Did Demonetization Enable Digital Money Transactions in E-Public Services Delivery? Evidence from Andhra Pradesh, India (7946 Words) By

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Did Demonetization Enable Digital Money Transactions in e-Public Services Delivery? Evidence from Andhra Pradesh, India (7946 words) by

Sundar Balakrishna, PhD (Economics, Indian Institute of Management Ahmadabad) Visiting Faculty (Economics area) in Indian Institutes of Management Indore, and Trichy. [email protected]; cell: 918332959789

Abstract

The study examines the socioeconomic dynamics of the Government’s push for cashless transactions triggered due to the demonetization of high value currency notes by the Government of India on 8th November 2016 with special reference to the Government Electronic Services

Delivery in the Indian State of Andhra Pradesh. For this purpose, the study analyses the daily revenue collections from e-public services during the said period through the cash and digital channels as a time series data. Since there is a bilateral causality between the use of cash and digital payments for Government services by the citizens, vector error correction mechanisms are employed to model this economic phenomenon. The analysis show that the citizens prefer cash modes of payment to digital payment solutions to avail e-public services due to transaction costs.

Keywords

Andhra Pradesh; Demonetization; Electronic services delivery; Government; India

JEL: O33

1 Introduction

In Governance, the central and state Governments in India have embraced information technology (IT) to revamp government and business processes to deliver efficient administration and civic amenities to the citizens with transparency, speed, agility, and efficiency. Andhra

Pradesh state (AP) has been in the forefront in assimilating and adopting information technologies in Government processes.

One of the first, and ambitious electronic-Government (e-Government) initiatives was the

"Government electronic services delivery" project which sought to render the Government processes online across all the Departments of the state (beginning from the receipt of a citizen's request to the delivery of the requested service to the citizen, with a robust audit trail to ensure transparency). The goal was to ensure efficient delivery of public services to every citizen with speed, and in a corruption-free environment.

The bureaucracy in this Indian state, as with other state Governments in India and elsewhere, had a formidable disrepute for extracting rents from hapless citizens for routine public services. By rendering the Government and business processes online, the electronic services delivery project sought to reduce and eliminate the discretionary power, and thereby the rent- seeking opportunities, of the bureaucracy. The Government electronic services delivery project was thus a bold stroke of the state to combat the rent-seeking proclivities of the bureaucracy, ensure that the public services reach the underprivileged sections of the society in an efficient and transparent manner, and thereby ensure that the benefits of information technology is consumed by every citizen, rich or poor, urban or rural, in an equitable manner (Sundar, 2017).

1.1 Information technology to reduce inequalities in access to Government services.

Government electronic services delivery was initiated as a pilot in 1998 in AP (where electricity and telephone bill payment services were offered online) and is a popular IT project of the Government in contemporary times as the project reduced corruption, enhanced transparency, and improved citizens' satisfaction levels. Today, this project offers 380

Government-related services (which include electronic delivery of records relating to land registration, applications for driving licenses and passports, registration of births, deaths, and marriages, and application for food ration cards), and about 250 business-related services (which include cell phone top-ups, movie ticket purchases, bus and train bookings, pension payments to aged citizens, basic banking services, and religion-oriented services). The project has won notable awards at the national and international levels which include the Skoch e-Governance award 2013, the Skoch Order-of-Merit award 2015, the Skoch-order-of-Merit award 2016, and the Computer Society of India Nihilent e-Governance award 2015 (Sundar & Venkataramanaiah,

2016).

Implemented by the Office of the Electronic Services Delivery-Meeseva (ESD-Meeseva) of the Government through a public private partnership model, a service charge is levied on each electronic transaction from the availing citizens who normally pay in cash. The average revenue collection per day by ESD-Meeseva for the FYs 2014-15, 2015-16, and 2016-17 is rupees 6.48 crores, rupees 7.84 crores, and rupees 7.95 crores, which indicates the pervasiveness and popularity of Government electronic services amongst the citizens from the urban and rural areas of AP. Touching on every life cycle event of a citizen, there is considerable demand for

Government electronic services by rural and urban citizens, which has narrowed the digital divide and reduced inequalities in access to Government services (Sundar, 2017)1.

1.2 External shock.

On 8-11-16, the Government of India demonetized 500 rupees and 1,000 rupees notes of

Mahatma Gandhi series, and declared these notes as illegal tender, thereby sucking out rupees

15.46 lakh crores of these high denomination notes, and constituting 86 percent of currency under circulation in the Indian economy. The demonetization created a crisis due to cash crunch, with citizens rushing to banks and automated teller machines (ATM) to deposit invalidated currency and withdraw valid currency for their activities. Citizens were subject to intense agony due to the long waiting lines outside banks and ATMs.

Digital technologies to address demonetization-related issues can have a crippling effect on trade and economy in the absence of suitable IT infrastructure. Appropriate e-Government responses may bolster the economy to a certain extent. Some supporting evidence in support of the argument can be inferred from a study of the recent, and sudden decision of the Government of India to demonetize 500 rupees and 1,000 rupees notes of Mahatma Gandhi series as mentioned above. This constitutes a field experiment, and affords a window to study the effects of demonetization on the nation's (and the states') economy.

1.3 Aims of the study.

To avail a Government service online, the citizen normally pays the service and statutory charges in the cash mode at any of the 6,300 odd ESD-Meeseva kiosks in AP. It may be noted that as with many other Indian states, the economy of AP state is predominantly cash-based. The

1 Please see Sundar (2017) and Sundar & Venkataramanaiah (2016) for more details on ESD-Meeseva.

5 demonetization created a cash crunch which lasted for several months, and created severe inconvenience to the citizens. The Government and the Directorate, ESD responded by introducing digital payment solutions in the kiosks through several e-Government initiatives.

Were these initiatives the first-best solutions? Did these demonetization-induced e-Government initiatives enable a less cash society, and benefit the citizens?

This study seeks to provide some answers to the questions posed. In doing so, the study critically analyzes the effects of demonetization on the business processes of the ESD-Meeseva, and emphasizes the conditions required for the voluntary adoption of digital payment solutions by the citizens. Thus, this study leverages a natural experiment (Demonetization) to draw lessons for shaping effective policies to promote financial inclusion, and herein lies its contribution.

In section 2, the economic phenomenon of the Indian demonetization is described. The positive and negative economic effects of demonetization, its impact on the common man, and the inadequate IT infrastructure to address demonetization issues is touched upon. In section 3, the demonetization-induced e-Government initiatives are described. Specifically, the ESD-

Meeseva facilitated digital payment solutions through innovative business models to address the cash crunch, and reduce the inconvenience to citizens. A contrarian finding in this study, based on available documentary evidence, was that under certain conditions of IT infrastructure paucity, digital payment solutions can constrict trade, and thereby increase inequalities in access to goods and services.

Did digital payment solutions benefit the citizens? Section 4 looks for some answers through econometric estimation. For this purpose, the study analyses the daily revenue collections in ESD-Meeseva between the period 3rd December 2016 (the date on which digital

6 solutions were introduced) and 15th August 2017 (when currency supply stabilized in the economy) through the cash and digital noncash channels as a time series data. Since there is a bilateral causality between the use of cash and digital payments for Government electronic services by the citizens, vector error correction (VEC) is employed to model this economic phenomenon. Contrary to expectations, the VEC analysis show that the citizens prefer cash modes of payment to digital payment solutions to avail Government electronic services.

Section 5 explores the reasons for the citizens' preference for cash modes of payment, though the digital payments for Government e-services were in the ascendancy during the first month post-demonetization. Under the burden of a multitude of merchant rates imposed by banks and other digital service providers, citizens end up paying more for a service through the digital mode as compared to cash forms of settlement. The study concludes that adequate IT infrastructure and rationalization of merchant rates may be required to promote digital modes of payment.

2 The Demonetization Experiment in India

The Government of India demonetized 500 rupees and 1,000 rupees notes of Mahatma Gandhi series, and declare these notes as illegal tender on 8-11-16. The sudden demonetization sucked out approximately rupees 15.46 lakh crores of these high denomination notes, constituting a staggering 86 percent of currency under circulation in the Indian economy, as mentioned above.

The Government allowed the citizens to surrender and exchange the invalidated 500 and 1,000 rupee notes in banks, subject to some verifications, till 31-12-16. The purported objective of this sudden demonetization of high denomination notes, the Government claimed, was to reign in black money (defined as any money income for which taxes imposed by the Government and

7 other public authorities have not been paid2), filter out counterfeit currency notes, and combat terrorism (Guruswamy, 2017a). Policy makers assumed, rightly perhaps, that terrorism is being funded by the parallel economy (estimated to be about 20 percent of the Gross Domestic

Product) through black money.

2.1 Impact on the common man.

As events turned out, the demonetization resulted in unintended consequences which adversely affected the common man. For a start, policy makers seemed to have ignored the fact that 98 percent of the transactions representing approximately 68 percent of the value transacted in the Indian economy, with a population of roughly 125 crores, are cash based. In addition, the

Indian economy was ill prepared for the massive demonetization on account of the skewed distribution of point-of-sale (POS) devices (which enables people to pay merchants for goods and services delivered by swiping debit and credit cards) and ATMs to withdraw and deposit cash through payment cards within its geographic territory. Just about 19 percent of the 215,000

ATMs exist, and function in the rural areas. Massive inter-regional disparities aggravate the financial exclusion in this digital age, in stark contrast to the national objective of achieving financial inclusion. In Bihar, only one ATM serves a population of 13,500 while Tamil Nadu has one for every 3000. Further, public sector banks operate 20 percent of their ATMs in the rural areas, while private banks operate only 8 percent of their ATMs in the rural areas (Jain &

Merwin, 2016).

The ATMs were not calibrated with the new denomination rupees 2,000 and 500 notes for several weeks after the announcement of the demonetization. As a result, the poor

2 Ministry of Finance, Government of India (2012). Black Money, (p.2), accessed online http://www.finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf 8 constituting the bottom of the pyramid, stood in long lines outside banks and ATMs, and were compelled to wait for several hours (averaging six to eight hours per day) to draw cash from their savings accounts. For several weeks after the announcement of demonetization, and until the calibration of ATMs with the new denomination rupees 2,000 and 500 notes were accomplished by the public and private sector banks, withdrawal of cash was rationed at the rate of rupees

2,500 per day per account holder until 31-12-16, and rupees 4,500 per day per account holder from 1-1-17 onwards, subject to a maximum withdrawal limit of rupees 24,000 per week per account holder. The shortage of cash was further compounded by the fact that the Monetary

Authority and Regulator (the Reserve Bank of India [RBI] ) issued a majority of the new notes in denominations of rupees 2,000 during the first few weeks post-demonetization, which the vast majority of the people found it difficult to exchange, and buy goods and services for their normal, and daily requirements. These new notes have little import in a market, where the quantity of notes of smaller denominations (rupees 10, 50, and 100) has remained constant, pre- and post-demonetization. An indirect, but disturbing implication, is that the notes of smaller denomination acquired a value higher than their stated worth, and the notes of rupees 2000 denomination is not much preferred (Guruswamy, 2017a).

Further, the data released by RBI on 13-1-17 shows that the currency in circulation as on

6-1-17 was only 49 percent (rupees 8.73 lakh crores) of the cash in circulation as on 4-11-16

(rupees 17.74 lakh crores). The downward trend of currency liquidity triggered due to the

Government's demonetization on 8-11-16 has continued even into the second week of January

2017. Media reports that the Government has constraints in its capacity to print, and distribute the new notes across the length and breadth of the country through the banking channels, and a sense of normalcy may be expected on this front by 31-3-17 (Deccan Herald, 2017).

The travails of the common man due to demonetization is but one facet. In the short term, private consumption has taken a massive hit due to liquidity crunch as the Indian economy consumes 67 percent of its GDP domestically; the rural agricultural economy, poised for recovery due to good monsoons in 2016, was crippled as landlords and farmers did not have the cash to pay wages to farm laborers; the unorganized sector was in doldrums as entrepreneurs owning micro, small, and medium industries were forced to shut down due to cash shortages; a staggering 400 million people engaged in the informal sector and daily wage jobs were rendered jobless; and wage laborers working in the construction sector in urban areas returned to their native villages due to assured food availability in Assam, Bihar, Madhya Pradesh, Odisha, and

Uttar Pradesh states. Close to 100 individuals in various parts of India died in their scramble for precious cash outside bank branches and ATMs, which was distressing. On the other hand, the raids conducted by the income tax department on cash hoarders, tax evaders, money launderers, mining barons, and top Government officers post-demonetization, and widely covered in the media, reveal that a significant proportion of the hoarded money (often as much as 30 percent) is in denominations of the new 2,000 rupee notes, and was "business as usual" for this class of citizens (Bamzai, 2017; Guruswamy, 2016).

2.2 Some inferences.

Several inferences are in order here. One, while the silent majority at the bottom of the pyramid, (especially in the rural areas where bank branches are sub optimal), underwent considerable difficulties to withdraw money from their accounts in the banks and ATMs due to cash shortages and ceilings (weekly and daily), the hoarders had easy access to enormous quantities of new notes of rupees 2000 which implied that bankers and hoarders were involved in money laundering, with their reach touching the far corners of India. Two, the objective of the

Government to reign in black money through demonetization of rupees 500 and 1,000 notes seem to be defeated, at least in the short run, as money launderers now hoarded the new 2,000 rupee notes. Third, money laundering (turning black money into white) has transformed into a country-wide cottage industry as there is considerable evidence that hoarders populated poor people's savings accounts (called the Jan Dhan account holders3) with black money by paying hefty commissions to the Jan Dhan account holders.

While the first and second inference presented here can constrict trade by reducing the common man's discretionary income, the third inference can potentially spark domestic trade as the Jan Dhan account holders, mostly from the rural areas, are now owners of windfall commissions from hoarders. As evidence, reports show that between 9-11-16 and 23-11-16, the hoarders flushed the Jan Dhan accounts with approximately rupees 27,000 crores, while the corpus of all deposits in Jan Dhan accounts in India since August 2014 is approximately 70,000 crores (The Economic Times, 2016a). Finally, the notes of the invalidated denomination (rupees

500 and 1,000) seemed to be in possession of every common man, and not limited to those individuals who hoard black money, as was assumed by the Government prior to demonetization.

2.3 Positive outcomes.

The demonetization resulted in the accumulation of rupees 14.97 lakh crores (constituting roughly 97 percent of the rupees 500 and 1,000 denomination invalidated) as deposits in the bank by citizens through exchange of the demonetized notes. Flush with funds due to the

3 The "Jan Dhan" Yojana (plan) is a financial inclusion scheme launched by the Government in August 2014, where any individual aged 10 years and above, and without a bank account, can open a savings account with zero balance in any of the branches of public sector banks. The account holder would be provided with accident insurance cover of rupees 100,000, overdraft facility of rupees 5,000, and a debit card usable in all ATMs (http://pmjandhanyojana.co.in/ accessed 18-1-17)

11 demonetization dynamics as outlined above, the major public sector banks reduced their benchmark lending rates by 90 basis points in the first week of January 2017 as the banks had more money to lend. Home and car loans dived south as a result, which was expected to fuel consumption. To enhance the discretionary incomes of the vulnerable sections of the society, interest rates on deposits of senior citizens were increased to 8 percent, rupees 6,000 per individual was deposited in the accounts of pregnant and lactating women in rural areas, and farm loans were given interest waivers for 60 days to encourage the summer crop (Deccan

Chronicle, 2017).

As another prong to ease the pain of demonetization due to the cash crunch, the

Government vigorously pushed cashless transactions through POS devices, and smart phones.

POS devices registered a healthy growth from 7.41 lakh POS devices in September 2012 to

14.96 lakh POS machines in September 2016. Banks provide POS devices to an existing customer or non-customer (with a current account and a valid business establishment running for at least 6 months) on a formal request. Post-demonetization, public sector and private banks reported a massive surge in demand for POS devices from businesses as diverse as salons, vegetable and fruit vendors, and roadside mom-and-pop stores located in both urban agglomerates and Tier II cities. Probably, this surge in demand from small businesses could be a strategy to not lose customers to more technology savvy rivals. Banks impose a fee (the merchant discount rate [MDR]) on the merchants (for offering debit and credit card services) at the maximum rate of 0.75 percent of the value transacted for transactions up to rupees 2,000, and a maximum of one percent of the value transacted for transactions above rupees 2,000 for debit card payments, and a uniform rate of 1-3 percent of the value transacted for credit card payments

(Singh, 2016). Banks could decide the quantum of MDR to be levied on their partner merchants based on commercial considerations within the caps described above.

2.4 Digital infrastructure status in India.

In reality, reports suggest that the value of transactions through POS devices and mobile wallets have declined drastically post-demonetization (from about rupees 51,000 crores in

October 2016 to rupees 35,000 crores in November 2016), though the demand for cashless digital tools like POS devices has steeply increased during the same period. This trend implies a fall in customers' sentiment due to the currency crisis post-demonetization, as citizens seem to be using their cards for procuring inexpensive goods and services and shun big ticket purchases

(CXO Today, 2016). The economy needs an additional 20 lakh POS devices, and original equipment manufacturers (OEMs) and their agents have requested 8 to 10 weeks to scale up the production of POS machines. A POS device costs between rupees 4,000 to 8,000 and only 250 million people in India possess payment cards.

In addition, use of electronic settlement instruments that use digital channels [as in POS,

Immediate Payment Service (IMPS), Unified Payment Interface (UPI), and Unstructured

Supplementary Service Data (USSD)] are costlier relative to cash settlements due to transaction charges imposed by banks and non banking financial companies (like MDR), which requires rationalization to nudge people towards a cashless economy. The digital infrastructure paucity in the economy needs no further illustration (The Economic Times, 2016a).

2.5 Negative outcomes.

Economists have estimated that the loss due to drop in production and income post- demonetization could be around two percent of the GDP, which translates to rupees 3,00,000

13 crores. The cost of printing the new denomination notes is expected to be roughly rupees 50,000 crores, as the cost of printing and delivering the new 500 and 2000 rupees notes is rupees 4 and 6 apiece. The human costs too appears to be non trivial. Of the 450 million work force in the

Indian economy, about 415 million are employed in the unorganized sector. Fifty percent of this unorganized sector are engaged in farm labor, 10 percent in the construction industry, 10 percent in small scale manufacturing, and another 10 percent in retail. The unorganized sector are mostly daily wage workers and earn less than the officially stipulated minimum wage of rupees 272 per day. The cash crunch due to demonetization has resulted in job losses to at least 220 million daily wage workers in the unorganized sector. Cash shortage has impeded sowing and harvesting causing distress to millions of farmers. Retail farmers selling perishable fruits and vegetables suffered losses due to fall in demand, induced by demonetization (Guruswamy, 2017b).

Even assuming the presence of adequate digital infrastructure to propel us into the utopian cashless economy, is digitalization beneficial to the citizens? As a partial answer,

Parthasarathy (2016) points out that a 100 rupees currency note may be expected to exchange hands about 750 times on average, after which it becomes unusable due to wear and tear. The same 100 rupees in electronic form is now indestructible, but attracts a transaction charge (like the MDR) on every exchange, and user charges by telecom service providers which are borne by the citizens. A non trivial portion of the transaction and user charges flows to the Government too.

3 Demonetization-induced e-Government Initiatives in AP

Post-demonetization, the AP State Government (represented by the Honorable Chief Minister N

Chandrababu Naidu) convened meetings on a daily basis with a core team of officials (drawn

14 from the departments of finance, information technology and electronics, education, social welfare, surface transport, excise, commercial taxes, information and broadcasting4, OEMs of

POS devices and mobile wallet companies), to alleviate the pain of demonetization suffered by the citizens due to the deficit of cash currency. The media reported that the State Government employees would be paid only half of their salaries for the month of November 2016.

Pensioners, small tradesmen, farm laborers, farmers, fruit and vegetable vendors suffered loss of income through the month of November 2016 (Hans India, 2016).

In view of the cash crunch induced due to demonetization, the State Government's priority was to introduce digital tools to facilitate cashless transaction at all Citizen-Government interfaces in the state which include fair price shops, Government liquor shops, bus station depots, roadside shops, agriculture markets, fertilizer markets, and Government Electronic

Services Delivery kiosks (also called the ESD-Meeseva kiosks). Early on, it was evident that there was a deficit of POS devices in the state, and at best, the OEMs of POS devices informed that 15,000 units would be available by 30-11-16 while the requirement was close to 150,000 units. The OEMs informed that the remaining 135,000 would be delivered by the end of January

2017, as production needs to be ramped up in offshore locations. Hence, the State Government instructed the concerned officials to populate fair price shops, small grocery stores in villages, bus station depots, ESD-Meeseva kiosks and Government liquor shops with the available POS devices (about 15,000 units) by 30-11-16. The State Government waived the taxes on the procurement of POS to encourage the merchants to install the devices, and asked the banks not to levy MDR till 31-12-16.

4 The author of this study is also a member of this core team representing the information technology and electronics department of the AP State Government.

3.1 Business models on the fly.

To implement this executive fiat, the office of the Directorate, ESD-Meeseva (and the other Government departments) had the choice of procuring the POS devices (at possible bulk discounts), and facilitate installation of the machines, with complete communication protocols utilizing public funds, or requesting the service providers (in the respective Government departments) to procure (or rent) and deploy, and recover the expenditure from future revenues.

Departments like the Transport procured POS machines expending public funds as their business processes was managed, like most departments, by Government officials. A disadvantage with this public procurement was the delay associated with Government procurement processes.

On the other hand, the Directorate, ESD-Meeseva implemented the citizen e-services delivery through reputed Information Technology and Financial Services firms, who were bound as service providers through a contract to ensure quality in services delivery. Hence, the ESD-

Meeseva advised its service providers to procure (or rent) and deploy the POS devices in the kiosks, since the service providers, and their concerned Village Level Entrepreneurs (VLEs) maintained strong banking relationships with the regional bank branches in their respective geographical zones5. Moreover, a competitive search for installing efficient POS devices at an optimal cost would be more powerfully driven by the service providers due to commercial considerations, as compared to a Government-led campaign for POS machines procurement. The service providers leveraged this flexibility to evolve specific models that suited their region of operations, and made good use of their existing banking relationships to minimize the cost of procurement and installation costs of POS machines. By allowing the full play of market forces

5 Service providers recruit VLEs through a competitive process, and VLEs are the front-end in the citizen services delivery value chain, who interface with the citizens and receive requests for Government services.

16 through incentivizing service providers, ESD-Meeseva evolved business models to rapidly deploy 3,600 POS machine devices by 31-12-16, and enable digital transactions for citizen services delivery. These business models, to implement the e-Government push for digital transactions, are now described.

3.2 Vendor-centric business model.

The ESD-Meeseva divided the rural regions of the state into three geographical zones

(based on geographical contiguity, and potential volume of e-transactions) and deployed as many service providers for citizen services delivery. These service providers found it commercially viable to deploy POS machine devices through a rental model. The VLEs were required to pay rupees 250 as a monthly rent to the POS device vendor (like Paynear and Pine Labs), and were locked into this business relationship for three years. The participating banks (State Bank of

India, and the HDFC Bank) charged a MDR at the rate of one percent of the value of each transaction. To cover the rental, MDR, and operational charges related to the POS device, the

VLE charged an extra 0.5 percent of the value of the transactions as convenience fee from the citizen wishing to avail the services from ESD-Meeseva kiosks. It may be noted that the MDR and the convenience fee resulted in an additional burden to the citizen, wishing to pay digitally

(through debit cards, credit cards, and internet banking) to avail Government services from ESD-

Meeseva.

3.3 Bank-centric business model.

The ESD-Meeseva divided the urban regions of the state (District and Mandal headquarters, and town municipalities) into two geographical zones (based on geographical contiguity, and potential volume of e-transactions) and deployed as many service providers for

17 citizen services delivery. There are 175 Meeseva kiosks spread in these urban locations which account for approximately 75 percent of the volume and revenues to ESD-Meeseva. The ESD-

Meeseva partnered with Axis Bank, through a competitive process, to collect cash currency from the kiosks situated in the urban centers. The banking partner benefitted due to the massive cash float (averaging between rupees four crores to 7 crores per day) accrued on a daily basis in the urban centers, and pays rupees one crore per month to ESD-Meeseva Directorate for the benefit.

Axis Bank employs personnel to physically collect the cash from each of the 175 Meeseva kiosks on a daily basis, and deposit in cash chests on the same evening situated in specific locations. The collected cash would be deposited in the Bank's branch offices in the various districts on the next working day during business hours. The Bank has employed a security agency to ensure the safety of the collected cash, the maintenance of the cash chest, and its eventual deposit in the Bank's branch offices.

With the nudge towards digital transactions, Axis Bank immediately realized the opportunity for cost savings in the daily cycle of cash currency collections described above. The

Bank volunteered to deploy POS devices in all the 175 urban Meeseva centers without cost, and on a free basis, to the service providers. The Bank expedited this deployment within three weeks, and reduced its cost of operations as the Bank was not required to employ personnel to collect cash from urban Meeseva kiosks, did not require cash chests, nor the services of the security agency.

In addition to the reduction of costs detailed above, the Bank benefitted from the imposition of MDR on every digital transaction. On the Government's insistence, the Bank did not impose MDR on debit card transactions till 31-12-16, but collected one percent of the transaction value as MDR for credit card transactions. With the gradual infusion of cash currency

18 in the economy, the Government relaxed the suspension of MDR on digital transactions after 1-

1-17, but laid out caps on MDR, based on the value of transactions.

As on date, and in alignment with the Government's advisory, Axis Bank charged a MDR of 0.25 percent (of the value of the transaction) for transactions of value less than, or equal to rupees 1,000, and a MDR of 0.50 percent for transactions of value greater than rupees 1,000 but less than rupees 2,000. The Bank charged a MDR of one percent for transactions of value greater than rupees 2,000. For international cards, the Bank charged an uniform rate of 3 percent of the value of transactions6. A similar model was employed by Bank of Baroda who deployed 2000

POS devices in the rural VLEs of AP, followed by SBI (170), SBH(6), Indian Bank(1), HDFC

(1), and Andhra bank(8).

Over and above these charges, the ESD-Meeseva imposed 0.012 percent of the value of the e-transaction on the citizens to offset the transaction cost resulting from the service tax being imposed on the swiped value (which included the value of the transaction and the MDR). In contrast, the service tax would be imposed only on the transaction value for every cash-based transaction in the ESD-Meeseva kiosk. In the existing dispensation, citizens would thus find cash-based transactions cheaper than digital transactions.

4 Data and Analysis

Tables 1 and 2 show the daily volume and value of electronic transactions through the cash, and the digital noncash (credit- and debit-card, the online, and the mobile Meeseva app modes) channels for the period 3-12-15 to 15-8-16, and 3-12-16 to 15-8-17 in the ESD-Meeseva.

6 These rates are applicable till 31-3-17.

These daily revenue collections in ESD-Meeseva through the cash and digital noncash channels constitutes a time series data7. Table 3 reports the descriptive statistics of the study sample.

The total value of electronic transactions (cash and the digital noncash modes) for the period 3-12-16 to 15-8-17 is rupees 1954.08 crores (the noncash digital mode comprising 22 percent of the total value). This represents a reduction of 14.28 percent from the total value of transactions recorded during the same period in the previous financial year. This significant reduction indicates that demonetization has reduced the consumption of Government electronic services by the citizens. The volume and value of electronic transactions through digital channels, as a share of total volume and value of transactions increased from about 25 percent in the first week of December 2016 to about 40 percent in the first week of January 2017, when the citizens faced crisis situations due to the cash crunch. With the infusion of fresh cash currency into the system by the RBI, the proportion of transactions through digital channels reduced to about 27 percent in the second week of February 2017, and later on stabilized to about 20 percent from March 2017 onwards and till date.

Though the Government of India demonetized the high value currency notes on 8-11-16

(see section 2), the Directorate of ESD-Meeseva could implement digital noncash payment solutions at Meeseva kiosks from 3-12-16. The daily revenue accruals at ESD-Meeseva through the cash and digital noncash modes constitute a time series, and Figure 1 provides a visual depiction of the daily value of Government electronic services transactions (in Rupees) for the period 3-12-16 to 15-8-17.

7 Source : Office of the Electronic Services Delivery, Department of IT, Government of Andhra Pradesh, Vijayawada.

R is employed for econometric estimation. Since there is a bilateral causality between the use of cash and digital noncash payments for Government electronic services by the citizens post demonetization, the daily cash and noncash streams must be analyzed as time series data, and tested for stationarity and cointegration The cointegration relationship between the cash and noncash time series data is valuable information, and should be factored into the model

(Wooldridge, 2009).

As depicted in Figure 1, the daily revenue flow through the cash and noncash modes suggests a seasonality on a weekly basis, as most ESD-Meeseva kiosks in urban centers operate for a limited hours during weekends. Certain other ESD-Meeseva kiosks in rural hinterland remain closed during weekends and recording nil revenue inflows. Visual inspection also suggests that the cash and noncash time series may be nonstationary as the mean, variance, and covariance seem to be a function of time.

To determine whether the time series are I(0) or I(1) stationary, the Augmented Dickey-

Fuller (ADF) test was employed. For the cash time series in levels, the ADF test (with an intercept, trend, and 6 lags) rejected the null and was significant at the 8 percent level ( d = -3.21, p = 0.076), suggesting that the cash revenue stream is I(0) stationary.

Similarly, for the digital noncash time series in levels, the ADF test (with an intercept, trend, and 6 lags) rejected the null and was significant at the 5 percent level ( d = -4.19, p =

0.01), suggesting that the digital noncash revenue stream is also I(0) stationary.

For testing cointegration, the Augmented Engle-Granger (AEG) test is employed, wherein the ADF unit root test is applied on the residuals estimated from the cointegrating regression (Gujarati, Porter, & Gunasekar, 2012). Thus, the noncash stream is regressed on the

21 cash stream, and the results of the cointegrating regression is presented in Table 4. The results of the ADF unit root test, applied on the residuals from the cointegrating regression (without trend and intercept), is shown in Table 5. The tau statistic ( = -9.676) is more negative than the Engle-

Granger asymptotic 5 percent critical value of about -3.34, and hence the null is rejected, indicating that the residuals are stationary. This suggests that the cash and noncash revenue streams are cointegrated.

Using this knowledge and the Granger representation theorem, the error correction model

(ECM) is formulated to describe the relationship between cash and noncash revenue streams at

ESD-Meeseva, as follows:

∆ 푛표푛푐푎푠ℎ = 훼0 + 훼1 ∆ 푐푎푠ℎ + 훼2 푢푡−1 + 휀푡 …(1)

where 푛표푛푐푎푠ℎ is the digital noncash revenue stream, 푐푎푠ℎ is the cash revenue stream, 휀푡 is a white noise error term and 푢푡−1 is the lagged value of the error term from the cointegrating regression (see Table 4).

The empirical counterpart of (1) is presented in Table 6. Statistically, the ECM term

(푢푡−1) is significant, suggesting that the noncash revenue stream adjusts to the cash revenue stream with a lag. Further, about 52 percent of the discrepancy between the long-term and the short-term noncash stream change is corrected within a week. However, short run changes in the cash revenue stream is not quickly reflected in the noncash revenue stream mode as the slope coefficient between the two is only 0.17.

This is not surprising as some delay is inevitable in spreading awareness about digital cashless payment solutions, especially in the rural areas where digital literacy is low when compared to urban areas of AP. People from urban areas often use internet banking and cards

22 for payments and fund transfers. However, people from semi-urban and rural areas have to resort to mobile wallets (Paytm, Oxigen, and Freecharge are popular wallets), and the Government- backed Unified Payment Interface mobile applications (for example, the Bharat Interface for

Money) for noncash transaction settlements. People do take time to learn, and engage with digital payment solutions in ESD-Meeseva kiosks, especially in the rural areas. Further, digital payment solution vendors also take time to deploy infrastructure for cashless modes (like POS machines ) due to procedural issues at ESD-Meeseva kiosks.

Since the cash and noncash revenue streams are I(0) stationary and are cointegrated, the vector error correction (VEC) is employed to model this economic phenomenon, and may better explain the two-way causality and the mutual interaction between the two time series. The results of the VEC model are presented in Table 7. The coefficient on the error correction term for noncash is statistically significant at the 5 percent level, implying that the changes in the cash volume levels in the economy affect the digital noncash revenue streams at ESD-Meeseva. This broad conclusion makes sense, as cash currency deficits triggered due to demonetization propelled digital noncash payment solutions in ESD-Meeseva centers. 푢푡−1 measures the deviation of the digital noncash stream from its cointegrating level of 0.138 of the cash stream at

ESD-Meeseva (see Table 4).

Similarly, the coefficient on error correction term for cash is also statistically significant at 5% level. This implies that changes in the digital noncash revenue stream affect the cash revenue stream at ESD-Meeseva. This result also makes sense. On the re-imposition of MDR by the banks from 1-1-17, the digital noncash payment solutions became more expensive relative to cash settlements at ESD-Meeseva, and so, people switched over to cash modes of settling e- transactions at ESD-Meeseva.

To summarize, the analysis show that under the prevailing dispensation with no softening of the MDR, the citizens prefer cash modes of payment to avail Government electronic services at ESD-Meeseva kiosks.

5 Discussion and Managerial Implications

Did the citizen benefit from the demonetization-induced digital payment solutions?

Several hidden charges surfaced during the implementation of the State Government's advisory.

To install a POS device, the merchant must maintain a current account with a participating bank, and must either procure the device (each costing between rupees 4,000 and 8,000 as mentioned, and with a one year warranty) or enter into an agreement for renting the device (costing between rupees 250 and 600 per month, with a lock-in period of a minimum period of two years) with the

OEM or the agent. The merchant, with the required documentation, must make a formal request to the participating bank. The bank, after suitable verification, allots a terminal identification number (TID), after which the bank professionals visit the establishment and install the POS device. The process, in normal times, takes about 7 working days.

The public sector and private banks, already burdened with servicing cash withdrawal and exchange requests from massive number of customers waiting in mile-long queues outside their premises, could not issue TIDs to requesting merchants for several weeks, which resulted in enormous delay in installing the POS devices. In addition, most merchants, including ESD-

Meeseva kiosk operators, maintained savings accounts with their banking partners.

ESD-Meeseva required 4,200 POS devices, and through constant persuasion with its banking partners, was able to populate 4,000 kiosks with POS devices as on date. ESD-Meeseva offered popular government-to-citizen (G2C) services and utility payment services online, and

24 on smart phones in addition to kiosks. Thus, a citizen could request a G2C service or pay utility bills (like electricity, gas, and telephone) online using his or her debit (or credit card), without having to visit the kiosk. The online offering proved to be a boon to citizens who faced unending constraints in withdrawing cash from their bank accounts through ATMs. At the peak of the demonetization-induced cash crunch, 58 percent of the transactions in ESD-Meeseva occurred through online, card payment, and mobile app channels, which has now dipped to approximately

30 percent. This trend shows that the citizens are preferring the cash modes of payment to avoid the MDRs imposed by the banking partners on digital modes of payments. The burden of digital payment instruments seems to overweigh the disadvantages associated with cash-based payment systems to the citizen. Thus, the goal of a cashless society with financial inclusion of the disadvantaged sections of the population was not achieved by the Government in AP.

In the final analysis, the push towards digital transactions to ease the pain in the wake of demonetization may not have fully benefitted the citizen. The business models, as evolved by the

ESD-Meeseva and its service providers discussed above, resulted in extra burden to the citizen in the form of MDR and other transaction costs. The Government may have to dispense away with the imposition of MDR and other transaction costs through meaningful dialogues and negotiations with POS device manufacturers, payment card vendors, banking partners, and RBI to lessen the burden of digital payments, and to achieve its goal of a less cash economy.

The lessons from the AP experience, as brought out in this study, is clear. The state

Government must take an active role and coordinate with the main stakeholders which include the digital and banking service providers, the RBI, and the citizens to comprehend the burden of transaction charges and seek innovative venues to reduce this burden on the citizens. No amount of preaching by the state Government on the benefits of a cashless society would nudge the

25 citizenry toward digital payment solutions. On the other hand, aligning and incentivizing the stakeholders, especially the technology and banking service providers, may ensure the successful adoption of digital payment solutions.

As most technology and banking service providers are multinational corporations with footprints in more than one country, there is a larger need for concerted, and active intervention by the national Governments in other emerging economies to align incentives of the stakeholders.

Compliance with Ethical Standards:

This study is not funded by any organization and / or institution.

Sundar Balakrishna (Author) declares that he has no conflict of interest.

This article does not contain any studies with human participants performed by any of the authors. This article does not contain any studies with animals performed by any of the authors. This article does not contain any studies with human participants or animals performed by any of the authors.

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FIGURE 1: DAILY REVENUE COLLECTIONS IN INDIAN RUPEES (INR) AT THE DIRECTORATE OF ELECTRONIC SERVICES DELIVERY-MEESEVA, GOVERNMENT OF ANDHRA PRADESH, VIJAYAWADA THROUGH THE CASH AND DIGITAL NONCASH MODE FOR THE PERIOD 3-12-16 TO 15-8-17

Source: Office of Director, Electronic Services Delivery-Meeseva, Government of Andhra Pradesh, Vijayawada.

TABLE 3: SUMMARY STATISTICS FOR THE STUDY SAMPLE

Parameter Mean Standard 푁 Deviation Daily revenue stream through the cash mode (INR) for the period 3-12- 61151443 37833318 257 15 to 15-8-16 Daily revenue stream through the digital noncash mode (INR) for the 12553900 9185143 257 period 3-12-15 to 15-8-16 Daily revenue stream through the cash mode (INR) for the period 3-12- 59488640 40689478 257 16 to 15-8-17 Daily revenue stream through the digital noncash mode (INR) for the 16842806 12658797 257 period 3-12-16 to 15-8-17 Source: Office of Director, Electronic Services Delivery – Meeseva, Government of Andhra Pradesh, Vijayawada.

TABLE 4: COINTEGRATING REGRESSION OF NONCASH REVENUE STREAM (noncash) ON THE CASH REVENUE STREAM (cash) FOR THE PERIOD 3-12-16 TO 15-8-17

Dependent variable: 푛표푛푐푎푠̂ ℎ cash 0.1385*** (7.926) Intercept 8602000*** (6.833) 푁 257 R-squared 0.1983 Adjusted R-squared 0.1951 F-statistic 62.82 푝 value 7.166e-14

Note: "***" 0.001 "**" 0.01 "*" 0.05 "." 0.1; tau statistic in parentheses.

TABLE 5: THE AUGMENTED DICKEY-FULLER (ADF) TEST APPLIED ON THE RESIDUALS ( 푢̂푡) ESTIMATED FROM THE COINTEGRATING REGRESSION PRESENTED IN TABLE 4

Dependent variable: ∆ 푢̂푡

푢푡−1 -0.539*** (-9.676) 푁 257 R-squared 0.2693 Adjusted R-squared 0.2665 F-statistic 93.63 푝 value 0.01

Note: "***" 0.001 "**" 0.01 "*" 0.05 "." 0.1; 푢푡−1 is the lagged value of the error term from the cointegrating regression shown in Table 4; tau statistic in parentheses.

TABLE 6: THE ERROR CORRECTION MODEL (ECM) TO EXPLAIN THE RELATIONSHIP BETWEEN THE NONCASH (푛표푛푐푎푠ℎ) AND THE CASH REVENUE STREAMS (푐푎푠ℎ)

Dependent variable: ∆ 푛표푛푐푎푠ℎ ∆ 푐푎푠ℎ 0.17107 *** (12.615) 푢푡−1 -0.52327*** (-9.396) 푁 257 R-squared 0.5262 Adjusted R-squared 0.5224 F-statistic 140.5 푝 value 2.2e-16

Note: "***" 0.001 "**" 0.01 "*" 0.05 "." 0.1; 푢푡−1 is the lagged value of the error term from the cointegrating regression shown in Table 4; tau statistic in parentheses.

TABLE 7: THE VECTOR ERROR CORRECTION (VEC) MODEL TO EXPLAIN THE BILATERAL CAUSALITY BETWEEN THE NONCASH (푛표푛푐푎푠ℎ) AND THE CASH REVENUE STREAMS (푐푎푠ℎ)

Dependent variable: ∆ 푛표푛푐푎푠ℎ 푢푡−1 -0.610 *** (-8.64) Intercept -26930 (-0.034) 푁 257 R-squared 0.2281 Adjusted R-squared 0.2251 F-statistic 74.77 푝 value 6.17e-16

Dependent variable: ∆ 푐푎푠ℎ 푢푡−1 -0.506* (-1.978) Intercept -94440 (-0.033) 푁 257 R-squared 0.015 Adjusted R-squared 0.011 F-statistic 3.91 푝 value 0.049

Note: "***" 0.001 "**" 0.01 "*" 0.05 "." 0.1; 푢푡−1 is the lagged value of the error term from the cointegrating regression shown in Table 4; tau statistic in parentheses.