India’s economy is making swift progress towards the digitization of money. Whilst this is great news, as they are keeping up with technological advances globally, India is faced with consequences surrounding the weak infrastructure, lack of internet access, smartphone devices and weak financial technology that is necessary for online payments. According to Credit Suisse, over 90 percent of India’s consumer transactions are completed with cash payments, raising issues since the Finance Minister has made deliberate efforts to encourage the withdrawal of physical money.
In early November, India’s Prime Minster Narendra Modi implemented the ban of large denomination notes. In line with the digitization and demonetization, following a meeting with the key decision makers of banks on November 24, Arun Jaitley, India’s Finance Minister has said that he is motivating banks to promote digital banking while discouraging and pushing out the use of physical currency.
Goa, a western Indian state, strives to be the first to reach the prime minister’s goal of a cashless society. Defence Minister Manohar Parrikar states Goa is making great progress, “Goa will soon be the first state with cashless society fulfilling a dream of the Prime Minster.”
With such changes put in place by the government this raises the issues of compatibility with Indian citizens and businesses in regards to adopting to a cashless society. Stagnation in this process is likely to be faced due to the weak infrastructure in meeting the demands of digitalization. For example, the number of citizens that have smart phones using data and adequate internet access is limited.
Whilst demonetization has played a significant factor in increasing the utilization of cards, this has also led to the failure of transactions as there is not an efficient enough capacity to support the increase in online payments. It is important to note that the overall debit card usage is a small percentage of the population.
Following this issue there are also not enough point of sale devices to cater to the population demands currently, let alone to meet the demands expected in the near future. As a result, Unocoin reckons growth in the number of users of bitcoin in India will be around 56 per cent per year.
A Rush to the Printing Press?
On top of the difficulties experienced by citizens obtaining their money, sources from the Security Printing and Minting Corporation of India Ltd (SPMCIL) have reportedly exposed a significant step has been missed from the five-stage process involved in the printing of the new 500 Rupee notes. The skipped step, “color examination,” may have been purposefully missed due to immense pressure experienced in light of the need for new notes, that were required to be printed in October given the Finance Ministers support.
If these reports are true, then this raises the risk of these new notes being counterfeited since it will be easier to reproduce them color-by-color. If the notes are easily faked, people will begin to lose faith in the Indian Rupee and, as a result, increase the demand for substitutes, one of the most popular is Bitcoin. Not a single counterfeit bitcoin exists which could make the cryptocurrency even more desirable.
Another Catalyst for Higher Bitcoin Prices and Adoption?
Economic forecasts are looking gloomy for India. Faced with the complexities of knock-on effects, such drastic changes will continue to weigh the economy down over several consecutive quarters. For example, the supply chain across the spectrum of small to large corporations are collapsing, as trucks remain stationary with no money for fuel. This, in turn, is impacting laborers as they are not incentivized to load the goods for free and distributors are unable to pay their workers.
Since India’s economy is challenged by a shortage of money, the Reserve Bank of India will attempt to smooth the effect by cutting interest rates by 0.25 percent at its next meeting, on December 6-7. Shiloh Shah, India’s Economist at Capital Economics states, “We think that it [Reserve Bank of India] will attempt to cushion the blow from demonetization."
If the Indian central bank follows through with an interest rate cut, this will, in turn, reduce the purchasing power of the Rupee and augment the attractiveness of Bitcoin, boosting both demand and its price even further.