help in government catching money laundering efforts of illegal black money. Most corrupt folks would be running legitimate business to convert black money into white. For example, a pub can be run by a politician’s son and though the total customer bill in a month is say ₹1 crore, the pub can report ₹2 crores as revenue via cash bills and thus convert black to white. However with GST, government has track of inflow and outflows of goods. A simple analytical tool can find out discrepancy in the inflow of let’s say alcohol. If most pubs in the location consume 10,000 litres to do ₹1 crores business but this pub consumes the same for ₹2 crores business, the tool can immediately flag for discrepancy and the establishment can be caught. Hence, given the inter-linked nature of GST taxation, it becomes harder for the corrupt black money to be laundered back into circulation in the wider economy without getting noticed.
UPI Story
While GST tackles at the supply side of things, UPI tackles from the demand side. UPI really took off as a payment option post demonetisation. This is a fact that even it’s (demonetisation’s) ardent critics agree. From a measly ₹49 crores of monthly transactions in Oct 2016 to ₹425,062 crores monthly transaction in Feb-2021. The growth of this is phenomenal. While in most financial indicators, we see yearly growth in double digits, UPI transactions sees growth in double digits month on month. March 2021 has become a pivotal month with UPI transactions crossing the ₹5 trillion (500,000 crores) mark in monthly transactions for the first time.
The thing with most news on UPI is that most often then not, the report highlights the value of transactions and showcases the growth of the same as compared to a previous time period (month or year). And that is missing the forest for the trees. And typically, most of us dismiss the report taking away only the fact that UPI adoption and usage is growing. The absolute figures don’t really matter to us. But hidden behind the absolute numbers is a story of changing payment preferences that is completely missed out. Let me elaborate on why that is so.
A study was conducted by one of the leading consulting firms on the various payment modes used for consumption/retail transactions. Basically what payment method do people use for making payments for day to day transactions such as buying grocery from a Kirana shop to buying the latest mobile phone on Flipkart. The split of various payment methods is shown below. In 2019, total UPI transactions valued at an average of ~200,000 crores of monthly transactions. At an estimated 40% P2M (payments to merchant) share of the above transactions, retail payments via UPI amounted to ~80,000 crores. This would translate to around 8% of monthly retail transactions estimated at ~1,000,000 crores monthly in 2019. Cash accounted for a major share at 69% with rest being accounted by credit/debit card and net banking options.
Now coming to 2021, UPI transactions have reached ~500,000 crores and keeping the same P2M share, we can estimate the retail payment transactions to be ~200,000 crores. The total retail transactions on the other hand can be easily be estimated given that they grow proportional to more or less with nominal GDP. Hence we can estimate that today UPI share of retail transactions to be nearly double at 16%. The more important thing to note here is the pace of change. UPI share of retail transactions has doubled in 2 years. And this is definitely going to continue for the next few years. The reasons are manifold.
Covid-19 has been an important factor for its growth. While in the initial months of the pandemic, there was a drop in UPI transactions as majority of economic activity ceased due to lockdowns. But post lifting of lockdown, the health concerns of doing physical transactions through currency and the need for social distancing spurred adoption for a large share of retail transactions. According to a KMPG poll, majority of its respondents reported higher usage of digital payment methods than cash. The poll reported an apprehension about cash transactions primarily due to fear of transmission. And like the adage “if you do something for sometime, it becomes a habit”, this adoption to digital payment is here to stay. Majority of the participants from the same poll opined that they would not move back to cash payments as they find digital payments safe and secure.
But there are additional factors pushing for retail adoption. In the initial years of UPI, the current key players of UPI platform focused heavily on P2P (peer to peer) transactions and incentivised the same through generous cash-backs. However, it is intuitive that in the offline world P2P transactions are just but a small share of the overall day to day transactions. Hence after being saturated in the P2P market, these players are now concentrating all their efforts in expanding into the P2M market. This is pure capitalistic forces at play as each players tries to outcompete against the other to garner market share by on-boarding more and more merchants on the platform even if it means reaching out to remotest locations.
For example, Phonepe has put together a 50,000 strong field force to reach out to and onboard merchants from Tier 4,5 & 6 towns. They have increased their merchant base from 11 Million to 18 Million in a few months and plan to reach 25 million by this year end (translating into nearly 40% of merchants in India). This renewed push means almost every retail merchant will soon have the option accept UPI payments. Take a look at Phonepe vendor map, even the remotest of towns today will have number of merchants on-boarded on its payments gateway. (I would suggest taking a look at the finding stores via map features on Phonepe to get a sense how remote villages are also being onboarded)
What does all of this mean or add up to you might ask. The above factors are combining to drive cash out of retail business in the next 3–4 years. By 2025, I conservatively estimate that nearly 60% of retail merchant transactions will be non cash. This is significant not only in percentage terms but also in absolute terms. My estimate is that by 2023, cash transactions in absolute value would have peaked at ₹870,000 crores and will start seeing yearly decline from then onwards. This is truly transformative because for the first time in history, the amount of money required to be in circulation will decline.
Currency Story
It seems the government is actively aware of the above fact. Hence it comes as no surprise that government/RBI is actively and slowly removing high value ₹2000 notes from circulation. No new ₹2000 notes have been printed since April of 2019. What is more interesting is that the government/RBI is slowly withdrawing the no of ₹2000 notes in circulation. In 2018, there were 336.2 crore ₹2000 notes in circulation amounting to ~37% of total value. This is ~2.4 notes per person. The same in 2021 has shrunken to 249.9 crore ₹2000 notes in circulation amounting to ~18% of total value which is ~1.8 notes per person. At this rate, we can expect the ₹2000 notes to further decline to 108.3 crores by 2024 and accounting to only 4.3% of total value. At 0.7 notes per person, there will be less than one note per person available.
Currently, most of ₹2000 notes have been replaced with ₹500 notes and thus keeping the total money in circulation the same. As anyone who has dealt with large sums of cash would vouch, it becomes much harder to transact with lower value notes. ₹1 crore would require 20,000 (200 bundles of 100 notes each) ₹500 notes as against 5000 (50 bundles of 100 notes each) ₹2000 notes. This itself is a huge hit on the logistics, storage and transactions via cash and thus black money transactions will be frustrated and inconvenienced at the least. While I believe removing ₹2000 notes is the first step, government in conjugation with the RBI will actually start actively start removing the cash component in the economy. Basis my UPI projections, I expect this to start happening from 2024 onwards. Less cash in the system, less the scope for black money hoarders to transact.
The End Game…
Now let’s tie all of the above together, the next five years will be truly transformative in the fight against Black money. First the usage of currency by common man will decline in absolute terms. More and more people will transact digitally to meet their daily needs even in remote places and with the smallest of vendors. This would mean for most retailers, a significant share of sales will be via non cash modes. This in conjugation with full implementation of GST and e-invoicing means there will be lesser scope to under-reporting of income. This means less of black money generated via legal business. And as more businesses become formal and transactions become digital, government and RBI will start taking actual currency out of circulation starting with high value notes. If this followed up with linking Aadhar to real estate transactions, the corrupt will find it very difficult to store and hoard black money.
And the web that will link all of the above will be the usage of technology, specifically Artificial Intelligence and Machine learning to detect evasion, fraud and laundering at scale. It is easy to corrupt, hoodwink or lie under the radar against a human opponent but nearly impossible against an automated 24x7 working machine.
Today in India, cash is still the preferred mode of payment, but in 2025 cash will not be. The average retailer will start viewing cash payments with suspicion lest he/she is accused of laundering/tax evasion. They might even charge a premium to accept cash transactions. All of this makes some one with corrupt money stand out easily. Of course, there will still be corruption but it will make it harder to be so, specifically at the lower rungs of the bureaucracy who might not have the tools and networks to dodge these more sophisticated systems.
