Demonetisation: What we missed and how

An incomplete understanding of the transition phase from a cash to a cashless economy has meant the entire exercise became futile. The data is there to see. 

The proportion of cashless transactions (both in terms of numbers as well as monetary value), put things exactly where it would have been even without demonetisation. So what was missed out? It could be the lack of appreciation of how Network Economics work.

As argued by many, moving to cashless economy from cash economy is a problem in Network Economics and it requires two things. One, a ‘shock’, - it involves developing the network of cashless payments. This is what the demonetisation initially achieved. 

Two, it needed interventions that make individuals stay with the new network. This was lacking. For individuals to use digital payments, it was necessary that individuals receive payments directly to their accounts.

Evidence shows, there is a positive correlation between individuals receiving payments in accounts and cashless payments. If one receives payments in cash, it is an extra effort to convert that into digital payment (by depositing into the account). 

However, if one received such payments in the account directly, this step would have been taken care of. However, an individual does not have much incentive to convert cash to digital payments. 

The incentive should have been for the person making such payments- especially for informal sector payments, perhaps through tax incentives.

The mood was more akin to punish all and sundry, rather than encouraging and incentivising any behaviour. 

Policy making should primarily follow the latter only resorting to the former as extreme measure. Sadly, this is perhaps the only lesson we will take away from the exercise!