India has made the largest changes in identification and monetization that the country — and most of the world — has ever seen by introducing a nationwide ID database and largely eliminating physical currency. This has the potential to transform the rest of the world as well.
Last November, as part of a controversial master plan to make India a cashless and digitized society, the Prime minister Narendra Modi announced that Rs500 and Rs1,000 notes were to be demonetized, which effectively stripped the value of 86 percent of the country’s circulating cash.
The move was one of the last stages of the plan, after the groundwork had been laid by introducing the Aadhaar biometric database, which gave 95 percent of the population a digital proof of identity in 2016. Aadhaar was augmented by India Stack, which allowed people to store and share information such as addresses, bank statements, employment records, and tax filings — all of which were ratified by the Aashaar system.
The key aspect of India Stack was giving everyone in the country access to one of 11 Payment Banks which could manage payments and transfers but not issue loans. Eliminating cash forced people to adopt this new digital infrastructure, causing 270 million people to open bank accounts and 10 billion dollars to be deposited in the first three years — this generated momentum for what may evolve into the first cashless society in the world.
The decision has significant ramifications not only for India, but for the rest of the world as well. For India, there will be friction initially because of the preeminence of cash-based transfers in the society: it was estimated earlier this year that 78 percent of transactions in the country still used cash.
This may be justified, though, by the longer term gains. The move could curb corruption and “black money” in India as well introduce a more robust, effective tax system. It could also make payments a completely secure affair — bringing an unprecedented formality and modern bureaucracy to the Indian economy.
The worldwide ramifications of India’s digitization are serious too. Raoul Pal, former manager of GLG Global Macro Fund, wrote in an editorial for Mauldin Economics, “It may well be a bitcoin killer or at best provide the framework for how blockchain technology could be applied in the real world.”
Even if it does not herald the end of bitcoin, the move will prove an interesting experiment to observe for other countries looking to go cashless, such as Sweden, which has seen a 40 percent reduction in cash and coin in circulation.