Great technological challenges of the 21st Century: the demonetization of India

The monetary policy experts’ assessment of President Narendra Modi’s demonetization of India has been mixed, but there is no doubt that this is a project with a very high level of complexity.

Of India’s population of 1.3 billion people, more than 1 billion have an Aadhaar ID card issued by the central government, which collects their biometric data (fingerprint, iris, and facial biometry) along with demographic data, is stored in a centralized databank, giving citizens a unique twelve-digit number, the largest national identification project of its kind in history.

Furthermore, 400 million of the country’s 1.1 billion bank accounts are already linked to Aadhaar’s identification numbers, and the government intends to register each and every one soon, in a bid to combat counterfeit bills, money laundering, corruption and financing of terrorist activities.

The demonetization of the country reached a peak on November 8, when Narendra Modi spoke to the nation in a televised address to say that 500 and 1,000 rupee bills, which make up about 80% of all money in circulation, were being withdrawn within hours and would have to be exchanged for new banknotes or be deposited in a bank account before December 30th. The radical measure, which prompted some dissent and huge queues at ATMs after banks were closed by the government, forced anybody involved in illegal activities to give up or lose their money, at an estimated cost of around $19 billion prompting a half-point drop in the country’s growth forecasts.

After having flushed out black money, the next question was how to provide viable alternatives to people to carry on trading in a country where some 25% of the country is illiterate, and where only 268 million people had a smartphone at the end of the third quarter of 2016. The government, in conjunction with the country’s largest private bank, has created an app called Aadhaar Pay, a unified payment interface (UPI) that allows any trader or shopkeeper to accept payment through an Android smartphone by just adding a cheap fingerprint reader from a pre-approved list of devices. To pay, users choose their bank from a menu, enter their Aadhaar identification number and scan their fingerprint, without using any card or passwords. What’s more, the system is free of commissions, and can be used by any bank by incorporating it into its payment apps.

The result is the largest mobile payment system ever created, allowing some 1.3 billion people to pay electronically, and which in addition allows the government to monitor all economic activity.

In India, demonetization, or the elimination of cash, is being used as a way to reduce some of the most important problems of one of the most populous economies in the world. With all its pros and cons, it surely represents a milestone that many other countries will be monitoring. Will we see similar initiatives in other economies soon? Will demonetization at some point become a global trend?

(En español, aquí)