The aim behind the government’s action was to combat tax evasion, counterfeiting and corruption. The government claimed that eliminating large denominations would make it harder to hide large amounts of cash. The abrupt nature of the move and the prolonged cash shortages that followed created disruptions throughout the economy, threatening the economic output of the country. The move was heavily criticized as poorly planned and unfair, and was met with protests, litigation, and strikes.

As a result of demonetization and its adverse effects on the economy, The Asian Development Bank cut its growth estimate for India for the financial year ending March 31 to 7% from 7.4%. JP Morgan expects growth to decline by half a percent to 6.7%. The cascading effect of demonetization – drop in sales, layoffs (in sectors like construction, textiles & jewelry) have all taken a big hit on the economy. According to some estimates, the cost for merely swapping out the demonetized currency is around 1.28 trillion rupees, or about $19 billion.

But not everyone lost out, e-wallet firms such as Paytm, Oxigen and MobiKwik turned out to be lucky winners and they won big. As per government data, the number of daily transactions has shot up from 17 lakh (November 8, 2016) to 63 lakh (December 7, 2016), a growth of 271%.

Huffington Post: In a single master stroke, the government has attempted to tackle all three malaises plaguing the economy—a parallel economy, counterfeit currency and terror financing.

According to a study titled Indian m-Wallet Market, within 12 days of the announcement Paytm raked in over 7 million transactions worth Rs 120 crore a day and was doing more transactions than the combined average daily usage of credit and debit cards in India. Now that is some serious business gain, all thanks to demonetization.

A lot of people were thankful for e-wallet firms for helping them tide through the tough days post demonetization, and rightfully so, but they failed to see how with every transaction they were losing the value of their money. Let me explain this using an example:

Mr. X buys Rs. 10,000 worth of goods online and he pays for it using an e-wallet. When the payment gateway receives the money, its charges TDR (transaction discount rate), on an average it will be 2% + service tax on transaction value. So payment gateway takes Rs. 230 ((10000*2%)*(1+15%)) out of Rs. 10,000. In most cases, the company pays 50% (Rs. 115) of its payment charges to the bank and the rest (Rs. 9770) to merchant. Upon receiving payment, the merchant will supply material to Mr. X. When the merchants supplies the product, the cost incurred (Rs. 230) is charged to Mr. X (either directly or by decreasing the value of the product to Rs.9,770 instead of Rs.10,000). Here is a visual depiction of the above transaction:

If we calculate the TDR for a large number of transactions we find that after about 70 transactions, 80% of the initial amount is lost as transaction fee alone (and 90% is lost after 100 transactions). Cash, on the other hand, does not lose its value in transactions. So going cashless does comes with its inherent problems, costs that the average Indian may not be aware about.

Is going cashless completely secure?

Although going cashless does seem like the way forward, we need to stop & think if it is completely secure. In December, Paytm servers were down for 1-2 hours, affecting a very large number of transactions. Paytm, in an official communication has also admitted to some fraudulent Paytm users who were part of an online scam. United Payment Interface (launched by RBI) uses a double factor authentication and is considered more secure according to bankers.

The Wall Street Journal: The long-term effects of India’s demonetization gambit remain unclear, largely because no other major economy has attempted such an experiment except during a crisis. But with growth slowing and job losses rising, the short-term prognosis appears grim.

Some experts feel it is RBI’s inefficiency when people pay small amounts like 10/20/50 using e-wallets, the institution should have done more to distribute smaller denomination notes post-demonetization. e-wallets are similar to carrying a self-signed cheque, very vulnerable to fraudsters. India is far behind other nations when it comes to dealing with debit/credit card frauds, we can only hope it is in a better state for e-wallet hacking and frauds.

Another talking point among experts is ownership, the single largest shareholder of Paytm is Alibaba, the world’s largest e-commerce company that is based in China. Although the idea seems far-fetched there are some who believe that with some pressure, Alibaba could get access to consumer spending and behavior patterns from Paytm. In a world where information is power, this idea should not be taken lightly.

Demonetization may have its pros & cons, and we are all more or less aware of it, but the flip side of it and its boost to e-wallet companies makes for a great case study. Some of the issues that may arise can be addressed:

• The government can revise or enforce existing laws to ensure that parties outside the country (such as Alibaba) do not get access to sensitive data.
• Data security must be regulated by an independent government agency that must set the rules & guidelines and enforce them from time to time. There must be necessary protocols put in place for cases of consumer fraud and the agency must be bestowed with necessary powers to handle such incidents.
• The government can encourage the use of UPIs and use its low transaction fee as a selling point.
• The government must bring about regulation in the transaction rates charged by e-Wallet firms and need to reduce these rates drastically. According to reports, this digital payments market will soon touch 2,000 trillion by FY 2021-22, even a small percentage of this market will be quite substantial.

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Image Credit: Pixabay

The author is Founder Director of SpingforthCap.com, a full service mid-market investment bank

The post Not everyone lost in demonetisation appeared first on Startagist.

2016 has been an exciting year for the Indian logistics industry — from GST to startups, each development is enhancing the industry to be more efficient and effective. There is a major shift coming from startups with new technologies and business models — close to 90 startups have been funded since 2014.

2017 will filter out the ones with sustainable business models. The outlook for logistics in 2017 remains bright. In terms of startups, the one with the sound fundamental play will remain standing while the fund-raise play falls apart.

India’s logistics industry is fragmented and underdeveloped; this leads to logistics costs remaining relatively high, due to poor physical and communications infrastructure. High dwell time at ports, low levels of containerisation, and a multi-layered tax system contributing to significant delays at border crossing points.

The proposed goods and services tax (GST) will help companies reduce logistics cost by 1.5 to 2.5 per cent as they reconfigure their supply chains and bring in key structural changes like fewer and larger warehouses, and larger number of bigger trucks on the road.

With greater adoption of the hub-and-spoke model, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations. Warehousing will be at centrestage with GST coming into effect as companies like Amazon looks to take a step forward in major cities like Hyderabad, while Alibaba looks to enter India through Paytm.

Demonetisation is also a boon to the industry as it is highly reliant on e-retail and online ordering. Cashless transactions and a digital India push will drive growth in hyperlocal logistics, which means there is a serious need for innovation and disruption in the last mile logistics space, which will be solved in coming years by startups like Last Mile Delivery, VDeliver, Lotruck and Connect India.

However, the payment gateway charges may cut into the thin margins of the providers and users. This requires a serious revamping and the cost must come down significantly to a level of one tenth of current levels.

The bold movement of Uberisation in India, led by companies like ReturnTrucks, is changing the vehicle engagement, utility, and transportation aspects of logistics. Newer trends will greatly change the landscape and dynamics of express cargo, which will take a different shape as newer companies like Rivigo, Delhivery, and Blackbuck take the ground and offer better value.

The value of time, which was never really understood by traditional players, will be a major reason for their lagging behind, as new players focus on route optimisation and quicker deliveries.

Global technological development will deeply impact and improve the logistics industry. Some of the major technologies in focus would be 3D printing, autonomous vehicles, AI, IoT, drones, and robotics. 3D printing will minimise the need for movement of spare parts and will greatly impact the logistics sector in coming years.

With AI and IoT already being used in tandem, their full potential will be unleashed in 2017, as more and more startups focus on AI for route optimisation, and IoT for fleet management and better optimisation for the operator. However, only a few logistics applications with substantial business impact have materialised so far.

Autonomous vehicles are on testing grounds. Self-driving vehicles have already made inroads into logistics, reaching a level of maturity for commercial use in warehouse operations. The next step for self-driving vehicles in logistics will be to overcome regulatory and security challenges to deploy autonomous vehicles on public roads.

While drones and UAVs still require mainstream adoption, first tests have demonstrated the future potential of UAVs especially in rural delivery scenarios. However drones will also be in focus in 2017, increased use and optimistic plans from the e-retail giant Amazon will completely change the landscape.

Advancements in robotics, AI and Machine Learning will greatly improve efficiency in logistics and warehousing, through various applications like warehouse robots and automation, route optimisation, territorial mapping and dynamic pricing.

2017 will be the defining year for the logistics industry, with better-than-expected growth, efficiency improvements, and newer technological applications. There will be mushrooming of startups, and the ones with clear sustainable business models will remain standing. We can expect more consolidation in the industry and also greater competition.

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This article was originally published on LinkedIn Pulse and was republished with permission.

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