Did Demonetisation Accelerate Financial Inclusion?

The claim that removing cash would improve financial access for the poor has become a fallback argument for demonetisation, despite notebandi failing to achieve its other objectives. Like many other arguments made for abolishing cash in favour of digital payments, this claim does not stand up to scrutiny.

On 8 November 2016, without warning, Prime Minister Narendra Modi told the Indian nation that all ₹ 500 and ₹ 1,000 paper notes would cease to be legal tender at the stroke of midnight, turning, by decree, 86% of India’s legal tender into “Cinderella notes” (Arunachalam 2017). Modi said this would flush out “black money” and help combat counterfeiting, tax evasion and terrorism, all central themes of the ruling party’s agenda. Within a few weeks, the administration had added an additional justification: demonetisation would advance financial inclusion and the country’s transition to Digital India. The Ministry of Labour and Employment claimed demonetisation would lead to more bank accounts being used for salary payments; Nandan Nilekani, “architect” of the Aadhaar identification system, hailed demonetisation as a tenfold accelerator of digitisation; and former government advisors-cum-bankers praised it for driving habit-change towards a cashless society (Lahiri 2016). The Prime Minister himself tweeted about methods of digital payment in Hindi and English and, in emotive speeches, linked the cashless society to his promise to voters of delivering “the India you desired.”

It is widely recognised now that demonetisation achieved little in terms of catching “black money” and battling illegality. But what effects did it have in terms of financial inclusion? If nothing else, did it at least promote greater access to finance? With this short intervention, we situate India’s demonetisation experiment in the context of a global war on cash, and examine data from an India-wide survey to probe for evidence that it accelerated financial inclusion. Our findings challenge the claims, made often with minimal or no evidence in demonetisation’s immediate aftermath, that demonetisation was a pro-poor endeavour and “led to increased financial inclusion and this momentum should be continued” (Kumar and Kumar 2016). Instead, our findings confirm those of other recent research which found that the uptake of digital transactions among the banked poor remained minimal, and changes in savings behaviour were negligible.