On November 9, Indian Prime Minister Narendra Modi nullified 86 percent of all the cash in circulation at a stroke. The move has led to chaos, with people waiting in line for hours to exchange their now-worthless 500 and 1,000-rupee notes. One estimate suggests the turmoil could lower India’s projected GDP growth by two percentage points this year. Street merchants, factory workers, farmers, and millions of others near the bottom of the economy rely the most heavily on cash, and are most likely to be hit the hardest.
Nevertheless, the government is now doubling down. According to Bloomberg, digital transactions on a range of goods and services, including insurance policies, train tickets, and gasoline, will be discounted, with the highest receiving a 10 percent break for using digital currency instead of physical cash.
India isn’t the first to push for a shift away from bank notes, of course, but what’s unique is that it’s happening by surprise government fiat. Some observers are skeptical that Modi will achieve his stated aim of cleaning up the country’s rampant “black economy,” where the wealthy are thought to hide their money and do business beyond the reach of the state. Since the declaration, India’s equivalent of the IRS has seized millions of dollars worth of cash in a series of raids. But the seizures don’t amount to much compared to the collapse of commerce that has occurred due to an ongoing shortage of cash.
Some early winners are emerging. Local digital payment companies are doing a booming business—particularly Paytm, the country’s most popular service, where people are signing up at 14 times the normal rate. Bitcoin has surged in value, too, which looks like a direct result of a spike in activity in India.
Modi’s government is now scrambling to print new denominations of cash that will replace the voided ones, a process that is expected to take months. It’s unlikely that a subsidy for digital transactions will dull the pain of such a huge shift on its own. But it may mean that once the dust settles, more of the millions of people now experiencing digital money for the first time will decide that it’s better than dealing with dirty paper.