India Undergoing Modi-fications: Putting “Demonetisation” in Perspective


The economics team at Payden & Rygel, manager of GSFM’s Payden Global Income Opportunities Fund, examines the changes underway in India and explores the consequences of the ‘Modi-nisation’ of the world’s largest democracy.

It is just like any other Tuesday evening in New Delhi, the capital of India. Thick with smog from firecrackers during the Diwali celebrations, the bustling city is quieter than usual as people seek refuge in their homes. On this cold night, Narendra Modi, Prime Minister of India, takes over the airwaves to make a sudden and stunning announcement.

With the demeanour of a head of state announcing that his country is going to war, he states that “corruption, black money and terrorism are festering sores, holding [India] back in the race towards development” and announces that the two largest denomination notes (the 500 rupee and 1000 rupee, equivalent to $7.79 and $15.57) in use “will no longer be legal tender from midnight tonight.”

The administration was criticised by some and applauded by others. Despite shortcomings in the implementation, Modi’s ruling party performed surprisingly well in the local elections in India’s largest state by population, Uttar Pradesh. Since then Indian equities (as measured by the SENSEX stock index) rallied almost 15%, even as economic forecasters slashed real GDP growth estimates for 2017 from 7.7% to 7.1% (refer figure one).



The true long-term impact of demonetisation will take decades to determine. In the interim, investors must look behind the scenes to see the major transformation that the Indian economy is undergoing. Once seen in context, demonetisation is a blip in India’s economic trajectory.

Demonetisation is merely the halfway point on the path to the real change investors should be focused on: digitisation. The Modi government envisioned the process of digitisation as having four steps: identification, banking infrastructure, digital records, and, ultimately, cashless commerce. The journey began with the Aadhaar Act of 2009 and, we think, ends with the implementation of IndiaStack. If India can endure the substantial bumps along the way, it will enjoy the fruits of being a truly digitised economy.

India before 2009: finding an identity

Most citizens in the developed world contemplate their identity in selfies and sleepless nights. In India, before 2009, nearly 50% of the population lacked an official identity. Millions of babies were born every year without a birth certificate, which precludes that individual from basic services such as driving licenses, bank accounts and mobile phones.

To remedy this problem, India launched a project called Aadhaar, a nationwide biometric database based on a twelve-digit digital identity, fingerprints and retina scans. Eight years later, Aadhaar is the largest biometric database in the world and has achieved a stellar participation rate of 99% for those over the age of 18.1 In case the scale of this success doesn’t register, the number of “identified” Indians now equates to roughly 15% of the world’s population.

Erecting a digital banking infrastructure

The next phase of India’s digital infrastructure overhaul was the banking and mobile phone industries. Building on the identification infrastructure, digital banking now allows Indian customers to open an account with just their Aadhaar identification number. The proliferation of new bank accounts as a result of the initiative boggles the mind. Over 270 million new bank accounts were opened in the span of three years.2

One of the primary incentives used to convince the previously unbanked to open an account was the linkage to social welfare programs. The rural population finally had an efficient and non-burdensome method of collecting on social welfare programs provided by the federal government with less leakage. Once people could instantly open a mobile phone account with their Aadhaar numbers, mobile phone penetration rapidly increased as well. In March 2017, the government made Aadhaar verification mandatory for all mobile phone numbers.

The war on cash

This brings us to cashless commerce: once bank accounts and wallets become digital and linked to biometrics, cash is no longer needed. In his initial speech (the one quoted at the beginning of this article), Modi gave the country until the end of 2016 to deposit their notes in a bank account. The idea is to curb the circulation of money in the shadow economy, the so-called kala dhan, or “black” money, thereby making counterfeit notes used by nefarious elements in society worthless. However, in an economy where cash transactions make up 98% of all consumer transactions,3 getting rid of 86% of the currency in circulation was disruptive, to say the least (see figure two).



Working people across India skipped work for days or weeks at a time to make sure their cash was properly deposited into banks. These same citizens spent additional days or weeks waiting in line at ATMs to withdraw new notes, notoriously difficult to source, in order to conduct daily business. The subsequent cash shortages affected millions. Without cash, the economy temporarily froze.

Will Indians start using digital money? Demonetisation resulted in a sharp increase in mobile app payments. Additionally, it scared the public into thinking that cash was no longer a permanent store of value. This forced the public to reconsider their allocation to holding cash versus holding deposits at banks and using digital payments.

Going fullstack

The final step in the digitisation process is IndiaStack. IndiaStack opens up the biometric system of Aadhaar and its payment process to app developers everywhere. Apple and Google have allowed app developers access to their platform, resulting in a proliferation of apps that have enriched the value proposition of smartphones and their operating systems. In a similar vein, IndiaStack will allow everyone to develop apps that could enrich the lives of Indians.

IndiaStack will allow developers to use government biometric data to verify the identity of customers. Businesses and branches of government could capitalise on this massive biometric database to build solutions for anything that requires identity or banking. Imagine all of the bureaucratic paperwork around the world that relies on photocopies of IDs, passports, and bank statements, and then digitise it all so as to never require “showing” or “mailing a copy” of your ID ever again.

IndiaStack gives developers the protocols, tools and procedures (technical term: Application Programming Interface, APIs) to know how to use this data. The evolution of IndiaStack began with the objective to issue UIDs (Unique Identification Numbers) and has evolved through the years to include biometrics, a series of eKYC (electronic Know Your Customer) verification platforms and interfaces, and finally APIs.

Taken together, IndiaStack is presence-less because it utilises biometrics that can be used and verified via smartphone anywhere in the world. It is paperless because digital records can move without the enormous burden of paper collection and storage historically required for record keeping.

Jury out

Plenty of risks and uncertainty remain. Chief among them is security. The importance of cybersecurity to protect such a massive and centralised database will now be paramount for India, but the potential benefits of a national, biometric database for which APIs exist can spur innovation and digitisation unlike the world has ever seen.

The government also hopes that some of this economic activity makes its way onto official books and broadens the tax base once digitisation is in full effect. A broader tax base has the potential to spur many of Modi’s fiscal initiatives including revamping the country’s roads, railroads, electricity grid and other desperately-needed infrastructure.

A digital infrastructure that can accommodate the sheer size of India’s economy had to be established and developed before a demonetisation event to capture economic activity.

It is too soon for unbridled optimism, but investors should step back and consider the broader context for demonetisation: the most useful benefit of demonetisation could be to speed up the digitisation process. It remains to be seen whether the best-laid plans can be translated into a reality in one of the world’s largest economies. Such foundations provide bright futures for economic progress, says the optimist.

[1] “Aadhaar covers 99% of adults in India.”, The Hindu (2017)
[2] Maulden, John (2017). “India’s Tech Revolution Has Already Left the West Behind.” Forbes
[3] Disrupting Cash, pg. 6 (2015). PWC



The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Payden & Rygel and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Payden & Rygel, Grant Samuel Funds Management, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. ©2017 Payden & Rygel.


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