NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, May 8, 2019

By Arvind Gupta and Philip Auerswald

More than two years have passed since India’s demonetization policy — which removed high denomination banknotes from the economy — became a reality. That bold move was met with a mix of support, confusion, and criticism. In an analysis we wrote in November 2017, we argued that demonetization was only part of India’s larger, strategic digital transformation. Since then, the institutional and economic evolution in India has accelerated in many ways and some of that change has been reactive and corrective.

Despite a significant rise in digital payments since demonetization and Indian banks having issued a billion debit cards, many Indian consumers still rely on cash transactions. While no single move can make a country the size of India cashless, demonetization succeeded in significantly reducing the anonymity and lack of traceability of money in the Indian economy by routing all currency through a formal banking channel. Comparing the current demand for cash with the historic rate of growth of the economy we have calculated that the Indian economy is operating at an estimated $33 billion less cash than it would have without demonetization. (We computed this by taking the 20-year long term trend of growth rate of currency in circulation and extrapolating it post-demonetization. The difference between the predicted currency and the actual currency is an estimate of the reduction in circulation caused by demonetization.) Clearly, the behavioral changes required to accomplish a larger digital banking transition were not going to happen overnight or even in the span of a single year.

Photo courtesy of Simone McCourtie.