Despite government and industry pressure, Indians prefer cash to digital money

In November 2016, India’s Prime Minister Narendra Modi banned the use of the country’s two largest bills, the 500 rupee (worth approx. $7.50) and the 1,000 rupee notes. People were allowed to exchange those notes into 500 and 2,000 rupee bills, but only at designated locations, and within a very limited amount of time.

According to the New York Times, the purpose of the ban was to “expose and penalize people holding huge amounts of cash they could not account for, primarily money on which taxes have not been paid.” However, the ban struck widespread panic among everyday Indians.

As Carmen Dorobăț writes in Mises Wire:

[T]he rupee ban has managed only to create chaos and desperation for millions of Indian citizens. They were left with no money to buy basic amenities, and saw their dearly earned savings being wiped out overnight. They queued in front of the banks and rushed to their ATMs, scrambling to exchange the worthless banknotes in the brief window of opportunity provided. Both banks and ATMs ran out of money, as India’s printing presses rushed to keep up by printing new lower-denomination currency.

But many Indians are so sick of corruption that they are willing, albeit grudgingly, to bear these hardships if the move should end it. They don’t know that it won’t: the move did little more than temporarily inconvenience the large money launderers and tax evaders, who have already found loopholes allowing them to profit from and minimize the effects of the government’s move—and that is a good thing.

India’s move to restrict the use of cash appears to be part of a larger war on cash by governments, primarily so that they can enhance their ability to track taxable income.

However, that doesn’t mean such measures will work. To get a sense of how effectivene India’s rapid ban was, all one has to do is read the New York Times‘s recent article on the matter. In short, despite the government’s actions, Indians still prefer using cash for their day-to-day purchases:

Signs and banners for Paytm, India’s biggest digital payments service, festoon Pooran Singh’s cellphone shop, where people drop in all day to add data or talk time to their prepaid phones.

Yet few of these people actually use Paytm at the store, which straddles two dusty streets in this sleepy north Indian city in which tractors jostle with cows for space on the narrow roads.

“People recharge in cash,” Mr. Singh said, after a young man handed him 20 rupees, about 32 cents, to top up his mother’s phone.

The scene in Mr. Singh’s shop underscores a persistent reality of India’s economy: People prefer cash for most routine transactions, despite intensive efforts by the government and global technology companies to lure them onto digital platforms.

India’s reluctance to give up paper money poses challenges for the firms that are vying to offer electronic payments, including local players like Paytm, which has received financing from the Chinese e-commerce giant Alibaba, and American tech companies, like FacebookGoogle and PayPal.

Indeed, it is encouraging to see everyday Indians figure out ways to determine how best to pay for their needs, regardless of what the government says. India’s lack of success ought to give other governments pause when evaluating whether to enact similar measures.

Unfortunately, given the desperate need of governments to find new ways to find tax money, it is unrealistic to expect them to give up anytime soon.

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