Will demonetisation accelerate shift to digital financial economy?

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The Modi Government’s bold gamble with note-bandi hasn’t been painless for most people and whether the benefits will outweigh the costs is a debatable issue now.


While the government’s demonetization drive is likely to negatively impact the economy in the short term, it could help over the longer term to propel growth capital as large swathes of informal economy becomes formal. This extreme currency step could see be a drop of banks’ non-performing assets, a critical limitation that is holding up the movement of bank credit for the private equity investment in the country.


With many technocrats believing that the systemic shock of demonetisation will speed up the digitisation of the financial economy it will be interesting to see how much time this shift will take which was originally thought to be taking three years.


On the positive side a big digital shift towards digital economy has already taken place in India even before the demonetisation move with total debit cards in India going up from 623.67 million in November 2015 to 867.35 million in September 2016. Similarly, payments through pre-paid instruments like m-Wallet or PPI cards have also gone up from 62.66 million in November 2015 to 97.07 million in September 2016.


Also, over the past decade backend architecture was put in place in India to enable a digital transformation. For the 250-300 million Indians with a smartphone, Raghuram Rajan in April 2016 inducted a new peer-to-peer payment app called United Payment Interface (UPI). The government now needs to spread the word on this more efficiently.


Going cashless, in digital terms, may be a fine goal but if people find themselves literally cashless, over the next two to three months, the public mood can shift. Getting enough paper money back in circulation quickly will be important to PM Modi’s strategy.


While technological solutions are present, making them work on the ground will require important mindset shifts. The major challenge will be whether merchants, paanwalas and auto drivers in the country will be willing to change from cash to cards or mobile payments.