Demonetization & Digitization

Narendra Modi’s demonetization policy, which was implemented in November 2016, continues to impact the Indian economy in evolving ways. As such, the verdict is still out on whether the move will help improve India’s economic growth. Supporters of the policy believe that it is a good move because it will help reduce black income, reduce the amount of cash dependency in India, and ultimately act as a cleanse for India’s financial systems. Critics of the policy argue that the implementation of the policy is faulty as infrastructural shortages, such as lack of banks and Internet access in rural India, prevent the policy from being a success.

Since the Narendra Modi administration devalued the old Rs. 500 and Rs. 1000 notes, there has been a massive push for increasing the use of payment apps to reduce India’s dependency on cash. As discussed by economist and former member of the NITI Aayog Planning Commission, Bibek Debroy, in a recent article, the cash to GDP ratio in India has increased from nine to thirteen percent in around fifteen years. Compared with ratios below 10 percent in neighbouring countries such as Bangladesh and Sri Lanka, this ratio is a number that the government is aiming to lower.

To do so, the government is looking to electronic payment options such as NEFT (National Electronic Funds Transfer System), RTGS (Real-Time Gross Settlement Systems), IMPS (Immediate Payment Service), UPI (Unified Payment Interface), Wallets (Paytm, Paisa PE), and etc.

Recently, the Modi administration launched the Bharat Interface for Money (BHIM) – a digital payment app, which works exclusively on android-based systems. The app is based off the UPI system; therefore if someone has subscribed to UPI payments on their bank account, they will be able to use the BHIM app. It also works in conjunction with the Aadhar Card system, so as to allow fingerprint impressions to be included as an additional layer of security.

However, while reducing the cash-GDP ratio is an important aim, the impact of electronic payment options remains questionable. According to a Global Attitudes Survey conducted by the Pew Research Center, only 22% of India has Internet access, and only 17% has smartphones. Additionally, even though the utilization of biometrics in the BHIM app is meant to be an added layer of security, it requires that a separate biometric reader be attached, which becomes an added cost.

Modi’s aims to digitize India appears to only be capable of digitizing wealthy Indians who can afford the hardware needed to access the digital realm. Therefore, for the most part apps like BHIM mostly have the capacity to do is reallocate cash from the wealthy to the poor. As an added bonus, the biometric security excludes people who, due to various biological and socioeconomic reasons are incapable of scanning their fingerprints.

While Modi’s goal of creating a “Digital India” is a laudable dream, there are severe infrastructure shortcomings, which need to be addressed before India can attain that level of development.