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Demonetization and Digitization of the Indian Economy


The government’s decision to ban Rs. 500 and Rs. 1,000 notes on November 8, 2016, to curb black money and terrorism financing through counterfeit notes has evoked mixed reactions. Demonetization has affected the daily lives of millions, especially those in what is called the informal sector—domestic workers, small traders, and farmers—but what its impact will be in the long term remains to be seen.

In the short term, demonetization has led to the rapid adoption of e-wallets, and credit and debit cards as a means of payment. Such digital payments have in a large way replaced cash transactions at least in urban areas.

Many economists and socio-political researchers also believe that the country’s path to digitization was smoothened and the time to achieve a cashless society has been compressed.

India and a cashless economy

The path toward digitization in India started with the e-commerce start-ups, such as FlipKart, Jabong, SnapDeal etc. These e-tailers helped begin the process of weaning customers to online channels in the country. Most of these e-tailers conduct the major proportion of their business through cash, but what they did do and is continuing to do is familiarize people with the convenience of online channels and cash less transactions.

While there is no evidence of e-tailers benefiting after about 86 percent of the currency in circulation by value in India was withdrawn, business at large fintech companies, popularly called e-wallet firms, have grown. According to media reports, including in the Economic Times, transactions in e-wallet companies had increased by more than 700% in the first few days after demonetization.

Slowly, but surely, digital transaction are becoming popular. Not just in India, but in other countries as well; although, the rate of adoption varies. In countries, such as the US and Netherlands, a large proportion of the transactions are through digital modes of payment, while in others, such as Italy, cash retains its paramount position. In India, many people in rural areas and the informal sector do not have bank accounts. About 40% lack access, according to different reports, despite the government’s efforts to improve financial inclusion. Even those who have bank accounts may not have easy access to a physical branch or may hesitate before using a bank account because of a lack of familiarity and apprehension about usage.

However, the internet and the sharing economy cannot be wished away in our country or overseas. As internet penetration and connectivity increase, the digitization of the economy is a natural progression.

According to a Google and The Boston Consulting Group report, Digital Payments 2020, the total payments made through digital payment instruments in India are likely to be about US$500 billion by 2020, which is 10 times the current level. The report also estimates that non-cash transactions, which currently constitute about 22% of all consumer payments, will overtake cash transactions by 2023.

Also, as the number of 3G and 4G internet connections rises and the price of mobile devices decreases, the number of internet users will increase at a fast rate. A Deloitte and Associated Chambers of Commerce & Industry of India (ASSOCHAM) study forecasts that India will have 600 million internet users by 2020.

Although, spectrum availability in metro cities in India is a small proportion of what is available in cities in other developed markets, internet penetration is likely to increase in the future.

In India, the government is committed to a digital transformation of the economy and government. This push has led to the rise of a new category of fintech service providers, payment wallet companies, and more recently payment banks.

Digitization and the Indian insurance industry

The insurance industry in India is on the brink of a digitally enabled transformation. As the use of smart, digital products and services increases, customers’ demand for fast, efficient, seamless, and intuitive products and services are increasing.

To enable and provide such services and products, all the stakeholders—insurance companies, distribution channels, customers, technology providers, etc.—will need to collaborate and network. In other words, an ecosystem of multiple stakeholders will power the next spurt of growth in the insurance industry, and the role of digital payments in facilitating the growth of such ecosystems is vital.

At the same time, digitization and the development of an ecosystem will make all stakeholders more vulnerable to data loss and theft. The increase in the use of virtual networks and intranets, and “aggregation” of cyber risk due to concentration of virtual supply chains will make cyber risk and security important enterprise-level risks that will need to be addressed.

There is also the risk of business interruption loss due to interconnected digital data supply chains.

Also, mobile wallet companies’ and payment banks’ reliance on technology, online connectivity, and requirement for high volume of remittance transactions to offset the low margin per transaction will make them vulnerable. From our observations, these companies are becoming increasingly concerned about such cyber frauds.

The complex supply chains, operational risk inherent in interconnected supply chains, and cross border partnerships will likely drive stringent insurance coverage requirements for participating companies.

In 2016, the vulnerability of different organization was exposed by a slew of cyberattacks and hacking incidents in India. These enterprise-wide risks are important, given that the 154-crore Indian e-wallet market is likely to grow to Rs. 30,000 crore by the end of 2022, according to a report by ASSOCHAM.


Cash continues to be an attractive means of payment because the payer and the payee do not have to pay any additional charges and is anonymous. The reason why digital payment has not become popular with small merchants in India is cost and poor infrastructure. At the least, merchants have to pay for a POS machine.

Nonetheless, the World Payments Report, prepared by Capgemini and BNP Paribas, estimates that global non-cash volumes will increase 10.1% to 426.3 billion in 2015. The highest growth is likely to be in Emerging Asia (31.9%), Central Europe, the Middle East and Africa (15.7%) and mature Asia-Pacific (11.6%).

For digitization to grow and to include all sections of the people in all areas of the country, there is a need for more value added services, better internet connectivity, regulatory support, and market education.

However, as the popularity of the internet and social media forums continue to rise, and people, especially Gen Y, become more and more attuned to digital interaction, digital means of payment is likely to become an integral part of the daily lives of people and organizations.


  1. Future of Money, Mint, Leslie D'Monte, also available at http://www.livemint.com/Industry/asnVex3sF8Ca8l8I0zESYO/The-future-of-money.html.
  2. World Payments Report 2016, Capgemini and BNP Paribas.
  3. World Insurance Report 2016, Capgemini and Efma.
  4. Internet users in India to reach 600 million by 2020: Assocham-Deloitte study.
  5. Safety first in cashless drive, Jayati Ghose, The Telegraph, available at https://www.telegraphindia.com/1161219/jsp/business/story_125458.jsp#.WFfU62c0M2w.
  6. E-wallets used to siphon off money, V Narayani, Times of India, available at http://timesofindia.indiatimes.com/city/mumbai/e-wallets-used-to-siphon-off-money/articleshow/56112481.cms.
  7. After demonetization, e-wallets strike it rich, while India runs out of cash, Javed Anwer, India Today, available at http://indiatoday.intoday.in/technology/story/after-demonetisation-e-wallets-strike-it-rich-while-india-runs-out-of-cash/1/817932.html.
  8. Demonetisation in India: Driving a digital treasure hunt, Yogesh K Dwivedi, Brink Asia, available at http://www.brinknews.com/asia/demonetization-in-india-driving-a-digital-treasure-hunt/
  9. Can India really provide bank accounts to 1.2 billion people, Jungkiu Choi, BBC, available at http://www.bbc.com/news/world-asia-india-29074310.
  10. Indian m-wallet market to reach Rs. 30K crore by FY22, India Infoline News Service, available at Indian m-wallet market to reach Rs. 30K crore by FY22