Demonetization and digitalization: The Indian government's hidden agenda. (March 2021)

• Record Type: Journal Article
• Authors: Fouillet, Cyril; Guérin, Isabelle; Servet, Jean-Michel
• Is Part Of: Telecommunications policy. Volume 45:Number 2(2021)
• Publication Date: 2021-03
• Subjects: Demonetization -- Digitalization -- Financial inclusion -- Cashless -- Mobile banking -- Policy implications -- India; Telecommunication -- Periodicals; Télécommunications -- Périodiques; 384
• DOI: 10.1016/j.telpol.2020.102079
• Languages: English
• ISSNs: 0308-5961

Abstract

Abstract: The Indian demonetizations of November 2016 came at an entirely new scale to those of January 1946 and January 1978. This time around, the Narendra Modi government's measures applied to 86.4% of the banknotes and coins in circulation, the equivalent to 11% of GDP. Much analysis has been undertaken on the demonetization. This has largely been critical because of its disastrous consequences on local populations and the most deprived among them. Our paper adopts a different angle: it argues that demonetization has had a key impact on the digitalization of payments. We use data from the Reserve Bank of India from 2014 to 2020 to show that the demonetization period brought about a decline in Automatic Teller Machines (ATM) withdrawals. It equally boosted the adoption of digital means of payments, via Point of Sale Terminals (POS) and mobile banking. Since October 2016, the number of POS transactions has risen almost threefold, while the number of ATM transactions has decreased by almost one-fifth. The current government's rhetoric is to promote digitalization as a means of both formalizing the economy and protecting the poor. Its claim is unfortunately highly debatable. Highlights: Our study investigates effects of demonetization on electronic and digital payments. We use RBI data from 2014 to 2020 to trace back the development of electronic and digital transactions. Demonetization led to the faster adoption of digital financial services as POS and mobile payments. Demonetization was a turning point in the adoption of digital transactions. Digital money may further widen pre-existing inequalities.