Does Modi’s War on Cash Make Sense for India?

The informal sector runs on cash.  Work that happens off the books is of course hard to regulate and hard to tax.   It is arguably unfair to scapegoat under-the-table work for missed revenue—US taxation of capital gains, for example, has often relied on the honor system.  However, there are ostensibly many good reasons for the government of India, which has long fought a reputation for corruption, to discourage cash transactions.  India’s large wholesaling sector deals almost exclusively in cash, meaning significant missed tax revenue, and the country ranks poorly in measures of perceived corruption, partially due to the fairly common practice of facilitation payments.  That said, a major currency change is a drastic tactic in a place where almost 80 percent of consumer transactions are conducted in cash.

Despite the stated goal of taking money derived from tax evasion out of circulation, banning—or “demonetizing”—Rs500 and Rs1,000 notes also hurt India’s sizeable unbanked population.  While 80 percent of Indians do have a bank account, thanks to initiatives like sending bank representatives door to door in rural villages, the 20 percent who don’t total roughly 191 million people.  And having a bank account does not mean using it—more than 47 percent of bank account holders in India did not make a deposit or withdrawal in 2017.


Modi’s war on cash is tied to promoting Aadhaar, the identity program that ties biometric data to government benefits and bank transactions.  Anyone who wants to activate a mobile phone must also be enrolled in Aadhaar.  The rate of enrollment in the system has been extremely high, encompassing 99 percent of Indian adults, but faulty technology and other problems with the system have impeded access to rations for some of the most underprivileged Indians.  Many government observers are concerned about the system’s potential privacy violations, which can affect all classes, but there is also a notable information gap in explaining and justifying Aadhaar.  The Indian government’s Aadhaar FAQ page exhorts,

“just ask your maid servant, household help, driver, poor living in slums & villages as to how they are using Aadhaar to prove their identity to get jobs, open bank accounts, for rail travel, and to get various entitlements & government benefits directly into their bank accounts without middlemen. Ask them and they will tell you how empowered they are by having Aadhaar.”

Disparate rates of internet access

This sentence assumes that poor Indians aren’t reading the government’s “myth busters” page, perhaps rightly so because of the rates of internet access discussed below.  A willingness to explain the government’s rationale to the middle and upper classes while expecting poor Indians to simply accept the new system underlines the unequal effect of India’s schemes to rapidly modernize the economy and bureaucratic structure.  Attempts at a cashless India disproportionately hurt informal sector workers and rural residents who have stored cash under mattresses in the absence of banks.

Relying on technology to bring everyone to formal banking is premature.  Indeed, only 38 percent of rural Indians accessed the internet at least once a day in 2016; the figure is about 50 percent for urbanites.  The approximately six out of ten rural residents who access the internet infrequently are disadvantaged in a system that seems to assume, if not require, near-constant internet access.  The primary vehicle for this sort of internet access is the mobile phone, and 358.46 million people in India are mobile phone internet users; this is only about 27 percent of the population.

In addition to the rural-urban gap, only 30 percent of internet users in India are women.  Rates of internet access among scheduled castes and scheduled tribes are far lower still.  The 2011 census found that 1.3 percent of scheduled caste households and 0.7 percent of scheduled tribe households had internet access.  These statistics indicate that the supposed streamlining of government benefits and modernization of payment through Aadhaar may only increase inequality by tailoring the economy to a population that is primarily urban, male, and among the higher castes.

Alternatives to banning cash

The Indian government has not succeeded in increasing formal banking or even reducing the use of cash; it has only made both accessing bank accounts and using cash more inconvenient.  This underscores the fact that there are other, likely better, methods of fighting corruption and increasing tax revenue that the government could employ.  India has not criminalized foreign bribery, and the government is not transparent in providing information about investigations of bribery and fraud, so it is difficult to know to what extent anti-corruption measures are being enforced.

Further, there are more self-employed people in India than any other type of worker, yet the country is ranked as one of the more difficult places to start a business.  Simplifying that process could both decrease facilitation payments and increase tax revenue by encouraging entrepreneurship.  In a country with disparate rates of internet access and unequal gender participation in the labor force, the population might be better served by modernization initiatives that focused less on the technology of an ideal world and more on increasing access to the more prosaic technology and capital that are currently only available to some.


Katie Weaver
Global Business Projects, India