How India’s Demonetization Policy is Affecting Smartphones, Carriers and Mobile Payments

How India’s Demonetization Policy is Affecting Smartphones, Carriers and Mobile Payments

For Android fans, 2016 has been rather uneventful. Sure, we’ve seen the end of the Google Nexus line, the release of Android Nougat, and the rise and fall of the Samsung Galaxy Note 7. The two Google Pixel phones, besides the price hike, are not that different than the Nexus phones of old. Android Nougat, while finally implementing multi-window, hasn’t really revolutionized the Android software landscape. And as for Samsung’s disastrous Galaxy Note 7 – eh, they’ll survive. But outside of the Android tech sphere bubble, events in 2016 have led to a huge shake up in the way the world does business. Sometimes, these major geopolitical events trickle down into the lives of your everyday Android fan.

We’ve talked before about how Brexit has temporarily affected the prices of certain smartphones, and how an Android enthusiast gets by in a ‘third-world’ country, but today we’re going to discuss something that is highly relevant to a dedicated portion of our readers – India’s recent demonetization of its highest currency denominations. While the whole issue is largely political in nature (and we do not hold an opinion on the motives or effectiveness), we are here to analyze how this move is likely going to affect the massive potential of the smartphone market in this developing country. Furthermore, we will touch upon how the Indian smartphone scene has been shaken up and changed by this move.

[This article will not touch upon the politics involved with the decision or its ramifications outside of the Android tech scene, so please don’t get political in the comments — we are a technology forum first and foremost.]


Demonetization – A Primer

If you’ve been keeping up with the latest in global news, you may have heard of India’s recent demonetization move. For a short summary, the Government of India decided to withdraw the legal tender status of ₹500 and ₹1000 currency notes (valued at ~$7.5 and ~$15 respectively), both of which are (or were) the highest denominations of currency available in the country, with the next highest being ₹100 only (~$1.5) from the old currency; new currency notes of ₹2000 ( ~$30) and ₹500 also were to be put into circulation. The move was announced on 8th November 2016, and was put into effect in a very short time period of less than four hours, effective from 9th November 2016.

For some perspective, refer to the figures quoted in Reserve Bank of India’s (the Central monetary authority in the country) Annual Report: the older currency denominations accounted for 86.4% of the country’s cash circulation in value (not volume), all of which are now deemed worthless for barter exchange in their old state. Citizens had to deposit their older notes with banks to achieve any more use out of them, and strict withdrawal limits have been imposed (and slightly relaxed since) to make sure that tight control is maintained.

In essence, the largest cash denominations were essentially wiped out overnight, and the sheer value loss caused by the move saw a severe cash crunch in the country. To understand how the recent events would affect the Indian smartphone industry, it is important to look at the scenario before the event and the predictions that were made alongside.


Smartphone Sales

Recent reports from Morgan Stanley, released a few months prior to the surprise move, stated that India was in the running to overtake the United States as the second-largest smartphone market by 2017, riding on top of robust annual growth in the smartphone market. The country would have grown at a compounded annual growth rate (CAGR) of 23% through 2018 (compared to 5% estimation for China for the same period), and would account for 30% of the global growth during the period.

As growth in China had decelerated and was expected to stagnate, the moment was ripe for India to become the next point-of-interest for smartphone OEMs and their product strategies. Morgan Stanley’s report from April of 2016 puts the number of smartphone users in India at 225 million. That figure – which is already impressive – actually only accounts for 18% of the total population of the country; 82% of the population of India does not have a smartphone, so the potential was (and is) absolutely massive. We saw plenty of OEMs shift their focus in smartphone production and marketing towards India precisely because of the huge potential for growth, and India has also been one of the engines driving smartphone prices down.

With Reliance Jio, a major LTE mobile network operator, expected to launch in 2016, Internet penetration in India was also bound to increase by a very good margin in a short time. All in all, the bigger picture was definitely rosy, a fact that was not lost on international OEMs that looked forward to a piece of the pie.

And then, demonetization happened.

The effects of demonetization were immediately felt in the form of a liquidity crunch in the market. Mind you, there was no lack of funds as people had plenty in the form of assets and bank balances (and old notes). What was missing was the ability to spend these balances. Electronic means of payment (RTGS, NEFT, Debit and Credit Cards) are still mediums largely restricted to urban and semi-urban areas, and even then, these do not enjoy the universal acceptability and preference that physical cash did before. To get a better idea on the cash dependence, India’s Cash-to-GDP ratio is reportedly at 10.86% of its GDP (which itself is growing), while countries like UK and USA have low cash dependence at 3.72% and 7.9% respectively. Further, for a population of 1.2 Billion, the country only has 22 Million credit cards and 636 Million debit cards (not taking into account the fact that people can hold multiple cards) as of March 2016.

Now, couple these with the fact that smartphones in India are still largely considered as a luxury rather than a necessity and you’ll understand how this demonetization move disproportionately affects the market segment that depends largely on cash – which happens to be the group that largely do not already own a smartphone. Further, sales of smartphones in rural and semi-urban areas continue to rely on physical brick and mortar stores rather than online marketplaces – places where the consumers and the sellers jointly prefer the convenience of cash. The direct consequence of all of these factors combined will give us a sharp decline in smartphone sales in these areas. Sales in urban metropolitan regions are affected as well, but the quantum of drop (and lost potential) is less pronounced here.

Of course, you do not need to take my word for it. On November 26th the Indian Cellular Association (ICA), which is the apex body of mobile industry in India comprising of the various stakeholders in the industry, put forth a formal request to the Government of India to allow the usage of the older and now invalid currency notes specifically for buying mobile phones. ICA claims that sales of mobile phones (smartphones and feature phones combined) have fallen by 50% due to the domino effect that demonetization is having on the Indian economy.

The mobile handset sales have crashed and the sales are down in the brick and mortar channel, which is more than 80 percent of our turnover… the daily collection of our trade and industry, which should be around Rs 350-400 crore [~ $51 Million – $59 Million] is down by 50 per cent.

Indian Cellular Association

Market research firm IDC forecasts that feature phone shipments (not actual sales, but a hard-cap on potential sales) will fall by 24.6% while smartphone shipments will fall 17.5% this quarter compared to the previous quarter.


Telephony Services

The importance of mobile services was not entirely lost on the government. Seeing how a very large part of the low and medium income groups prefer using prepaid SIM connections over postpaid billing connections for their telephony needs, the government did allow the use of older ₹500 notes for topping up prepaid connections up to December 15th. There are restrictions in place, such as a maximum ceiling for a prepaid recharge with the old note being fixed at ₹500 (the value of the old note) per prepaid connection (effectively allowing you the use of only one of your older currency notes). But, looking on the bright side, some respite is better than nothing. The government did recognize telephony as an essential service, but consumers are holding back unneeded expenditure in this sector as uncertainty on the liquidity crisis continues.

One telecom service operator is standing above the pack, being on the positive end of the demonetization move: Reliance Jio.

Jio launched commercially to the public in early September 2016, becoming India’s first and only 100% VoLTE operator in the country with a full 4G LTE network (no provision of 3G/2G service, which is a very big step forward for India). When Jio launched commercially, it actually launched completely free for the end user — no contract, no security deposit, no monthly fee, no prepaid expense, no money to be paid even for the SIM card — no strings attached at all. The free service provided users with unlimited 4G data, free VoLTE calls and texts across all networks, along with access to Jio’s multimedia app suite. The only catch here was that data was soft-capped at 4GB daily per user, after which the user was throttled down considerably. But seeing how this limit was generous and the service was entirely free, there is not much to complain here. The free period was to end by 31st December 2016, beyond which the still-affordable rates of the telecom operator would apply. Consumers still retain the choice of going ahead with the rates, as one could simply cancel the SIM and dispose it off after enjoying the freebies.

While other telecom operators in the country are losing out on income as families look to cut down petty expenditure, Jio is gaining more and more subscribers. People who had held out on Jio are joining over if only to cut down on cash expenses. Jio sensed an opportunity with the demonetization policy, and thus the company recently announced that they will extend its free service offer until March 31, 2017. For consumers who are strapped for cash, a telecom service which does not want any of your money is an obvious winner. Other operators are most definitively feeling the heat, as many are now offering much more attractive deals to entice their customers to remain loyal to their services.


Digital Wallets

An EDC machine, used at merchant counters for card based transactions.

An EDC machine, used at merchant counters for card based transactions.

In the past few years, a strong emphasis was put on mobile payment solutions in order to transform the Indian economy from cash-heavy to cashless (or close). Banks and bank accounts are the center point in this equation, but more and more means are being adopted to add on factors of convenience. Not all merchants or consumers could practically afford Electronic Data Capture (EDC) machines, commonly known as card swipe machines, for all of their financial transaction needs. This is where digital wallets factor in.

The concept of a digital wallet in the current Indian context is very much alike Android Pay and other mobile payment solutions in functionality, but differs in its implementation. Android Pay stores information regarding your debit and credit cards and is used to facilitate transactions at merchant counters, but popular digital wallets in India like Paytm, MobiKwik, Oxigen, FreeCharge, Airtel Money, Jio Money (and many more offerings by banks too) try and act as a wallet to actually store currency value within digital accounts rather than just act as information gateways for your bank account. In this regard, these digital wallet solutions are much closer to the likes of PayPal than they are to Android Pay or Samsung Pay.

[The security of such digital wallet solutions is questionable, but that is a topic for a different debate. Personally, I hold only nominal value in such wallets.]

Paytm is the current leader in the Indian market thanks to its early entry as well as consistent marketing efforts. The demonetization move strongly bolstered its usefulness as the service even facilitates exchange transactions which do not necessarily have a financial/for-profit nature (like splitting a bill with friends). Paytm rightfully saw immense opportunity by the government move, and immediately reacted with advertisements across television, newspapers, and social media pages as well as aggressive on-the-ground marketing targeting local shopkeepers and first-time users alike. Within a period of days, the app registered a 700% increase in overall traffic, a 1000% growth in amount of money added to Paytm accounts, 300% increase in app downloads, and a 500% increase in user transactions per week. As of a few days ago, the platform claims to have 150 Million users with 5 Million transactions per day, and is on its way to processing ₹24,000 Crore (~$352 Million) in transaction value by the end of the fiscal year. Just for reference, Paytm started off humbly in 2010, and it was only in 2014 when Paytm’s wallet solutions were launched.

Paytm’s runaway success highlights one very important point: Google missed the mobile payment train in India. With the current turn of events heavily in favor of mobile wallets, Paytm’s familiarity and ease-of-use appealed to the Indian demographics and provided relief in desperate times. By doing so, the company/app has gained trust and widespread acceptability (ranging from the small time newspaper vendors and local grocery stalls all the way to supermarkets and malls), something which currently-non-existent competitors like Android Pay will find extremely hard to compete with. Trust is of utmost importance wherever money is concerned, and Paytm has reached that critical mass where its familiarity will only accelerate its popularity.


Demonetization of the highest denominations is, no doubt, one of the biggest changes that the economy of India has seen in recent times. While not being directly related to the smartphone sector, it has still resulted in widespread ramifications less than a month out from the policy’s implementation. The totality of the effects is very difficult to ascertain even in the long term. India was on track to become an even bigger market for smartphones and related services, and this move may have drastically altered the course of India’s burgeoning smartphone market, influencing everything from smartphone sales and shipments to mobile carriers and digital wallet solutions. It even extends onto other scenarios, like spending on apps and effects on smartphone prices, but it’s harder to draw conclusions on these aspects at the moment. All we can do right now, is wait, watch, and go with the flow.

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