Demonetisation in India: From Financial Inclusion to Digital Financialisation

31530585646_0a0e070353_o.jpgOn 8th November, 2016, the Indian government announced that it was banning the use of 500 and 1000-rupees currency notes from midnight, effectively scrapping 86% of India’s currency notes by value. The Indian public would have to change the outlawed currency notes for new ones at bank counters by the end of the year.

In the following months and years, the move, which came to be known as demonetisation, caused immense suffering to the Indian public and damage to the Indian economy. So, why was it carried out? In an upcoming paper, Daniela Gabor and I seek to demystify demonetisation by locating it within wider changes in the Indian economy—changes that started in the financial inclusion space but are now reverberating across the entire financial sector. We refer to this process of change as digital financialisation.

What Drives Digital Financialisation?

The digital financialisation story begins in the financial inclusion space. Until the mid-2000s, the practice of financial inclusion entailed the Indian state prodding banks, particularly state-run lenders, to open more branches in rural India to increase the supply of financial services. However, with the rise of digital technologies, financial inclusion ceased to be solely a supply-side exercise. Policymakers realised that tools like Direct Benefit Transfer, which involves transferring subsidy payments directly into the bank accounts of recipients, instead of indirect price-based subsidies, would increase the “demand” for financial services among the poor. The acceptability of such coercive demand-side measures, which didn’t consider the possibility that some people in far-flung rural areas might struggle to access their bank accounts, was established before demonetisation.

To facilitate Direct Benefits Transfer, the Indian government introduced Aadhaar, a 12-digit identity number linked to the holder’s biometric data, which would help the government accurately identify subsidy recipients for transfer payments. However, Aadhaar, which was specifically created to help the government better target subsidies, didn’t remain confined to the development sector. In 2015, the Indian state effectively made Aadhaar mandatory for all Indians by requiring that almost all transactions with the government reference the citizen’s Aadhar number. Further, the public was required to link their Aadhaar numbers to their mobile phone accounts, bank accounts, investment accounts, etc. Private companies were also allowed to use the Aadhaar database to carry out know-your-customer checks, until the Supreme Court banned this practice last year.

How does one make sense of all these developments, along with demonetisation? Some researchers have linked these measures, which essentially discourage cash transactions, to the global drive for cashless payments. However, we argue that they represent a more fundamental shift in the financial sector—the rise of digital financialisation.

Digital financialisation is the coerced fusion of the digital and financial realms to create a hybrid realm that opens new possibilities for profit generation and surveillance. The digital realm is the space where an individual engages with digital communication technologies such as mobile phones and the internet, while the financial realm encompasses financial transactions. The process starts with populations that are part of neither the digital nor the financial realm. They become subjects of this new hybrid realm through a process that is framed as financial inclusion through digital means. However, this process then continues to include better-off populations that were part of the digital and financial realms, but separately, as the massive expansion of the Aadhar project demonstrates. A citizen cannot leave opt out of one realm without leaving the other as she is now part of a hybrid realm.

Who Benefits from Digital Financialisation?

The fierce competition and breakneck pace of innovation in the digital payments space in India has attracted a lot of attention. However, the real prize in digital financialisation is not revenue from lopping off a small slice from cashless transactions but the data generated through cashless and other non-financial digital transactions, which are linked to an individual’s Aadhaar number. This data can be used for surveillance by the government and monetised by private sector actors. For instance, Paytm, a digital payments provider in India, has been accused of sharing data of protesters in India’s Kashmir state with the government of India, an allegation which he company denies.

How do companies monetise this data? By creating detailed profiles of customers to better target products and services to them. The Institute of Research and Development in Banking Technology, an organisation founded by the Indian central bank, gives a glimpse into this process:

By capturing and analysing every browse, click, on-site search, device type and mouse over, the company can then have a better and deeper understanding of the motivations behind the customer. This information, when integrated with the data that companies already hold on their customers, such as age, gender, purchase history or credit score, can allow them to be more effective when sending personalised offers or optimising website and mobile apps.

The Indian state, using its coercive power, and private companies, are creating a massive surveillance infrastructure for generating, harvesting and monetising data of citizens. But, digital financialisation is more than an acknowledgement of the outsized importance of digital data in modern societies. It represents a new mode by which finance imbricates itself in the life of individuals and is characterised by new models of profit generation as well as distinctive inter-elite conflicts, which we elaborate on in our paper.

Sudeep Jain is a PhD Candidate in the Economics Department of the University of the West of England (UWE), Bristol. Photo: Dr. Partha Sarathi Sahana.

This blog post is a part of the blog series Inclusive or Exclusive Global Development? Scrutinizing Financial Inclusionin which a new perspective on financial inclusion is published every #FinanceFriday of February, March and April 2019.

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