On November 8th, 2016, India’s Prime Minister Narendra Modi announced the demonetisation of two high value denominations, all 500 and 1,000 currency notes of the Mahatma Gandhi series, during a 50-day withdrawal period concluding on December 30th, 2016. This bold decision aims to bring a high amount of cash, assumed to be unaccounted for, back into the country’s economy.
The process of demonetisation is carried out in order to replace existing currency with new one and it may be required when there is a need to bring about a change in the currency of a country. According to India’s Finance Minister, Arun Jaitley, the demonetisation aims to clean the entire economic system of the country, increase the size of the economy and boost its revenue base. Talking about the demonetisation and the government’s upcoming Goods and Services Tax (GST), Mr. Jaitley remarked the two are “an attempt to change the spending habit and lifestyle” in India .
This is the third demonetisation in India’s history and the first in the country’s digital era and aims to transform individual’s lives by steering a cash-based economy towards the financial technology sphere and by making digital transactions more transparent, traceable and secure. While the young Indians seem to be distinctly tech-savvy, considerable amounts of cash in India, especially in rural areas, seem to lays with senior generations, who may appear wary of transitioning to digital payments. One way to educate the seniors on how to transition from cash to digital currency, which has both a technical and cultural aspect to it, may be for financial institutions to offer complimentary educational programs teaching financial basics and elements of cyber security in order to boost individual’s confidence in using digital services and attract new customers. Such programs seem to be common in the UK where financial institutions, such as Barclays, offer free training courses for people who wish to enhance their knowledge on financial services and money matters.
This scale of demonetisation may be a premiere for any advanced or advancing economy and aims to revolutionise India’s financial system and to make it more transparent and stable. The Indian government had promoted the demonetisation as a beneficial method to boost the economy overall. In his announcement speech, PM Narendra Modi said: “After December 30th, I promise to show you the India you have always wished for.” By taking this step, India follows in the footsteps of other countries, such as Italy, where switching from cash to digital transactions appears to have increased financial accountability. Electronic money seem to provide a credible alternative to cash and may boost India’s fintech sector and its emerging economy, by allowing authorities to follow the route of the taxes and clearly map where the money go.
This move may also present an opportunity for fintech companies to expand their services to new customers. Institutions able to document their cash flow may present more credibility when applying for credits; as a result, banks may become more likely to lend to such institutions, therefore facilitating access to credit towards mortgages and other financial services.
India has seen a series of important changes through its history and, as an emerging economy and a country on the path to modernisation, may continue to come across more innovations in the future. The demonetisation announced at the beginning of November is one of these changes meant to improve the monitoring and governing system of the country. While the transition period may present certain challenges, in the long run this measure may prove beneficial, provided the government is committed to follow the necessary steps and actions to meet the demand of new currency and ensure a smooth flow of new money.
How may the demonetisation help India’s financial future?