Why a country so unfamiliar with digital payments outlawed 86% of its currency: foreign analysts

Prime Minister Narendra Modi announced cash ban on November 8th and since then the whole nation is undergoing a pain due to cash crunch. The question baffling many analysts is why a country so unfamiliar with digital payments would outlaw 86 %of its currency, the most-favored method of settling transactions.

Some of the facts from a study by Tufts University researchers:

Less than 10 % of Indians have ever used any kind of non-cash payment instrument and less than three percent of the value transacted in the year ending March 2014 used cards. Fewer than two percent of Indians had used a mobile phone to receive a payment.

Indians who have used a mobile phone to receive a payment is less than two percent.

The Tufts researchers see it differently. India, they say, has erred in choosing a bank-led model over a telecoms-led one.

"Consumers have been left unaware of how they might use mobile phones for services other than communications, texting, or Facebook," the study said.

The Indian startup, however, has witnessed explosive growth since the government's November 8 currency ban, tapping opportunities isn't proving to be easy. Paytm launched an in-store payment app last month, only to withdraw it amid security concerns.

Paypal-style wallets, which customers fill from their bank accounts, won't pose too serious a challenge to traditional lenders. But Paytm, as well as mobile operators Bharti Airtel and Reliance Industries, are close to establishing so-called payment banks that can accept customer deposits so long as they only invest in government bonds and don't make loans.

But with both banks and telcos suffering from a deficit of trust and access, neither should be the first choice for replacing cash. The only institution whose balance sheet people actually want is the one they've always used to settle transactions: the Reserve Bank of India.

Even at the Bank of England, the idea is still just a research project. If Modi had embraced it, the pain of demonetization would have become unnecessary. Given people's preferences, it's still not too late to consider.