Has demonetization failed in India?

More than a year on from India's demonetization efforts, has use of cash in the country been impacted?

Back in October 2016, the Indian government surprised everyone with the sudden announcement that it would be taking two of the country’s most popular banknotes out of circulation, with immediate effect.

The initial impact of the removal of the 500 and 1,000 rupee notes was to create major disruption, with long queues forming at banks and ATMs as people tried to exchange their old banknotes. But this was just the most high-profile move in what has been a concerted effort by the authorities in the world’s second-largest country to encourage its citizens to move into the formal banking system and embrace non-cash – and particularly digital – payments.

Indeed, prime minister Narendra Modi stated back in 2016 that his dream was to turn India into a cashless society. He said: “[A] 100 percent cashless society is never possible. But we can make a start with less-cash society – then cashless society will not be a far-off destination.”

But more than a year on from these efforts, how successful have they been in persuading citizens to change their payment habits?

Awareness of alternatives remains low

A recent report by the Economic Times notes that despite these efforts, awareness among the public of non-cash payment options remains relatively low. This is especially true outside the major cities, as digital payments have not yet reached smaller towns and villages. Overall, the publication observed that 54 percent of all retail transactions are via cash withdrawn from ATMs, while 28 percent are POS card payments and 18 percent of transactions currently use prepaid payment instrument (PPI) interfaces, such as mobile wallets.

However, it is not only an urban-rural divide. For instance, Anna Durai, who drives a rickshaw in Chennai, also observed that his customers remain wary of digital options, even when they are available. “People still prefer cash because they’re not very comfortable using POS machines or other digital payment options,” he told the Economic Times. “They have to be coaxed to use digital payment options.”

Indeed, despite a short-term spike in digital payment activity following the removal of the 500 and 1,000 rupee notes – which made up around 86 percent of cash in circulation at the time – usage levels are now said to be falling back near to pre-demonetization levels. Quartz noted, for example, the amount of cash in use in October 2017 had dropped by only around nine percent compared with the previous year.

Use of cash defies demonetization efforts

When it comes to the use of cash across India, ATM usage figures suggest there has been little impact on demand. According to RBR’s Global ATM Market and Forecasts to 2022, ATM withdrawals in the country last year totalled the equivalent of $730 billion, a compound annual growth rate of 10.2 percent from 2012.

There were around 15 billion individual withdrawals from Indian ATMs in 2016, up by 25 percent from the previous year, and by 2022, it is estimated that this will rise to 26 billion transactions. In order to meet this growing demand, it’s also expected that the number of ATMs in the country will have to increase by 38 percent by 2022.

This clearly suggests that India is no less cash-obsessed more than a year after demonetization efforts. While its true that the use of digital alternatives, such as Paytm, have become more familiar and offer people a useful alternative, it seems that for many Indian citizens, there’s no replacing the comfort and certainty that comes from having physical notes in their pocket.


Written by Bryan Peddie

Bryan Peddie

Bryan is part of the ATM hardware marketing team at NCR and is based at the company's R&D Center in Dundee.

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