A lot has been said about the effects of demonetisation on GDP, black money, corruption etc. But not much is known about the impact of the note ban on the day to day activities of rural and peri-urban populations in the country.

To understand this, IFMR LEAD conducted an in-depth analysis, covering 2200 households across six States. The studies conducted also examined the post demonetisation effects on adoption and usage of digital financial services by low income households employed primarily in the informal sector.

Our research suggests that demonetisation had severe adverse impact on the economic and financial lives of the poor. Participants reported a 20 percentage drop in their income immediately after demonetisation and faced significant difficulty in finding employment. Many also reported delay in their wage payments due to the liquidity crunch caused by demonetisation and heavy reliance on cash based transactions in the informal sector. During the period, most used alternate payment methods such as using old notes and banking on their close knit social network by purchasing goods on credit.

Less than 5 per cent of the surveyed households reported using digital financial services for their transactions. When reviewed in light of the RBI data on digital transactions for the last one year, which suggests an increase in the overall number of digital transactions post the demonetisation period, it must be noted that only 30 per cent of India’s population is digitally included, implying that the narrative on increase in digital financial transactions excludes the remaining 70 per cent of the population who do not have digital-financial access. Several demand and supply side barriers to adoption and usage of digital financial services ranging from high dependence on cash, lack of trust in digital financial services, limited internet access or connectivity, low penetration of smartphones and limited digital/financial capabilities to transact digitally were reported by the participants.

This low adoption extends far beyond semi-urban and rural households. Although supply side interventions have ensured basic awareness and access to digital financial products, merchants are still wary to adopt these due to lack of technological knowledge, distrust in digital transactions, perceptions on extra taxation and potential security threats and cyber-security concerns.

Our data point towards a huge gap between the aspirations of the government to become a digital economy and the reality of the present. While the demonetisation announcement might have created awareness regarding the different digital methods available for financial transactions, transition to these platforms requires gradual effort and time and would highly depend on different customer segments based on their socio-economic profile.

Young adults, urban population and those who are more educated would be more likely to be the first ones to transition to the digital platform. Therefore, a segmented approach can be adopted by policy makers while directing their efforts towards the goal of moving to a digital economy. Financial service providers on the other hand, need to design appropriate incentives for their customers to consider digital platforms for financial transactions.

The writers are with IFMR LEAD. With inputs from IFMR LEAD’s financial inclusion team