In a televised address on Nov. 8, Indian Prime Minister, Narendra Modi announced that two of India’s highest denomination currency bills – Rs. 500 (US$7.35) and Rs.1000 (US$14.70) – would no longer be recognized as a legal tender. Overnight, the move rendered 86 percent of the country’s cash in circulation worthless.

What followed was millions of Indians queuing up for hours outside banks to trade in their demonetized bills for new Rs. 500 and Rs.2000 bills, an exchange set to continue until Dec. 30.

While some are understandably frustrated with this unexpected move, others are lauding PM Modi’s disruptive measures.

The Indian government has dubbed this move as “a surgical strike against black money” and a step to transform India from a predominantly cash-based economy – where 90 percent of all transactions happen in cash – into a digital one.

But how prepared is rural India for this overhaul?

“Overall immediate impact in the rural areas is more negative than for cities,” said Ravi Ramamurti, Director of Center for Emerging Markets and a distinguished professor of International Business and Strategy at Northeastern University. “Rural areas rely more on cash than modern methods of transacting like mobile wallet, credit or debit and therefore the impact is more.”

The people of lower economic strata, daily wage workers, who work in the fields or in construction, who do not have bank account and rely on daily wages will be particularly hard-struck said Ramamurti.

According to “Digital Payments 2020,” a Boston Consulting Group (BCG) and Google report released in July 2016, India is on its way to becoming a “digital behemoth” given the rising smart-phone penetration and expanding internet access. The report estimates the total payments through digital payment instruments will be in the range of $500 billion by 2020.

However, that won’t manifest itself evenly across the country.

In fact, smart-phone penetration and rising internet access may not necessarily translate into increased digital transactions in rural India.

There’s an urban-rural digital divide in terms of internet access in India. India has 342.65 million internet subscribers as of March 2016, according to the Telecom Regulatory Authority of India (TRAI). 111.94 million of those are rural subscribers, in short, the majority of the country’s connected people live in urban areas.

In terms of mobile subscribers, however, India is ranked second in the world with over one billion mobile subscribers. That’s a lot in a country of 1.2 billion.

After Modi’s demonetization move, India has witnessed a surge in usage of credit and debit cards but financial inclusion in India remains low. According to a World Bank study, bank accounts in India increased from 35 to 53 percent between 2011 and 2014. Between 2014 – 2015 public-policies aimed at financial inclusion, such as Pradhan Matri Jan Dhan Yojana opened additional 25.82 crore bank accounts. Still, a vast majority of citizens do not have bank accounts and some who do have, are dormant accounts, therefore many are unable to use cards or mobile-banking services.

However, Ramamurti pointed that in the long run it is hoped that demonetization would lead to better financial inclusion and push India faster towards digital payment economy.

The mobile banking industry, which reported a massive surge post-demonetization, says it’s an opportunity to bring financial transparency to the country. Paytm, a mobile wallet company, reported a 250 percent spike in overall transactions. A similar surge in downloads and transactions were reported by other mobile wallet companies like PayU India, MobiKwik, and Freecharge.

To ensure smooth transition to digital payments in rural India, mobile wallet companies will have to provide services in languages other than English and improve digital literacy among those users. Companies like Paytm and MobiKwik have already started doing this, albeit slowly.

It is going to be very important, Ramamurti points, that they create dependable infrastructure which will provide guidance to uneducated and digitally illiterate people.

But the biggest challenge following demonetization will be, how to bring about a behavioral change among people: where cash has long been king.


Photo credit: Livemint via Google