Demonetisation and digital payments

Effect of India’s DeMonetisation on uptake of digital payments

An analysis of data from the Reserve Bank of India to detect a step change that
could plausibly be attributed to DeMonetisation

Author: Jammi N Rao

Date: 06 Nov 2018

Abstract
On Nov 8 2016 at about 8 pm, the Prime Minister of India announced that effective
midnight that day, the existing stock of Rupee 500 and 1000 notes would cease to be
legal tender.

Though not mentioned as an objective of the policy initially, one of the benefits claimed
for it was a significant shift away from payments using paper money and towards digital
financial payments (DFPs).

Two years on from Nov 2016 it is germane to ask, ‘Did DFPs really take off?’

In this analysis I use a time series analysis forecasting approach applied to monthly
data from RBI on the volume, and the total value, of financial transactions by each of
several different digital mean

Taking the data upto October 2016 (the month before demonetisation) and using
Autoregressive Integrated Moving Average (ARIMA) modelling to forecast future growth,
I show that the actual growth observed in the months after Nov 2016 was well within the
expected range of forecast.

My analysis shows that any growth in the volume of (DFPs) post-demonetisation can be
explained almost completely on the basis of trend growth. DFPs were growing before
Nov 2016 and they continued to grow post-demonetisation at about the same rate.
There is little direct evidence of any causal effect of demonetisation that was either long
term or sustained.

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Source and description of data
The data for this analysis were downloaded from the publicly available ​Database of
Indian Economy​ published on its website by the ​Reserve Bank of India​. Specifically, the
time series data on Payment Systems Indicators records for each month the total
volume (i.e. number of transactions in millions), and the total value of the transactions
(in billions of rupees) for each of the non cash payments systems in use.

A screenshot of the data is attached in Appendix 1.

The payment systems indicators that I downloaded are:

## [1] "Month" "RTGS_vol"   

## [3] "RTGS_val" "CCIL_vol"   
## [5] "CCIL_val" "Paper_vol"   
## [7] "Paper_val" "Retail_vol"   
## [9] "Retail_val" "IMPS_vol"   
## [11] "IMPS_val" "NACH_vol"   
## [13] "NACH_val" "AllCards_vol"   
## [15] "AllCards_val" "CreditCards_vol"   
## [17] "CreditCards_val" "CreditCardsATM_vol"   
## [19] "CreditCardsATM_val" "CreditCardsPOS_vol"   
## [21] "CreditCardsPOS_val" "DebitCards_vol"   
## [23] "DebitCards_val" "DebitCardsATM_vol"   
## [25] "DebitCardsATM_val" "DebitCardsPOS_vol"   
## [27] "DebitCardsPOS_val" "PPI_vol"   
## [29] "PPI_val" "mBanking_vol"   
## [31] "mBanking_val" "CardsTotalNumber"   
## [33] "CreditCardsNumber" "DebitCardsNumber"   
## [35] "ATMNumber" "POSNumber"   
## [37] "DigitalGrantTotal_vol" "DigitalGrandTotal_val" 

The other data in the RBI database are subsets of these; for instance RTGS data is
broken down into Customer transactions, Interbank transactions and others. I have
restricted my analysis to the total for each modality of payment.

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Analytical methods
Each column of the data set can be seen as a time series at regular monthly intervals. If
a time-series is stationary or can be transformed into a stationary time-series by suitable
transformation, it can be modelled using statistical regression.

Such regression breaks down the periodic variation or noise into a smooth trend
component, a seasonal component and what is left is a residual unexplained variation.
The parameters of the regression equation allows the time series to be forecast into the
future for a set number of periods, to generate an expected value at each time period
and, because of the residual component a 80% or 95% upper and lower confidence
interval.

This is standard time series analysis, and the ​statistical programme R​ provides some
powerful tools for the purpose. Keen readers should see the ​monograph by Rob J
Hyndman

I used the R package ‘forecast’ to carry out the ARIMA analysis and the R package
‘ggplot2’ to generate the charts.

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Analysis and Results
The analytical steps

I illustrate the steps in the analysis using the mobile banking payment system as a
template before repeating the same analysis for the following indicators:

1. Digital Grand Total by value

2. Digital Grand Total by volume

3. All cards by value

4. All cards by volume

5. Retail sales by value

6. Retail sales by volume

7. RTGS payments by value

8. RTGS payments by volume

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Mobile payments by value

Chart 1 shows the raw data in a standard time series chart. I have partitioned the data into a pre
and post Nov 2016 series to show the effect of DeMonetisation. The indicator was rising steeply
from 2016 onward, post demonetisation there was an acute spurt upward that was not
sustained. By mid 2017 it had fallen back to levels seen a year earlier. Since then there has
been a steady rise with the slope about the same as 2 years earlier.

The key question is this: using just the data we had pre Nov 2016 what would be have
predicted for, say April to Aug 2018? First we need to establish that this time series - i.e
the data from April 2014 to Oct 2016 - is capable of being made stationary, i.e
understand the trend, seasonal and residual components of the data series. This
partitioning of the variability is shown in Chart 2

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Now we can use the forecast package in R to use this data to forecast the future. Note
that for the purposes of this ‘thought experiment’ we act as if we are in Nov 2016; the
only data we have are upto Oct 2016 and we ask ourselves, ‘What is the best prediction
we can make how mobile payments will grow over the next 22 months - to Aug 2018.
We then overlay the data that have in fact observed and see if what we have observed
was ’predictable’ back in Nov 2016.

Chart 3 shows the result of this analysis. The white line is the mean of the predicted
values of the indicator, the shaded areas on either side are the 80 and 95% confidence
bands, and the red line is the actual observed values of the indicator.

As can be seen the values observed are well within, indeed more recently they are
slightly lower than what we might have predicted in Nov 2016. I believe this is strong
evidence of the lack of any appreciable effect of DeMonetisation on the value of mobile
payments. They are higher than they were in late 2016, but then they have been
growing steadily since 2014 and any growth post DeMonetisation is merely part of trend
growth

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Analysis and results of other payment system indicators

For the subsequent indicators, I present just the final plot of the forecastand the actual data
observed to draw a conclusion whether there was a change that was not outside the range of
statistically predictable values.

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Mobile banking payments by volume

Chart 4 shows a dramatic rise in volume of mBanking transactions. It was clearly in excess of
anything that could have been predicted in Nov 2016 using the data available up that point.

Chart 4 (mBanking volume) is in sharp contrast to Chart 3 (mBanking value). It would

appear that whereas the total value of transactions done each month using mBanking
has gone up in keeping with the pre Nov 2016 trend, the number of such transactions
has gone up well beyond trend growth. This would suggest that the average value per
transaction has fallen back sharply at some point after Demonetisation.

Average spend per transaction in mBanking payments

Chart 5 shows precisely this trend. I have not done any predictive modelling here, the
chart shows tells its own story. Clearly, the average size of mobile Banking transaction
rose briefly above 15,000 Rupees but then fell back rapidly over 2017 to levels of just
over 5,000 Rupees that were last seen in early 2015. Possible reasons for this could be
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a backlash against charges for remittances and payments using mobile based payment
services.
.

Total digital transactions by value

Total Digital Payments is perhaps the most pertinent indicator to track. This indicator is the sum
of the following indicators:
● 1.1 Customer transactions through Real-Time Gross Settlements (RTGS)
● 1.2 Inter-bank RTGS transactions
● 2 CCIL operated payments systems
● 3 Paper Clearing
● 4 Retail Electronic Clearing
● 5 Card Payments (debit and credit cards)
● 6 Prepaid Payments Instruments (includes m-Wallet, PPI cards and Paper Vouchers)

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Chart 6 shows that total digital transactions have been steadily growing throughout the period
2004 to 2018. This growth has continued after DeMonetisation in Nov 2016 but this has been
trend growth. The post Non 2016 growth is within the range that could have been predicted
before DeMonetisation by statistical modelling using the data available at that point.

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Total digital transactions by volume

Chart 7 shows that the volume of transactions included in the Total digital payments
indicator rose sharply immediately after Demonetisation and after some moderation
continued over the next 22 months to be just above the 95% upper confidence limit of
the range that might have been predicted in late 2016 based on the data then available.

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Plastic card payments by value

Chart 8 shows that the value of transactions made using Plastic cards after DeMonetisations is
above the range that could have been predicted in Nov 2016 based on the trend data then
available. But this finding needs to be seen in the context of the known pattern of debit card
usage in India. Predominantly it is used to draw cash at ATMs. See later

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Plastic cards transaction volumes

Chart 9 shows that the growth in number of transactions using plastic cards (debit and
credit cards) has been steady but unspectacular. The growth in the period since
DeMonetisation is in the middle of the range of values that could have been predicted in
Nov 2016 based on statistical modelling of the data available at the time.

Charts 8 and 9 need to be interpreted in light of known patterns of of card use in India.
Debit cards are widely held. As of August 2018, Indians held 980 million debit cards but
only 41 million credit cards. Debit cards are used in the main to draw cash out of ATMs.
In August 2018, debit cards were used 805 million times in an ATM (with an average
transaction amount of INR 3,400); and 357 million times at a Point of Sale terminal (with
an average transaction amount of INR 1370).

Credit cards are relatively predominantly at POS terminals (144 million transaction in
August 2018, vs 0.8 million times at an ATM). See more detailed data on ​debit and
credit card usage

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Immediate Payment Service payments

Chart 10 shows the trend growth in the total value of payments made using IMPS - the
Immediate Payments Service. The growth in the period after DeMonetisation has been a
continuation of the trend prior to that event. The actual growth observed is just above the
predicted line but well within the 80% confidence range.

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IMPS Payments transaction volumes

Chart 11 shows the trend growth in the volume of transactions settled using IMPS - the
Immediate Payments Service. The growth in the period after DeMonetisation has been
a continuation of the trend prior to that event. The actual growth observed is just above
the prediction line but well within the 80% confidence range.

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RTGS payments by value

Real Time Gross settlements are used for payments over INR 2 Lacs. Chart 12 shows the
predicted trend in growth using ARIMA modelling and the observed growth. After
Demonetisation growth in RTGS payment volumes has continued largely on predictable trend.It
fluctuates quite a bit (for example see the spike in 2012) but the observed numbers
post-DeMonetisation has stayed mostly with in the 80% confidence band, occasionally going
above it but still within the 95% confidence band.

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RTGS payments by volume

Chart 13 shows that the volume of transactions using the RTGS payments system has
continued to grow. The growth after Demonetisation has been within the 95% range that
could have been predicted in Nov 2016 using ARIMA modelling of the data available
upto that date.

Summary of results

ARIMA modelling of the time series data upto October 2016 - the month before
DeMonetisation - shows that for most of the digital payments systems indicators, the
growth in the 22 months following (November 2016 to August 2018, the latest month for
which RBI has published data) has been ‘on trend’.

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Discussion

Newspaper reports​ as well as a ​research paper by Maiti SS​ of RBI suggest that there
has indeed been a shift from cash and paper based systems to digital payments. These
reports were based on analysis comparing the value of digital transactions a few
months after Demonetisation with corresponding values before that event.

This approach is almost certainly flawed because it does not take into account the fact
that as India’s economy grows and as financial technology and the necessary digital
infrastructure spreads the uptake of digital payment systems grows organically. Any
increase over a period of time cannot confidently be causally attributed to a specific
one-off policy intervention with any degree of certainty.

Ascribing causality is always fraught. The danger is that those who espouse a particular
policy or defend a policy move by ‘their hero’ will have a natural inclination to pluck
selectively at data before and after the policy to show that a change has occurred. But
we need constantly to be aware of the well known logical fallacy known as the ‘post hoc
ergo propter hoc’ fallacy. Translated from Latin it means ‘After this therefore because of
this’. Just because event B occurs at some point in time after A, it does not follow that A
caused B. To be able to show that A caused B, one would have to show convincingly
that B would not have occurred had it not been for A.

In the case of economic data like payments systems indicators there is steady change
(usually growth, but sometimes also decay) over time, and there is fluctuation from one
period to the next. By selectively choosing time point one could make whatever
argument one wishes to. Therefore, with time series data the best and most rational
approach is to consider the whole data set an look for patterns.

Time series analysis is now a well developed technique. A time series can be modelled
using standard statistical regression techniques and, just as with any other regression
model, the model parameters can be used to ‘predict’ how it will pan out into the future. I
use the word ‘predict’ within quotes to make the obvious point that this is not prediction
in the astrological or tea-leaf reading sense but rather statistical prediction. As with all
statistical prediction, there is a mean expectation and surrounding it one can set up a
range within which the observed actual values can be expected to land with a given
degree of confidence.

My approach in this analysis has been in the nature of a thought experiment. If we were
back in time in early Nov 2016, when the Demonetisation that happened on 8 Nov was
not on anyone’s horizon, and we looked at the RBI data set on payments system
indicators, and asked ourselves this question: “Given this data where do we think the

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numbers will be 15 months to 22 months later?”.

My analysis shows that what really happened - the actual observed data - was foer the
most part within the range that we might have predicted.

Demonetisation can be credited for at most a marginal effect on one or two digital
payment systems indicators - namely, a) the number of mobile payments, though not on
the total value of them,

b) the number of total digital transactions, but again not on the total value of them,

c) the value of plastic card transactions but not on their number, but note here the
predominant use of debit cards in India is to draw cash at ATMs.

But these account for relatively small amounts of money. The big ticket items are
RTGS, and IMPS and here both the numbers of transactions and the total value are
within the range that could have been predicted back in Oct 2016 with the data then
available.

Conclusion

Demonetisation cannot be claimed to have led to a change in the use of digital means of
payments as opposed to cash.

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Appendix 1

Screenshot of RBI’s webpage showing the top few rows and columns of the payment systems
data set.

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