India’s Prime Minister Narendra Modi promised the poor they would benefit from his surprise ban on 86 percent of the country’s currency in November. Now, nearly five months later, it seems the poor have made the shocking move work for themselves – and Modi – with the help of digital finance technology.
When Modi gave four hours’ notice for the ban on the 500- and 1,000-rupee notes – the two largest denominations worth about $7.50 and $15 – his stated purpose was to eliminate fake currency (or “black money”), corruption, tax evasion and terrorism funding. The media backlash was immediate as people fainted while waiting in line for empty ATMs, and banks did not have enough new 2,000-rupee bills to exchange for the banned ones.
But amid the chaos, another form of currency stepped forward: digital. India’s largest digital wallet company, Paytm, saw the number of daily transactions double to 5 million within 10 days of the demonetization announcement, and they have since increased to 8 million. The number of users registered on Paytm rose 64 percent to 200 million from January 2016 to February 2017.
Data from the Reserve Bank of India also showed that the value of mobile wallet transactions increased by 62 percent from October – before demonetization – to December 2016. Even more significant, the volume of transactions more than doubled, indicating that most of the growth has been in small transactions.
This data is consistent with “experience on the street level,” Anit Mukherjee, a policy fellow at the Center for Global Development, wrote in a recent blog post after a visit to India. While there, Mukherjee stopped by his favorite street food vendor and asked him about the impacts of demonetization.
“[The vendor] said that within two days, he realized that things have changed and he needs to get on this digital bandwagon,” Mukherjee said in an interview with Humanosphere. “He didn’t have a point-of-sale machine for debit cards, so he got himself one of these QR codes digital wallet membership, and it was pretty painless.”
The street vendor told Mukherjee that 80 percent of transactions at his stand were via digital wallet within days of demonetization. And his experience was not unique, laying rest to worries that the under- or uneducated poor would be left behind in a shift to digital.
“Don’t assume that people, just because they are poor or just because they don’t have an education, that their adaptation to technology is worse than yours,” Mukherjee said. “In fact, you are worse than them in most cases because the technology is their lifeline.”
The sudden spike in digital transactions did not go unnoticed by Modi, who was not gaining much traction on his stated aims. Quickly the narrative changed from being focused on anti-corruption to making India a less-cash economy. To bolster that drive, the government set an ambitious target of 250 billion digital transactions by March 2018, equivalent to 200 transactions per person over the next 12 months.
The new message seems to be resonating with voters. Earlier this month, Modi won a landslide election victory in the largest state and his party overwhelmingly won another, wins that will strengthen his bid for a second term.
Notable members of the international community are singing his praises as well. Despite lowering India’s first growth projection since the demonetization from 7.6 percent in June to 7 percent this month, World Bank CEO Kristalina Georgieva said “PM Modi’s decision to ban high-value banknotes” will have a “profound and positive impact on India’s economy,” according to Hindustan Times.
“What India has done will be studied [by other countries],” she said. “There hasn’t been such demonetization in a country so big.”
Of course, India’s demonetization has not been without negative outcomes, and even economists who promote less-cash economies have criticized the hastiness in which it was implemented. But at the end of the day, Mukherjee says that a more digital economy will offer the poor more choices, which will hopefully lead to more financial inclusion and less inequality.
“Previously you were beholden to cash payments and all the problems that goes with it,” he said. “Now, you have the option of asking for a payment at the end of the month on say a mobile savings instrument, on your mobile phone. It’s expanding choices for the people who are on the bottom of the ladder.”
Of course, these choices have to actually be accessible for the poor. For example, mobile banking and payment platforms were been designed to work both on smartphones and basic feature phones. Interoperability of systems that are not proprietary to specific banks is another key aspect of financial inclusion that has made great strides in India.
Therefore it seems that with certain options in place, India’s poor have coped considerably well with demonetization after the initial shock.
“Honestly,” Mukherjee said, “when I was there, we went to some rural villages and they said – and again this is anecdotal: ‘Look, 500- and 1,000-rupee notes, how many of us have seen in our lifetimes?'”
Still, “the jury is still out,” he said, because a shock as big as India’s demonetization will play out over a long period of time.
“If any of the gains in moving to digital finance are just a short-term thing, then we have not achieved anything from such a big disruption,” Mukherjee said. “But if over a period of time, the bottom 20 percent or bottom 40 percent of the population are using these products and making their lives better, then I think we’ve achieved something.”