Cashing out: digital payments and resilience post-demonetization

Abstract

We explore how different segments of the population in India coped, in terms of business transactions, with the sudden decision of the government to stop accepting certain legal tender bills, popularly referred to as demonetization. The decision to demonetize was followed by a large-scale push for adoption of digital payments. Behavioral changes during such shocks do have specific nuances different from those during normal times. Using the concept of resilience, we examine the drivers of behavior change that differentiated those that were able to make the switch compared to those that weren't. Those technologically more adept were more resilient to the shock, in terms of being able to navigate through new means of exchange. Also, rural poor showed greater resilience than urban poor, a function of the level of homogeneity in those societies with respect to technology adoption and the ability to cope without changing cash practices. We also found that those who had bank accounts and relied largely on those accounts for daily transactions, without being aware of alternate modes, were impacted the most. From a policy perspective this research cautions against unintended consequences of purely access-driven incentives to behavior change, advocating instead a holistic approach.