"This is a public sector innovation unthought of in history.

A cultural-economic revolution in
the making!" exclaimed Monishankar Prasad, a New Delhi-based author and editor, about
India's demonetization initiative and subsequent drive towards developing a cashless
economy.

The biggest problem with India suddenly removing 86% of its currency from circulation
without having an adequate supply of new notes ready to take their place is that fact that
India is more reliant on cash than almost any other country on earth. Suddenly, hundreds of
millions of people were left without the means to engage economically, to buy the things they
wanted and needed, and myriad businesses were left without a readily available mechanism
to receive payment for their goods, to buy supplies, or pay their staff.

Indian customers queue outside a bank on the first monthly pay-day since the a currency ban
on large-denomination notes was announced in Mumbai on December 1, 2016. (INDRANIL
MUKHERJEE/AFP/Getty Images)
India’s demonetization scheme was a unilateral initiative that was planned in secret — in a
back room of Prime Minister Modi’s home, in fact — by a small group of insiders tied-in
with the upper echelons of India’s government. The strategy was to instantly nullify all 500
and 1,000 rupee banknotes, the most common currency denominations in the country, and
then eventually replace them with newly designed, more secure 500 and 2,000 rupee notes.
This endeavor instantaneously became policy when the prime minister announced it via a
surprise television address at 10:15 PM on November 8.

One of Modi’s main brands is that of a corruption fighter, and his demonetization initiative
was rushed into effect in an attempt to catch the black market off guard — which could
potentially lead to a big payday for the central bank if large amounts of illicit cash wasn’t
redeemed. That plan flopped, as almost all of the recalled notes were officially accounted for
one way or another.

Read more about Modi's demonetization initiative here, here and here.

But this surprise demonetization also did something else: it pushed millions of new users onto
the country’s digital economic grid by virtual fiat. Not even the banks were notified in
advance of Modi's plan, and, even with strict exchange limits that prohibited people from
exchanging over $60 worth of rupees at a time, they simply didn’t have enough of the newly
designed banknotes on-hand to distribute to the masses looking to redeem their canceled
notes. Rather than being a 50 day transition, as the Indian government projected, it is looking
as if it will take four months to a year before the country's currency supply is restored.

In point, the people of India were left in limbo as the government cancelled the bulk of their
currency without providing them with the means to obtain the newly printed notes to replace
it. On the surface, this seems as if it was a matter of gross negligence, but there may have
been more to it than that. As the demonetization process continues, Modi’s rhetoric is less
about fighting corruption and more about transitioning India to a cashless economy.

Up until this campaign, India was an incredibly cash-centric economy. Cash accounted for
upwards of 95% of all transactions, 90% of vendors didn’t have card readers or the means of
accepting electronic payments, 85% of workers were paid in cash, and almost half of the
population didn’t even have bank accounts. Even Uber in India accepted cash — the only
country in the world where this option is available — and “Cash on Delivery” was the
preferred choice of 70% of all online shoppers.

By temporarily turning off the engines which drove the cash economy, India hoped that more
people could be brought into the fold by using track-able — and taxable — digital financing
vehicles, like debit cards and e-wallets.
An Axis Bank cashier works at a makeshift ATM counter in the wake of the Indian
government's demonetization move. (SAM PANTHAKY/AFP/Getty Images)

Whether or not India was ready for this cashless revolution is another question.

“Look, you still have a reasonably large part of the population that doesn't even have a bank
account,” said Arpan Nangia, the head of the India desk for HSBC’s commercial banking
division. “Yes, our position is that everybody should have a bank account and everybody
should be transacting through that, but if a large part of your population doesn't even bank it
is going to take some time for you to invest before you can say let's go completely cashless.”

However, reservations about the timing of India’s big cashless push at this point are
irrelevant. It’s happening, ready or not.
India is currently in the middle of an all out movement to modernize the way things are paid
for. New bank accounts are being opened at a heightened rate, e-payment services are seeing
rapid growth, cash-on-delivery in e-commerce has crashed, and digitally-focused sectors like
the online grocery business have started booming.

“Even the vegetable vendors on the streets have opened up Paytm accounts and they have a
machine outside their shop where someone can scan the bar code and make the payment,”
Nangia explained.

“A lot more retail outlets are accepting e-wallets, including my laundry provider and my
dabbawala," Prasad proclaimed. "This is revolutionary, and survival of the fittest.”

Modi’s demonetization initiative has been a boon for India’s e-payment providers. Paytm
reported a three-times surge in new users -- tacking on over 14 million new accounts in
November alone. While Oxigen Wallet’s daily average users increased by 167% since
demonetization began.

“Ever since Prime Minister Narendra Modi’s demonetization announcement, we have

Cryptocurrencies like Bitcoin and Asiadigicoin have also been the recipients of a positive
upswing from Modi’s currency purge — with Bitcoin in particular being driven up in value.

The lack of cash in the economy combined with the buzz around electronic payments systems
has also sparked some very innovative solutions. The farmers’ markets of Telangana began
experimenting with their own electronic payment system where customers with Aadhar-
linked bank accounts could buy vegetables using tokens which could be purchased via debit
cards at specialized kiosks.

“These changes indicate towards a more inclusive society in the future,” Saxena said. He then
outlined several areas in which India is trying to improve its digital economy, which include
simpler, more technologically advanced digital payment systems, increased merchant
acceptance, improvements in UPI, which allows monetary transfers between any two bank
accounts via a smartphone, as well as a reduction in cash-based transactions.

“The Prime Minister's move to incentivize digital payments will offer a strong support to our
ongoing efforts in helping the country leapfrog the cash generation to digital payment
solutions," added Deepak Abbot, the senior vice president of Paytm. "This will not only help
millions of Indians overcome the hassles of dealing in cash but also act as a significant step
towards propelling India to emerge as a truly cashless economy.”