Last November, Indian Prime Minister Narendra Modi shocked the country by banning the use of all 500- ($7.50) and 1,000-rupee ($15) notes, effectively removing over 85 percent of India’s currency in circulation. Modi said that the ban was intended to curb corruption, tax evasion and the flow of counterfeit money, as well as disrupting terrorist organizations. By December 30, people had to deposit their banned bills in bank accounts, or exchange them for the new bills the government was printing.
But, the Indian government didn’t print enough replacement notes in time for a smooth change, creating a cash shortage that disrupted large sectors of the economy. In response, Indians started switching to electronic payments faster than had been anticipated. Modi’s bold move will likely accelerate India’s push towards digital payments, - a major long-term benefit.
In a recent Washington Post article - What the U.S. can learn from India’s move toward a cashless society, - academic and writer Vivek Wadhwa noted that India has built a digital payments infrastructure that’s enabling it to skip two generations of financial technologies. When it comes to digital payments, India may be actually leapfrogging the US, based on practical innovations, hard work, and, - necessity being the mother of invention, - the urgent need to step up to a major problem, - a decade ago, nearly half the Indian population had no identification whatsoever.
Wadhwa explained that “When you are born in a village without hospitals or government services, you don’t get a birth certificate. If you can’t prove who you are, you can’t open a bank account or get a loan or insurance; you are doomed to be part of the informal economy - whose members live in the shadows and don’t pay taxes.” He then described some of the key steps taken by the Indian government to address this problem.