The 2nd anniversary of the Indian currency demonetization on 8th November 2016, still brings back memories of long queues at the banks and ATMs. Overnight the government took the drastic decision to declare Rs 500/- and Rs 1000/- currencies as invalid with the intention of catching the tax evaders, defaulters, and black money hoarders from the Indian economy.
The significant economic and social benefits of demonetization brought with it challenges. Executing the decision caused inherent problems for the common people who spent time in exchanging the old currencies that could have been avoided with effective planning. This created immense pressure on the banking systems to have the bank notes replaced with new ones.
The emphasis on accepting digitization for money transactions to curb the menace of tax defaulters, black money hoarders is still being pushed by the government. The creation of a cashless economy and the broadening of the taxpayer base were the additional objectives of this exercise.
Current impact on the financial landscape
As per the online report by Google Inc and Boston Consulting Group, India’s digital payments sector will be worth $500 billion by 2020. Facilitating this growth is the growing Internet user base, backed by Unified Payments Interface (UPI) and Aadhaar, rising smartphone usage and positive government initiatives.
Online payments through various channels like e-wallets, e-banks, plastic cards, etc. has led to the exponential growth of allied technology ecosystems. Enhanced security features for protecting the customers personal information is instilling confidence for performing online transactions. Improved technology initiatives across the rural areas are driving the digital transformation necessary for its continued sustenance.
Studies have shown that there is a dramatic increase in the credit/debit card usage post the demonetization. There is further evidence of people using digital wallets for transactions and payments. Transaction volume and value post demonetization has been exponential as seen with the number of new digital wallets being developed with added security features.
They were adding more money into their digital wallet accounts. Transactions made through peer-to-peer transfer and e-shopping were the major areas of digitization.
To boost the adoption of digital payments across the population, digital platforms providers and retailers must work together. Incentives like cashbacks, vouchers, low-cost EMI’s, redeemable coupons and other factors have contributed considerably to online sales marketplace. There is a significant shift from cash towards non-cash transactions in the aftermath of demonetization, with transaction value up by 93%, and transaction volume up 84%.
So, the adoption of cashless payment modes jumped by between two and three times in the post-demonetization period. Data on e-wallet usage in the physical marketplace suggests that cashless technologies has made inroads into the customer paying methods.
Demonetization effect still largely depends on the financial inclusion and the development of technology infrastructure in the regions. This also largely depends on demographic factors like the consumers’ age, gender, marital status, education. In the economically weaker sections this spending and digital adoption tends to be conservative in nature.
Whether this demonetization have a lasting effect on the digital adoption is yet to be seen. But it has certainly kickstarted the transition from a cash-based to a digitally enabled economy.
The result of this exercise is a case study for other economies on the feasibility and adoption of digital payment systems. Policymakers must prioritise on the technology innovation, improving the digital services infrastructure, and educating the people on the benefits of digital financial inclusion. This will accelerate towards a cashless economy.
– Shantha Kumari,
Sr. Technical Writer,