Digital Payments and Consumption: Evidence from the 2016 Demonetization in India

Demonetisation, Banking and Trust in ‘Bricks’ Or ‘Clicks’

“…As the newly illegalised notes could be exchanged only for a limited time through bank accounts, initially until 24 November 2016, with some later dates for certain categories (Chodorow-Reich et al, 2020: 61), banks immediately experienced rising deposits, but were for several months unable to provide sufficient new currency notes. Contrary to alleged concerns about black money, RBI figures later confirmed that 99 per cent of the invalidated currency notes were returned to the RBI (Agarwal et al, 2019: 22).…”

“…However, on 8 November 2016, Prime Minister Modi suddenly announced that all ₹500 and ₹1,000 banknotes would with immediate effect become illegal tender, while new ₹500 and ₹2,000 banknotes would be provided in exchange for the old banknotes (Agarwal et al, 2019: 8). Given the secretive nature of this measure, instant problems arose, since printing press constraints prevented immediate replacement of the demonetised currency notes and the drastic result was that the supply of cash that could be used in daily transactions declined sharply (Chodorow-Reich et al, 2020: 57–8).…”

“…Seeking to promote ‘Digital India’, the government of India has been taking energetic and increasingly far-reaching steps leading to greater digitalisation of financial transactions in the twenty-first century (Ligon et al, 2019: 15; Reserve Bank of India, 2019). Prominent measures include the ‘demonetisation’ of 8 November 2016, which ‘resulted in a sudden and sharp decline in the availability of cash … and a forced uptake of digital payments’ (Agarwal et al, 2019: 2). Earlier well-known measures to drive digitalisation included prominently the Aadhaar scheme, which provides a unique 12-digit identity number for every person in India, including foreign residents.…”

“…Kapur et al (2008) show how various innovative government schemes seek to spread the benefits of technological progress directly to India’s poor. Such programmes include an initiative called JAM (Jan-Dhan-Aadhaar-Mobile), a trinity of digital provisions linking bank accounts, identity cards and mobile phone numbers to plug leakages in government subsidies (Agarwal et al, 2019: 89). In addition, new banking norms and procedures known as KYC (Known Your Customer), designed to assist fraud prevention and avoid duplication, have been created under the leadership of the Reserve Bank of India (RBI).…”

“…Public reactions soon reflected people’s shock and loss of trust in a government that overnight devalued their hard-earned cash. Given that the devalued currency notes constituted 86 per cent of currency in circulation at the time in terms of value (Agarwal et al, 2019: 8; Chodorow-Reich et al, 2020: 57), this had major impacts on trust, affecting everybody’s lives. Indeed, criticism of this ‘impetuous action’ (Singh, 2016) was instant and fierce.…”