Demonetization and Digitization: D.basu@iimb - Ac.in Jianzhang@hkbu - Edu.hk

Demonetization and Digitization*
Sumit Agarwal, Debarati Basu, Pulak Ghosh, Bhuvanesh Pareek and Jian Zhang
Abstract
Using large datasets from four diverse sources, of both suppliers and facilitators or recipients of
digital payment platforms, we conduct a comprehensive analysis of the impact of unexpected
demonetization in India on payment digitization. The drying-up of cash due to demonetization
leads to a significant increase in the level of payment digitization and the rise applies to both
traditional and non-traditional digital payment modes -- cards and e-wallets. The usage pattern
persists even during the re-monetization period when cash makes a comeback in the economy,
indicating the success of demonetization in enabling new digitization technologies to make inroads
into consumer payment habits. Heterogeneity tests reveals that regions that are underdeveloped
economically, lag in financial inclusion and technology infrastructure and have a population with
more conservative demographic characteristics experience a weaker digitization response.
Key words: Digitization, Payment Method, Demonetization
JEL Code: G02, G10, Q5
*
We thank Souphala Chomsisengphet, Ivan Png, Nagpurnanand Prabhala, Tarun Ramadorai, Ken Rogoff, David Reeb,
Wenlan Qian, Amit Seru, Barnard Yoeng, and seminar participants at the Indian School of Business, RBI, National
University of Singapore, ABFER, Hong Kong Baptist University for helpful comments. All errors are our own.
Corresponding Authors – Agarwal: Department of Finance, NUS; ushakri@yahoo.com; Basu: Department of Finance
& Accounting, Indian Institute of Management Bangalore, d.basu@iimb.ac.in; Ghosh: Department of Decision
Science and Information Systems and Centre for Public Policy, Indian Institute of Management Bangalore,
pulakghoshc@gmail.com; Pareek: Department of Operations Management and Quantitative Techniques, Indian
Institute of Management Indore, bhuvaneshpareek@gmail.com; Zhang: Department of Finance, Hong Kong Baptist
University, jianzhang@hkbu.edu.hk
1
Electronic copy available at: https://ssrn.com/abstract=3197990

1. Introduction
Paper money and checks have been the dominant modes of payment and exchange for most of the
twentieth century. The last two decades, however, have witnessed a fast diffusion of digitization
in consumer payment instruments, through improved debit/credit card networks, e-wallets1, mobile
payments and the striking new phenomenon of digital currencies. Both policy makers and
academics have embraced the idea of payment digitization. The creation of a cash-less economy is
an important milestone in reducing currency printing and circulation costs, enhancing transmission
of monetary policy measures and financial inclusion and curbing black money, tax evasion and the
unorganized sector (Rogoff, 2015). Many central banks and governments, in both developed and
emerging economies, continue attempting to replace paper currency with plastic and propagate the
usage of digital payment instruments. The primary focus of extant literature has been on
understanding how consumers’ approach the decision on payment modes (Rysman, 2007; Zinman,
2009). This study advances the literature through a comprehensive analysis of payment digitization
by examining the availability, acceptance and following adoption of digital payment modes,
around the latest and largest demonetization scheme worldwide.
On November 8th 2016, the Government of India, in an unanticipated 2 and a radical move,
demonetized two of the highest value banknotes in circulation: INR500 (~USD7.50) and INR1,000
(~USD15). These banknotes accounted for almost 86 percent of notes in circulation in value terms
(Refer to Appendix A). For a heavily cash-based economy, this sudden stripping of legal tender
status of existing notes and the prolonged unavailability of new notes led to economy-wide
complexity and disruption (See, Chodorow-Reich et. la. 2018)3. This unprecedented move caused
a big debate among policymakers, politicians and academics about the motivation behind and
consequences of such actions. The ever-shifting objectives included flushing out black money, and
combating tax evasion, counterfeiting and terrorism. Subsequently, over 99% of the currency was
returned to the central banks and so none of these motives turned out to be relevant. However,
demonetization, which is an exogenous policy shock to the availability of cash, can have a more
prominent impact in a different sphere – payment digitization. Specifically, the sudden cash
squeeze may initiate a revolution towards a cashless economy via the rapid adoption of digital
payment options and became a game-changer for the financial industry4.
1
In this paper, the word “e-wallet” is used interchangeably with “digital wallet”.
2
Refer to http://profit.ndtv.com/news/economy/article-rbi-warned-of-inadequate-preps-for-demonetization-writes-
raghuram-rajan-1745463, last accessed on 20th April 2018.
3
They dicuss the short term consequences of demonetization and show that it increased digitization but also reduced
the quarterly GDP by 2%. Our paper, is quite different and is only focussed on the longer term impact of
demonetization.
4
It echoes the rising popularity of digital payments, as covered in the media. Refer to
http://www.thehindubusinessline.com/economy/india-skips-plastic-money-leapfrogs-into-mobile-wallet-
payments/article9407059.ece;
http://www.hindustantimes.com/business-news/mobile-wallets-see-a-soaring-growth-post-demonetisation/story-
zwdBi3UGqG1qZD92AEF9GK.html; and,
1

Adoption of digital payments can also bring about economy-wide changes that may have broad
and far-reaching implications. First, digitization can significantly advance the financial inclusion
agenda, which is becoming a priority for policymakers, regulators and development agencies
globally. Digitization helps overcome the costs and physical barriers that have beset valuable
financial inclusion efforts by providing opportunities of rapid scaling through more accessible
devices like mobile phones and retail points of sales. Second, a digital revolution may also
contribute to bridging gender gaps by empowering women and enhancing their labor market
outcomes and entrepreneurship opportunities, especially in emerging economies (Accenture, 2016;
Sorgner et al., 2017).
We therefore, examine the impact of demonetization on digitization to ascertain possible positive

externalities of the scheme. The demonetization shock allows us to use a quasi-experiment setup
to examine a consumer’s choice of spending mechanism and garner deeper insights into the usage
of successful payment innovations. Our analysis relies on four proprietary datasets that characterize
the effect of demonetization on digitization from multiple viewpoints. Ever since the payment
industry started to experience digitization with the origination of credit cards in 1950s, banks have
been the dominant player in the sphere. However, the emergence of FinTech in recent years,
particularly digital wallets, at an incomprehensible rate has disrupted the traditional business model
by creating new and efficient means of payment5. The growth also brings new opportunities and
risks for retail banks. So we first focus on the suppliers of digital payment modes (both traditional
and non-traditional) and obtain two large panel datasets: (1) of customer-level data of debit card
transactions from the largest Indian bank; (2) of customer-level data on e-wallet transactions from
the largest mobile-first financial services company in the Indian market.
Retailers are the recipients of these payments and impact the adoption and diffusion of digital
payment modes. The acceptance of newer payment modes by retailers should lend credibility to
and increase the ease of use of digital payment modes. Thus, our second set of analyses is based
on datasets procured from two retailers. The first is transaction-level data from India’s largest
online supermarket, with a delivery only model, that has presence across about 25 Indian cities.
However, customers of an online store may be more digitally sophisticated and thus, may not be
representative of the general population. So we also supplement our analysis with spending data
from an omni-channel strategy supermarket chain with both physical stores and a dedicated online
store. It is India’s fourth largest supermarket chain and has presence all across the country.
http://www.livemint.com/Companies/02xKYa7PKoROOpbx5xbxhM/Demonetization-to-give-major-push-to-
ewallets-payments-thr.html, all last accessed on 20th April 2018.
5
Emerging markets are leading the way in the adoption of new payment technology. According to one survey
conducted in 2016 for Asia Pacific regions, 45 per cent of smartphone users surveyed in China are using digital wallets,
36.7 per cent in India and 23.3 per cent in Singapore. Refer to https://insideretail.asia/2016/02/18/china-quick-to-
adopt-digital-wallets/, last accessed on 20th April 2018.
2

We begin by studying whether customers switched to or increased use of traditional digital
payment channels, i.e., cards (debit and credit). Compared to credit cards, debit cards serve as a
more suitable substitute for cash for two reasons. First, debit cards are more abundant in the
economy (615 million debit cards versus 23 million credit cards were in circulation in India as of
October 2015) and are becoming increasingly popular in the Indian context6. Second, unlike credit
cards, debit cards have no temporal separation between consumption and payment. We document
a significant increase in debit card usage post-demonetization and the rise is much stronger for
infrequent card users with relatively lower level of usage ex ante. Transaction volume rises by
almost 400 percent and transaction value by almost 150 percent for infrequent card users, while
the same numbers for frequent users are 28 percent and 43 percent respectively. We also segregate
this shift by usage at vendor-type and the results reveal a major increase in retail POS and e-wallet
use of debit cards, particularly for infrequent users.
We further verify and extend these results using a panel dataset of e-wallet transactions. The
consumer can transfer cash into the digital wallet using net banking, debit and credit cards and
even physical cash through designated bank branches and then use the e-wallet to pay vendors
using the vendor’s registered cell phone number, scanning the vendor’s Quick Response (QR) code
or automatically through e-wallet and vendor linkages (also see Agarwal et. al. 2018). In many
cases, payments can also be made on offline mode, i.e., without requiring an active internet
connection. Such transaction ease should facilitate the adoption of e-wallets, a) by less
sophisticated customers and vendors, b) by vendors in the unorganized sector and, c) for small-
value transactions (Wakamori and Welte, 2016).
Our analysis confirms the anecdotal evidence 7 and reveals that the usage of e-wallets did
experience a surge due to demonetization in both transaction volume and value. The e-wallet data
allows us to decompose the demonetization response by detailed transaction type, like adding
money to e-wallet, making peer to peer (P2P) transfers – retail or individual and e-shopping. With
respect to both transaction volume and value, the transaction-type analysis reveals a major spike
in add money and P2P transactions during demonetization and much higher levels post
demonetization. While we find an 82 percent rise in the amount of money added to the e-wallet,
P2P transactions show an increase of more than 745 percent for transfer to individuals and 405
percent for transfer to retailers. While a low ex ante value pre-demonetization results in a larger
percentage increase, the results show e-wallets were a payment mode of choice in the absence of
cash.
6
Debit cards displayed a growth of 64 percent (on a larger base of 374mn) between October 2013 and October 2015,
while credit cards grew at only 23 percent (on a much smaller base of 19mn) during the same period.
7
Refer to http://www.hindustantimes.com/business-news/mobile-wallets-see-a-soaring-growth-post-
demonetisation/story-zwdBi3UGqG1qZD92AEF9GK.html, last accessed on 20 th April 2018.
3

We then move to retailers - the recipients and facilitators of payment innovations, and study the
shift in payment choice at an online marketplace. While the data from suppliers of payment
innovations allows analyzing only non-cash transactions, the sales data from a retailer helps us
observe both cash and non-cash transactions. Cash-on-delivery is the most popular payment mode
in India, but we expect the use of more digital payment modes at an online marketplace (as
compared to physical marketplaces) even prior to demonetization. The effect of demonetization on
spending pattern at an e-grocer should then be muted. However, segregating the sales data into
cash and non-cash, we find a significant shift towards non-cash transactions in the aftermath of
demonetization – based on both value (increase of 93 percent) and quantity (increase of 84 percent)
of sales. This corroborates our earlier results while proving the importance of cash even within the
digital retail space in the Indian economy.
We next analyze transaction data from a physical marketplace, which allows more granular
segregation of the non-cash payment mode into card and e-wallet. We can thus, compare the impact
demonetization has on different payment modes. Similar to the earlier results, we find a significant
shift towards non-cash transactions in the aftermath of demonetization – based on both number of
transactions and amount spent. Among the digital payment methods, card usage is a lot more
prevalent than e-wallet usage pre-demonetization and this trend continues post demonetization as
well. While we see an increase in e-wallet usage, the majority of the shift out of cash is absorbed
by card payments at physical stores: card transactions increase by 136 percent in count and 129
percent in amount spent. The same numbers are 72 percent and 80 percent respectively for e-wallet
transactions.
The customer and bill-level data also allows us to segregate the sample into high and low bill value
customers, based on the value of currency notes demonetized. We then examine the change in
spending pattern by customer type. Overall, the results reveal about a 2 times and 38 times increase
in number of card and e-wallet payments respectively post-demonetization. These figures are about
1.80 and 50 respectively with respect to amount spent. The growth in spend through cards is much
lower for high value customers at approximately 45 percent in transaction count and about 80
percent in amount spent. For e-wallet spends, even high value customers display a 70 times growth
in number of transactions while the amount spent increases by 17 times post-demonetization. This
implies a much larger increase in card usage among low value customers as a result of
demonetization and an increase in e-wallet users irrespective of bill value. Taken together with the
e-grocer results, we find a significant post-demonetization shift to digital payment modes across
retailer kinds and despite initial digitization levels.
Next, we explore the heterogeneity of the demonetization effect by exploiting spatial variations, in
both socio-economic and demographic characteristics, that may influence the adoption of digital
payment technology. We particularly focus on three categories of factors: (1) overall economic
development such as GDP and unemployment rate; (2) levels of financial inclusion and technology
4

infrastructure development and; (3) demographics. Our findings are summarized as follows. First,
the digitization trend persists in all the three Indian megacities we examine, even over six months
after the event. Second, we show that the impact of demonetization on digital payment adoption is
most muted in regions that are underdeveloped economically, lag in financial inclusion and
technology infrastructure development and have a population with more conservative
demographics. All our observations are consistent with prior literature that tries to uncover the
elements underpinning the diffusion of digital payment technology (Pohjola, 2003; Comin and
Hobijn, 2004; Vicente and Lopez, 2006; Montazemi and Qahri-Saremi, 2015).
Finally, we undertake additional analyses to garner greater economic insights and to further assess
the robustness of our results. In our robustness checks, we first examine whether general or supply
shock-based price increase explains the increase we find in sales value. Our data reveals no
significant difference in average prices pre and post demonetization. We also find that while prices
remain stable for staples, sales and prices of luxury products (high end electronics) and housing
decline. In additional analysis, we attempt to gauge market expectations with respect to a FinTech
revolution by studying the market reaction to demonetization on banking stocks. We find
significantly higher cumulative abnormal returns for banking stocks post demonetization. However,
this is found to be short-lived indicating a probable correction of expectations - of e-wallets and
credit cards leading the digital payment revolution instead of traditional banking options like debit
cards and net banking. This supports our results as well.
Our work is closely related to the literature on consumer’s payment choices and innovation of
payment instruments (Rysman 2007; Klee 2008; Ching and Hayashi 2010; Yang and Ching 2015;
Koulayev et al 2016; Wang and Wolman 2016; Wakamori and Welte 2017; Rysman and Schuh
2017 provides an effective overview of the literature and discussion of payment innovations). We
make three contributions to the existing literature in the digitization space. First, in contrast to
survey-based studies that may introduce bias, we use four transaction-level datasets from both the
supply-side and demand-side of digital payment. The comprehensiveness of our data enables us to
understand how consumers approach their payment choices in greater detail. Second, our paper
extends prior studies that focus on understanding the substitution between cash and cards and add
the latest payment innovation that arises in the context of what is commonly described as the
mobile revolution – e-wallet. Third, we explore spatial heterogeneity through various demographic
and socio-economic characteristics that can influence payment digitization and our results suggest
that the ambition towards a cashless economy depends on joint efforts of removing barriers in
terms of geography, infrastructure, affordability and familiarity.
We also contribute to the growing literature on financial inclusion, both theoretical (Aghion and
Bolton, 1997; Banerjee and Newman, 1993) and empirical (Burgess and Pande, 2005; Cole et al.,
2011; Dupas and Robinson, 2013; Bruhn and Love, 2014; Prina, 2015). Extant literature has
focused more on understanding the broader impact of increased access to banks on aggregate
5

income and labor market outcomes. Three recent studies advance the literature by providing
evidence on the usage of banking services by poor individuals based on an RCT study of 6000
accounts across three countries (Dupas et al., 2017), an administrative account-level micro data-
based study in India (Agarwal et al., 2017a), and a study about how consumers in Rwanda move
to using formal credit after introduction of a credit bureau (Agarwal et. al. 2017b). Within this
literature, we use unique consumer financial transaction-level data and provide a novel assessment
of the impact of large-scale demonetization on the consumer’s choice of payment methods. While
we do not have the luxury of directly measuring access to financial services, our results echo with
these findings and highlight the potential of creating a cashless economy as an alternative solution
to the financial inclusion agenda.
Finally, our study is broadly related to the literature seeking to assess large-scale programs and
regulations trying to change household behavior including consumption (Johnson et al., 2006,
Mian and Sufi, 2010), mortgage refinancing activity (Agarwal et al., 2015) and borrowing
(Angelucci, 2015). Within this literature, we evaluate the world’s latest and largest demonetization
program and examine the externality of cash unavailability on a different sphere – payment
digitization.
The rest of the paper is structured as follows. Section II discusses the state of digitization in India
and the demonetization policy experiment. Sections III and IV describe the data and methodology
used, Sections V and VI present the empirical results, and Section VII concludes.
II. Institutional Background
II.A. Digitization in India
The mid-1990s saw a movement towards digital payment systems around the world: many central
banks attempted to replace paper currency with plastic money by propagating the use of digital
payment modes including debit cards, credit cards and e-wallets. The shift towards creating a
cashless economy with a booming digital payments sector became a central theme in many
emerging economies then. This is because payment digitization offers a multitude of benefits8 for
an emerging economy like India, including cost efficiencies and a path to a more inclusive society.
However, India experienced no major shift in its cash usage pattern during this phase. About 87%
of the value of all transactions in 2012 was in cash and it is estimated that the Reserve Bank and
commercial banks in India spent a total of INR21,000 crore (~USD3 billion) in currency operation
8
Refer to https://www.forbes.com/sites/boozandcompany/2013/07/19/how-to-reap-the-economic-rewards-of-
digitization/#51144789479a; and http://www.mitpressjournals.org/doi/abs/10.1162/INOV_a_00061, last accessed on
20th April 2018.
6

costs annually (Mazzotta et al., 2014). While the value of electronic payments increased 9, India
continues to be a cash-based economy; with currency in circulation accounting for almost 18% of
its GDP, one of the highest among emerging economies. The same number for developed
economies like UK and USA is about 3.5% to 8%. As of 2015, India’s preferred digital payment
mode was still cash on delivery with 57 percent of all digital shopping transactions falling in this
category. Other payment modes are represented as follows: debit cards accounted for 15 percent,
credit cards 11 percent, net banking 9 percent and e-wallets 8 percent.
The staggered development of payment digitization in India can be attributed to a number of

challenges. At the forefront has been a low level of internet penetration. India, as of January 2017,
had about 462 million active internet users, about 60 percent of which is in urban India. Of this,
443 million were active mobile internet users10. This accounts for more than 30 percent of the
country’s population using the internet and about 24 percent using it via mobile phones. This is a
significant increase from just 7.5 percent of the population using the internet in the year 2010 and
only 0.5 percent using it in 2000 11 . While this number still remains much lower than other
developed countries with India not featuring even in the top 100 countries by internet penetration,
the double-digit growth rate of internet users in India is the highest across the world12. This augurs
well for India’s digitization dreams, more particularly with respect to its digital payment
aspirations.
Also, a large portion of India’s population continues to be financially illiterate13, without access to
formal banking channels, and in favor of traditional transaction modes like cash. This is apparent
as a high percentage of cash-on-delivery orders continues to plague the e-commerce industry14.
Cost inefficiencies, data privacy concerns, price competition and customer demographics like a
rural-urban divide and age increase the challenges (Raja, Velmurgan and Seetharaman, 2008)
further for the digital payments industry. These challenges became evident with declining digital
payments, increasing zero-balance customer accounts and consolidation in the industry as cash
made a comeback15 post demonetization.
9
PwC Report (in collaboration with Internet and Mobile Association of India and Payments Council of India),
Disrupting cash: Accelerating electronic payments in India
10
Refer to https://www.statista.com/statistics/309866/india-digital-population/, last accessed on 20th April 2018.
11
Refer to https://www.statista.com/statistics/255135/internet-penetration-in-india/, last accessed on 20th April 2018.
12
Refer to http://browntape.com/internet-usage-in-india-and-its-impact-on-online-retail/, last accessed on 20th April
2018.
13
Refer to http://www.livemint.com/Opinion/f5xo11OSPqxGWUdaWKVb8J/Why-India-needs-to-work-on-
financial-literacy-now-more-than.html; and
http://www.masterintelligence.com/content/intelligence/en/research/reports/2015/mastercard-financial-literacy-
index-report-2014h1.html, last accessed on 20th April 2018.
14
Refer to http://www.businessinsider.com/cash-on-delivery-remains-the-preferred-method-of-payment-in-india-
2016-6?IR=T, last accessed on 20th April 2018.
15
Refer to http://www.thehansindia.com/posts/index/News-Analysis/2017-03-29/Cash-is-back-Digital-payments-
recede-/289647, last accessed on 20th April 2018.
7

The Indian government has consistently endeavored to push forward its digital payment aspirations
through policies and regulations 16 . For example, in order to encourage adoption of cards, the
government established frameworks for safety and security, rationalized the Merchant Discount
Rates and has been issuing RuPay cards under the Prime Minister Jan Dhan Yojana17 scheme. The
efforts also expand to other payment digitization modes, beyond cards. The digitization trend in
India began with e-commerce start-ups incentivising the Indian customer to have online footprints.
Since then, rising personal consumption expenditure, increasing penetration of smartphones,
ubiquitous and more affordable access to internet and progressive regulatory changes have driven
the growth in digitization. The Indian Government’s Digital India vision and the entry of large
corporates like Reliance in the telecom sector have aided this growth. This development manifests
in the increasing competition in the e-wallets industry with banks, telecom and e-commerce
companies also riding the bandwagon.
II.B. Demonetization in November 2016
On November 8, 2016, the Indian Prime Minister Narendra Modi announced a demonetization
scheme, commonly called notebandi, in an unscheduled live televised address: notes of INR500
and INR1,000 would be invalid past midnight and in exchange for the old notes new INR500 and
INR2,000 would be issued. India is not the only country to have demonetized currency; several
other countries have embraced it in the past, including United Kingdom in 1971, Ghana in 1982,
Nigeria in 1984, Australia in 1996, Zimbabwe in 2015 and Pakistan in 2016. This was also not
India’s first such experience since India has seen a series of demonetization episodes18 with the
latest one being the third and the largest. What also distinguishes the latest event from the earlier
occurrences is the suddenness of the announcement. For a heavily cash-based economy, this
sudden stripping of legal tender status of existing notes and the prolonged unavailability of new
notes led to economy-wide complexity and disruption. Amidst the paralysis was the key reason of
rapid growth rate of these notes in circulation over the last five years19 and the government motives
of flushing out black money and combating tax evasion, counterfeiting and terrorism - which are
all central themes of the current ruling party20 in India.
III. Data
16
Refer to https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=840, last accessed on 20 th
April 2018.
17
Refer to https://www.pmjdy.gov.in/scheme, last accessed on 20 th April 2018.
18
Refer to http://www.freepressjournal.in/featured-blog/indias-history-with-demonetisation-from-1946-to-
2016/988212, last accessed on 20th April 2018.
19
Growth of 76% in INR500 notes and 109% in INR1,000 notes since 2011.
20
Refer to http://www.bjp.org/en/core-issues/vision-of-modi; and http://timesofindia.indiatimes.com/india/currency-
ban-to-be-central-theme-at-bjps-2-day-national-executive/articleshow/56366114.cms, last accessed on 20th April
2018.
8

We combine four unique and proprietary datasets to explore the effect of demonetization on
digitization from multiple viewpoints. Specifically, we obtain data from both the suppliers of
digital payment modes - (1) debit card transactions data from a traditional provider, a bank; (2) e-
wallet transactions from a non-traditional provider, a mobile e-commerce company - and the
demanders or facilitators of digital payment modes - (3) spending data from India’s largest online
grocery store; (4) bill-level data from a supermarket chain with both physical and online presence.
The variable definitions, by dataset, are presented in Appendix B.
III.A. Debit Card Data
The customer-level debit card data is acquired from a bank in India that currently caters to about
370 million customers and enjoys about 23 percent market share. The largest bank in India and one
of the top 50 banks globally with respect to total assets, this bank is also the leader in digital
banking in India. We first obtain data relating to point of sale (POS) debit card transactions
pertaining to more than 107,000 customers across a 15-month period (2016:01 to 2017:03) from
the bank. We focus particularly on debit card holders and their transactions since debit and credit
cards have the highest share (at about 40 percent) of all digital payments done in India.
For each individual in our sample period, we can observe details of daily debit card transactions
including date and amount or value of transaction along with information about the vendor. The
dataset also includes a rich set of demographic characteristics of every customer including age,
gender, marital status, location (whether rural or urban) and has a branch identifier. The branch
details also provide additional geographical details like district and city. The availability of
transaction-level data and customer demographics makes the dataset richer and allows a deeper
understanding of variations or heterogeneity in the spending pattern response to the negative
consumption shock.
Since we do not have information on other banking relationships of these customers, ensuring a
more prominent and permanent relationship with the bank is important to reduce measurement
error. Given the size, market share and representativeness of the bank, measurement errors are
expected to be much lesser as our bank is likely to be the dominant bank for our sample consumers’
daily use. Moreover, we use a data filter to identify a sample of customers that are more likely to
rely on this bank for their daily financial needs. Specifically, rather than using all customers with
debit cards, we restrict our sample to customers who have both a savings bank account and a Public
Provident Fund (PPF) account with the same bank. This sample of customers with multiple
relations, one of which is a long-term relationship, should ideally include customers with relatively
higher levels of loyalty that in turn should lead to higher debit card use.
We further clean the sample to include only debit card holders who actually transact using their
debit cards, i.e., active debit card users. To do so, we first drop customers with zero debit card
transactions during the 15-month sample period. This reduces the number of users by 37,000. Next,
9

we drop the customers who were inactive debit card holders’ pre-demonetization. This brings our
final dataset down to 59,963 customers over 15-months. Within this dataset, we create subsamples
of more/less frequent or high/low debit card users based on their pre-demonetization usage. This
helps us examine the shift in spending pattern separately for customers who are early adopters of
digital payment modes and those who are late or slow adopters.
The data includes transactions across more than 174,000 vendors and we manually classify these
vendors into three broad categories based on type (e-wallet, e-commerce and retail) for a more
comprehensive understanding. The first category, e-wallet, includes all debit card-based
transactions made at any e-wallet vendor, either for direct purchase at the vendor or for transfer of
cash into the wallet for purchase at other vendors. The e-commerce category includes all debit card
transactions made at any online shopping website directly. The retail category includes all POS
transactions made at any physical vendor. This classification results in our sample comprising
about two million transactions, of which about 18 percent are e-wallet transactions, 66 percent are
retail transactions and the balance 16 percent are e-commerce transactions. Panel A of Table 1
presents the summary statistics of these variables.
III.B. e-Wallet Data
We then shift to the latest innovation in the digital payments space – e-wallets and obtain a novel
transaction-level dataset from the largest mobile commerce/e-wallet company in the Indian market.
The company also offers a full marketplace like any other e-commerce player but is primarily an
e-wallet21. As of February 2017, the company had about 200 million registered users with almost
50 percent of those being active users. It connects its users to more than two million merchants,
with more than 40 percent being offline merchants that accept payment through this e-wallet. Its
offline transactions account for almost 65 percent of its total business, experiencing almost a 12-
fold growth in offline commerce. The company crossed one billion in transactions in the 2016
calendar year and has since then captured more than 25 percent market share in the digital payments
space. This helps us explore whether newer digital payment modes like e-wallets experienced a
surge due to demonetization.
We obtain transaction-level data (volume, value and vendor if any) over the same 15-month period
(2016:01 to 2017:03) for more than 772,000 transactions by 10,000 customers. The vendor types
include utility providers (like telecom, electricity and water), transportation agents (like airlines,
railways, buses and taxis), physical stores (like pharmacies, restaurants, theatres and retail stores)
and all e-commerce platforms; thus, covering the gamut of customer requirements in the organized
sector. Within the unorganized sector, this includes mom and pop stores, street vendors (like fruits
21
This is unlike the Amazon model, where Amazon is primarily an online marketplace that has now introduced its
own e-wallet through Amazon Pay. This provider is primarily an e-wallet and financial services company, which also
has an online marketplace linked to the same portal. The marketplace has now been separated from the e-wallet in
identity but both parts continue functioning on the same portal.
10

and vegetables, tea and wares), home-based vendors (like newspapers and milk) and other service
providers like barbers. We segregate the data based on transaction-type and select the top three
categories by share of total number of transactions which represent about 85 percent of the total
sample. These are (1) adding money to e-wallet (55 percent of the transactions); (2) purchasing
directly on the company’s e-commerce platform (5 percent); and (3) transferring money to others
(24 percent). The last category of person-to-person (P2P) transfers is further divided into two
categories, i.e., paying organized vendors identified as retailers using QR codes (5 percent) and
paying vendors (organized and unorganized) identified as individuals, using their mobile phone
numbers (19 percent). Panel B of Table 1 presents the summary statistics of these variables.
III.C. Online Marketplace Data
The debit card and e-wallet data help us understand the shift in spending pattern from the supply
side by examining availability of alternative sources of money. We also use two proprietary
datasets from the demand side – retailers: one from an online marketplace and the other from a
physical store. The retailers facilitate the use of the alternative sources of money. This helps us
explore three things. Firstly, we examine whether demonetization caused a shift in payment mode
across online channels where initial levels of digitization are expected to be higher. Secondly,
whether and how customers at a physical marketplace react when a vendor provides all digital
payment options in a post-demonetization less-cash scenario - which payment mode do customers
opt for or shift to from cash? Finally, whether demonetization also affects consumption or spending
pattern.
Our first dataset is transaction-level data from a purely online food and grocery player. A
Bengaluru-headquartered start-up of seven years, this company is India’s largest internet-based
grocer and is present across 26 Indian cities offering more than 20,000 products. It has amassed
more than 5 million customer registrations and receives more than 50,000 orders per day. The
company’s total sales is growing at almost 10 percent month-on-month currently and experienced
a three times increase in the last fiscal year 2016. The store runs three parallel business models.
The first is to cater to planned grocery buying wherein a customer can place an order, choose a
convenient delivery slot (four slots per day) and the order will be delivered accordingly. The second
is for immediate requirements wherein a customer can place an order and ask for an express
delivery within ninety minutes. The third is to accommodate customer-based store preferences
wherein the company ties up and provides purchase and delivery options from some specialty
stores (for example, particular bakeries or ice cream parlors).
For each order, a customer can choose to pay through digital payment modes or through cash on
delivery. The digital payment modes include debit and credit cards, net banking and e-wallets. We
examine this availability of cash and non-cash payment modes at the largest online grocery store,
where the level of customer digitization is expected to be higher. Our sample contains aggregate
data on total orders received daily, which can be approximated to daily sales. This is because the
11

store has a 99.5 percent order fill rate. Our data covers about 40 million daily orders received from
four cities and across twenty products - fruits and vegetables category (10 fast moving and 10 slow
moving perishable products).
Fruits and vegetables are useful to our analysis on three accounts. Firstly, these are staple products
required at higher frequency at most households making it more of a necessity than luxury. This
implies that these products are expected to be consumed irrespective of spending mechanism.
Secondly, the unorganized local market is the main competitor as vendors or suppliers of staples
and this market is cash-based from both demand and supply sides. This implies that the
unorganized market is expected to face a larger demand and supply shock, followed by an
anticipated shift in demand to other competitors providing non-cash payment modes. Finally, fruits
and vegetables account for 18 percent of the company’s total sales and is therefore, two of its key
product segments.
The sample covers a 12-month period from 2016:07 - 2017:06. At the disaggregated level, for each
order, we have data on the total number of orders received, total order quantity placed and total
price charged per order, by city and product. Moreover, the data also helps identify the payment
mode used or transaction type for every order – cash or non-cash. Given this, we expect that our
sample of 52,560 data points (365 days x 2 transaction types x 4 cities x 18 product categories 22)
is random, representative and fundamentally useful in understanding the effect of demonetization.
This dataset also provides additional advantages being micro-level consumption data of essentials
with less measurement error and allows high frequency analysis of spending behavior - pattern and
mechanisms. We aggregate this data to 730 data points (365 days x 2 transaction types) overall
initially and then by city. We then use a difference-in-difference approach, using total volume and
value of sales, to explore how spending behavior, particularly the use of spending mechanism,
changes post demonetization. Panel C of Table 1 presents the summary statistics of these variables.
III.D. Omni-Channel Physical Marketplace Data
For a more robust study of spending pattern, we acquire a similar dataset from a supermarket chain
that has an omni-channel strategy with both physical stores and a dedicated online store but is
primarily a brick and mortar company. The online portal of the company is recent, dependent on
its physical stores’ supply chain and currently caters to only short distances around its physical
stores. A fast-growing food and grocery business (grew at more than 20 percent in the last financial
year 2014-15) with around 530 stores across the country and more than INR35 billion (~USD525
million) in revenue, the company is the fourth largest supermarket chain in India. It belongs to
India’s third-largest private sector business group which has presence across diverse industries in
more than 40 countries.
22
We drop two leaf vegetable products, Palak and Methi, for lack of complete data across the three cities being studied.
12

We obtain bill-level data (value, payment mode and customer details) over a 12-month period
(2016:04 to 2017:03) for more than 411,000 customers. This gives us a sample of 34 million bill-
level observations. We then clean this data to exclude customers with invalid data and missing
demographic data. In the next step, we restrict our sample to customers who have done a minimum
of five transactions and a maximum of 120 transactions at the retailer during the year-long sample
period. This is to exclude from our sample, customers who are not regulars (less than five
transactions in the year) and those who may be buying for non-private consumption purposes (10
or more transactions a month so 120 in the year). This reduces our sample to 12.4 million
transactions.
We segregate our final sample by payment mode and limit our sample to the following – cash (65
percent of total transactions), card (26 percent) and e-wallet (0.5 percent). We use the data to
examine the general effect of demonetization on digitization of payment mode in a physical
marketplace. For this purpose, we aggregate the data by month, customer type and payment mode
resulting in 14.8 million observations (411,731 customers x 12 months x 3 payment modes). We
also create customer-type subsamples based on bill value, i.e., high value (bill value > 500) or low
value (bill value <= 500). Since currency notes of 500 and 1000 were demonetized, we expect
customers with bill values above 500 to have a higher incentive to digitize since it will require
more frequent use of such high value notes. We also do some granular analyses based on individual
customers using city-level data. Panel D of Table 1 presents the summary statistics of these
variables.
All our samples cover a 12-15 month period around demonetization. For analysis based on daily
data, 8th November 2016 is defined as the cut-off date such that all dates after the 8th are in the
post-demonetization subsample. For analysis based on monthly aggregates, October 2016 is
defined as the cut-off month such that all months after it fall in the post-demonetization subsample.
This is done since pre-demonetization is only the first week of November, while the other three
weeks of the month are post demonetization. November is also the month that experienced the
highest magnitude of non-cash chaos before re-monetization began in the Indian economy. We
also conduct a series of robustness tests using additional data sources. These datasets have been
described when discussing the results of the supplementary tests.
IV. Empirical Methodology

IV.A. Supply-Side of Digital Payments
We start our analysis by explicitly testing the effect of demonetization on debit card usage. This is
captured by the binary variable D which takes the value 1 for the post-demonetization period,
which is categorized as time after 8th November 2016 for daily/weekly data and time before
November 2016 for monthly data. We estimate the following specification:
Usagei,t = β0 + β1 * Dt + Xi,t + εi,t (1)

13

where the dependent variable, Usagei,t, is measured using two variables, number of transactions
and amount spent, for customer i at time t. The difference in debit card usage before and after
demonetization is captured by β1 and we expect β1 to be significantly positive with use of digital
payment modes increasing post-demonetization.
Since the vendor types are available in our data, as discussed in section III.A., we estimate Equation
(1) across three broader categories of vendors - e-wallet, retail and e-commerce. We are particularly
interested in the use of retail and e-wallet because they represent the most popular traditional and
non-traditional use of card respectively. This helps understand where debit cards have been used –
whether to pay retailers directly or to transfer balance to e-wallets for further use. As the newly
emergent payment mode, e-wallets are typically used through websites/applications or a mobile
phone number and do not require POS machines. This makes it more conducive for transactions in
the unorganized sector and by smaller players in the organized sector. The benefits further include
no direct linkage to bank account (security and tax concerns), ease of use (no swipe or pin
requirements; One Time Password based) and additional facilities like transferring amounts to
friends and family and access to some only e-wallet accepting applications like taxi services. In
contrast, the use of debit cards at typical retailers, which form the majority of total transactions,
mostly rely on POS machines to reduce transaction time. Moreover, retail vendors with POS
machines were slower (than non-POS vendors) in adapting to and accepting e-wallet payments.
This meant that payment modes at such vendors were limited to cash or traditional modes like debit
and credit cards for some period post-demonetization.
The usage response may also depend on a customer’s status quo, so we further divide the sample
based on the ex-ante debit card usage frequency and implement a difference-in-difference
identification strategy. The subsample of high (low) frequency users include those cardholders who
have used their debit cards for at least (less than) five POS transactions during the pre-
demonetization period. This categorization of user type into high and low frequency users can also
be interpreted as existing versus new users of digital payment modes. Then we aggregate the data
at the user-type (represented by subscript preD_high = 1 or 0) - month (represented by subscript t
= 1 to 15) level. Therefore, every month in the sample yields two separate transaction
counts/amounts (59,663 individual accounts across both user types) and a total of 894,945 sample
points. For example, summation of all transactions by high frequency users in month 9 is given by
usage1,9 and transactions by low frequency users in the same month is given by usage0,9. We
estimate the following specification:
Usagej,t = β0 + β1 * preD_highj + β2 * Dt + β3 * Dt * preD_highj + εj,t ----- (2)
The dependent variable, Usagej,t, measures the frequency and transaction amount as in Equation
(1) but for group j and month t. The binary variable, preD_highj, takes the value 1 for ex ante
frequent users and zero otherwise. β1 captures the baseline difference between high (frequent) and
low (infrequent) users pre-demonetization and is expected to be significantly positive based on our
14

definition of the variable. β2 helps capture the pre and post difference among less frequent users
and is expected to be significantly positive if the drying-up of cash after demonetization makes
consumers switch from cash to non-cash modes of payment. However, for users who had adopted
traditional digital payment modes (debit cards, in this case) pre-demonetization itself, we would
expect a significant but only marginal impact of demonetization. Thus, we expect β3 to be
significant but of low magnitude compared to the coefficient for current usage of high users - β1.
We also examine how the behavior of existing users differs from new users with respect to debit
card usage and vendor type. We expect that mostly low pre-demonetization users of debit cards
shift to e-wallets. This is because for high users, the switching costs are expected to be higher
because of existing comfort with debit card use. However, for low users, a) the switching costs
may not be as high and, b) there might be initial inertia or concerns with respect to debit card use
since it links directly to their bank accounts. These may make e-wallets preferable for ex ante low-
users. Next, we examine how high and low users adapt when using their debit cards at POS-based
retail outlets. While high users would be expected to increase their retail transactions marginally
but significantly, low users would be expected to increase retail transactions by a much higher
magnitude.
We apply the same debit card data specification in our analysis of the e-wallet transaction data. As
discussed in section III.B., e-wallet transactions can be further classified into four categories – add
money, e-shop, P2P-retail and P2P-individual and thus, we also undertake a sub-sample analysis
based on transaction type. To the extent that the transition cost into e-payments from cash is
relatively low due to already available mobile phones, we would expect a reasonably quicker and
stronger response of e-wallet usage in the aftermath of demonetization. We also examine this shift
across cities.
IV.B. Demand-Side of Digital Payments
We then turn to retailers to study the impact of demonetization. First, we explore the data from the
online marketplace. We are interested in assessing the relative adoption of cash versus non-cash
payment and thus, extend Equation (1) to include the payment mode indicator. We aggregate the
sales at the transaction-type (represented by subscript non_cash = 1 or 0) - day (represented by
subscript t = 1 to 365) level. Therefore, every day in the sample yields two separate sales values
and an overall total of 730 sample points. For example, summation of all cash transactions on day
131 is given by sales_value0,131 and non-cash transactions on the same day is given by
sales_value1,131. Formally, we use the following specification:
Salesk,t = β0 + β1 * Non_cashk + β2 * Dt + β3 * Dt * Non_cashk + εk,t ----- (3)
where the dependent variable is not usage but sales and is measured by its quantity and value. The
dummy variable, non_cash, takes the value 1 if a transaction is made using any non-cash payment
15

mode and 0 if it is paid in cash. The coefficient of interest here is β3. Since the demonetization-led
cash crunch is anticipated to have forced consumers to adopt non-cash modes of payment, we
expect β3 to be significantly positive. This would indicate a higher value and volume of non-cash
sales post-demonetization. This specification is also run by city for further analysis later.
For the data obtained from the physical marketplace, we can further observe the components of the
non-cash transaction: card or e-wallet. Therefore, the data aggregation is slightly modified
compared to the above and every month in the sample now yields three separate transaction (cash,
card and e-wallet) counts and amounts and an overall total of 36 (12 months x 3 modes) sample
points. For example, summation of all card transactions in month 9 is given by salescard,9 and e-
wallet transactions in the same month is given by salese-wallet,9. We then use the following
specification:
Salesk,t = β0 + β1 * Dt + β2 * Cardk + β3 * e-Walletk

+ β4 * Dt * Cardk + β5 * Dt * e-Walletk + εk,t -- (4)
where the dependent variable, sales, is defined as in Equation (3). The two indicator variables,
Card and e-Wallet, take the value 1 if the transaction is made via card and e-wallet respectively
and 0 otherwise. β2 and β3 in Equation (4) capture how the usage of card and e-wallet differs from
cash pre-demonetization. The coefficients β4 and β5 can be interpreted as the impact of
demonetization on the usage of card and e-wallet compared to cash. To ease the concern of low
statistical power due to data aggregation, we also formulate the analysis based on individual-month
data with 15 million observations.
We delve deeper into this analysis by classifying customers as high value or low value. This is
done based on bill amount. We create an indicator variable called hi_value which takes the value
1 if the bill amount is greater than INR500, 0 otherwise. We choose INR500 to segregate the data
since the event demonetized INR500 and INR1000 currency notes. Also, INR500 accounted for
majority of the notes demonetized. The unavailability of these currency notes would be expected
to cause a greater shift to digital payment modes for purchases above the 500 mark. Every month
in the sample now yields two separate customer types and three separate payment modes. This
yields an overall total of 72 (12 months x 3 modes x 2 types) sample points. We then augment
equation 3 with this variable and use the following specification:
salesp,q,t = α + β1 * Dt + β2 * Cardp + β3 * e-Walletp + β4 * Dt * Cardp + β5 * Dt* e-Walletp +

β6 * hi_valueq + β7 * Dt * hi_valueq + β8 * Cardp * hi_valueq + β9 * e-Walletp * hi_valueq +
β10 * Dt * Cardp *hi_valueq + β11 * Dt * e-Walletp * hi_valueq + εpay,t -- (5)
The key coefficients here relate to the variable hi_value. We expect β6 and β7 to be significantly
negative and β8 and β9 to be significantly positive. This is because high value customers are
expected to be more digitized and thus, users of lesser cash even pre-demonetization. While we
16

expect card and e-wallet usage to increase post demonetization (β4 and β5 respectively), we expect
this increase to be much higher among low value users. This is because low value users are
expected to be more cash-based pre-demonetization. Thus, β10 and β11 are expected to be negative.
This specification is also run by city.
IV.C. Heterogeneity Analysis
After examining the effect of demonetization on digitization, we explore the demographic profile
of customers, their level of digitization and how demonetization moderates the association between
the two. We use the demographic variables available from the debit card and physical marketplace
data and evaluate some relevant macro-economic variables. We particularly focus on demographic
characteristics like gender, marital status and city of residence. We also include proxies for existing
level of customer digitization by verifying the provision of email addresses at the POS. We also
analyse the demographic characteristics city-wise and evaluate the magnitude and persistence of
the impact of demonetization on digitization.
V. Effect of Demonetization on Payment Digitization
V.A. Demonetization Effect on Traditional Digital Payment Mode – Debit Cards
In this section, we begin by reporting the aggregate statistics on debit card usage around the
demonetization period. Figure 1(a) plots the number of unique vendors in our transaction-level
dataset over a 40-month horizon starting three years before the demonetization shock. We also
segregate and plot the transactions by vendor-type: retail (POS), e-wallet or e-commerce. Despite
continuous efforts by the RBI to digitize and propagate debit card use, the last three years show a
relatively flat graph for the number of unique vendors. Demonetization, however, causes a major
upward shift taking it to more than 65,000 unique vendors (shaded area). We find that this jump is
especially pronounced for retail vendors (from 23,915 vendors to 61,867), despite much higher
pre-demonetization levels of about 70 times the number of e-commerce (from 335 to 453) and e-
wallet (from 93 to 116) vendors. More importantly, demonetization seems to have enabled new
digitization technologies to make inroads into consumer payment habits: the number of vendors
decline once cash makes a comeback in the economy (post re-monetization) but still stays above
40,000 which is more than double the initial levels.
We observe similar patterns from the weekly plot of number and value of debit card transactions
in Figure 1(b), in which we also segregate the data based on a customer’s ex ante digitization level.
While we see an expected demonetization-based spike in debit card usage among high users who
already are comfortable with the digital payment mode, the figure also shows a significant increase
in levels for low users. This indicates an increasing base effect, i.e., demonetization helped increase
the number of debit card holders who actually transact using their cards. The new post-
demonetization level is marginally higher than the pre-demonetization level for high users, but for
17

the low users, we see a significant shift in usage pattern indicating more permanence of the
demonetization effect. A similar trend is seen in retail and e-wallet transactions for low users.
However, for high users, a higher permanent shift is seen in retail transactions only.
With respect to vendor type, the increase is mostly for retail and e-wallet transactions. While cash-
on-delivery orders have dominated the Indian e-commerce space, e-commerce customers are
expected to be more digitally sophisticated. Also, the significant jump in e-commerce transactions
during the Indian festive season in October (around week 40) indicates that most e-commerce
purchases are not essential products. Therefore, it is also possible that post the festive season and
due to demonetization, e-commerce-based consumption of non-essential products declined. The
flatter slope of the transaction plot compared to the positive-sloped transaction count plot (in the
e-commerce plots) also indicates that while amount spent did not vary much, customers did switch
to debit cards. Since the e-commerce subsample reveals much lower demonetization impact, the
regression analysis is restricted to the retail and e-wallet subsamples.
We then, verify the above observations within a difference-in-difference regression design and
apply equation (2) to the debit card transactions. Panel A of Table 2 shows the estimates for the
full sample, where the dependent variable is number of transactions in Columns 1 and 2 and the
transaction amount in Columns 3 and 4. The high/low users definition is corroborated by the results
since high users transact 10 and 4 times more than low users in terms of count (comparing the
intercept of 0.24 with the β1 coefficient of 2.57) and amount (comparing the intercept of 970 with
the β1 coefficient of 4,054 for high users) respectively. The coefficient on the interaction term
captures the relative increase by the high users compared to low users. While the positive estimate
indicates the rise is greater for frequent users in terms of level, the comparison of change by user
type suggests the opposite. We find that post-demonetization, low (high) users show a four (0.30)
times increase in number of transactions and a 1.5 (0.20) times increase in amount spent. Thus, as
per expectations, we find that demonetization pushed less frequent users of debit cards to
significantly increase use of this traditional digital payment mode. Existing high users who had
adopted debit cards prior to demonetization also increase their use during the cash crunch but do
so only marginally23.
Our analysis by vendor type in Panel B of Table 2 provides more insight into the digitization
transition seen among debit card users. Equation (2) run on the e-wallet subsample (columns 1 and
3) shows that high users did significantly more e-wallet transactions prior to demonetization (a β1
of 0.64, significant at 1 percent) unlike low users (an intercept of 0.01). More importantly, in line
with our expectations, we find that demonetization leads to more low users adopting e-wallets with
23
In unreported regressions, using a less granular sample with aggregation by week and payment mode, we find that
the average weekly spend using debit cards is approximately INR3.20 crores (~USD480,000) for high users and about
INR0.60 crores (~USD90,000) for low users. In the weeks following demonetization, the amount spent via debit cards
more than doubles for low users to INR1.5 crores (0.60 + 0.90; ~USD225,000) and increases by less than 30 percent
or by INR0.90 crores; (~USD135,000) for high users.
18

a β2 of 0.08, significant at 1 percent and eight times the intercept. This translates to a 2.6 times
increase in amount spent on e-wallets for low users. The same is not seen for high users. Moreover,
high users seem to curtail e-wallet transactions post demonetization as captured in a significantly
negative β3 in column 1. The concurrent increase in amount spent on e-wallet transactions (column
3) by high users however, may be an indication of increasing amount spent per e-wallet transaction.
This is possibly because increasing usefulness of e-wallets in a cash starved economy led to holding
more money in this payment mode.
Similarly, in columns 2 and 4, results for the retail subsample are presented. Unlike with e-wallets,
we find a significant increase in retail transactions for both user types. High (low) users show a 58
(450) percent increase in number of transactions and an 18 (155) percent increase in amount spent.
This clearly indicates that demonetization forced low users to not just adopt newer digital payment
modes but also increase their footprint in the traditional digital payment mode space significantly.
With respect to high users, it is seen that high debit card users were also e-wallet users prior to
demonetization. In the months following demonetization, high users appear to have increased retail
usage (in both number of transactions and amount spent) and amount held in e-wallets. For high
users, the push has enabled more frequent use of digital payment modes. Thus, we see an increase
in overall digitization.
V. B. Demonetization Effect on Non-Traditional Digital Payment Mode – e-Wallets
We next complement the above study with transaction-level data from the largest e-wallet company
and investigate whether demonetization caused a surge in e-wallet use. Figure 2 plots the number
and value of e-wallet transactions, over a 15-month horizon starting from January 2016, and also
segregated by transaction type – add money, P2P – retail, P2P – individual and e-commerce. We
find a significant increase in transactions undertaken to add money to the e-wallet despite higher
base values pre-demonetization. Users can either add as much money to their e-wallets as is
required for a certain transaction (add-as-you-pay) or add a larger sum of money and retain the
same in the e-wallet for future use. The former requires more effort and time since adding money
every time requires following a three to four step security process but ensures greater security since
there is no extra cash in the e-wallet that can be lost. This is akin to visiting an ATM to withdraw
cash every time you transact. The latter, on the other hand, requires lesser effort and time but more
trust and is similar to withdrawing a bulk amount of cash and storing it in your wallet for future
transactions. Transaction value shows a higher jump than transaction count indicating that many
users held money in their e-wallets as against following an add-as-you-pay strategy.
With respect to P2P transactions, we see a sharper uptick in P2P – individual. These are instances
of an individual transferring cash from their e-wallet to another individual’s e-wallet, where this
individual is not identified as a retailer. This category helps identify the payments made to vendors
in the unorganized sector (refer to section III.B.). The higher increase in number of transactions as
compared to amount spent also implies that these are possibly smaller value transactions. This is
19

in line with anecdotal evidence of e-wallets being used to not just pay smaller scale retailers (like
locality-based grocers) but also vendors in the unorganized sector (like tea and newspaper vendors).
With respect to e-commerce transactions, in line with the debit card transactions, we see a flatter
graph for both number and amount of transactions.
We then test this using equation (1), for the overall sample (unreported) and by transaction-type.
As seen in Figure 2, columns 1 and 2 of Table 3 also show that the magnitude of coefficients is the
highest for add money transactions. A β1 coefficient of 0.42 reveals a 23 percent increase in number
of add money transactions. The same coefficient for amount spent is 1,168.15 and accounts for a
45 percent increase in amount added. Columns 5 to 8 display the coefficients for P2P transactions.
While P2P – individual transaction count doubles, it increases by 39 times for P2P – retail. This is
also a result of a much smaller base (intercept of 0.01 to β1 of 0.39 in column 7). With respect to
amount spent, P2P – individual increases by almost four times (intercept of 149.83 to β1 of 571.55
in column 6) while P2P – retail increases by 61 times (intercept of 2.64 to β1 of 182.74 in column
8). Each of the coefficients evaluated above are significant at 1 percent level. In the case of e-
commerce transactions, we find a dip in the number of transactions, but the amount spent remains
similar post-demonetization. This may be an indication of the general slowdown in consumption
post-demonetization
V. C. Demonetization Effect on Customer Spending – Online Marketplace
Increasing adoption of digital payment requires both providers of digital platforms and the retailers
or facilitators of digital platforms to work together. So we now provide evidence from the retailer
side and examine the impact of demonetization on digitization using transaction data from India’s
largest online grocery store. Figure 3 plots the sales amount, quantity and average price, segregated
by transaction-type (cash or non-cash), for a period of 365 days starting 2016:07. Demonetization
happened on the 131st day in the plot. We find a significant increase in non-cash sales amount and
quantity sold and as expected, cash sales reveal the opposite trend. More importantly, this trend
seems to persist even seven months after the shock. The average price graph shows no specific
price impact due to demonetization but leads to a gradual decline in prices over the next 100 days,
which may be an indication of the consumption shock that led to curtailed demand.
We then formally test the impact of demonetization using equation (3) and report the results in
Table 4. We quantify the sales volume in terms of value and quantity. We are interested in the
coefficient estimate on the interaction term, Non_Cash X Demonetization (β3), which measures the
difference in spending via non-cash payment modes between the post- and pre- demonetization
periods, relative to that for transactions paid for in cash. We find an economically large and
statistically significant response of non-cash spending relative to cash: column 1 reveals an
increase of about INR0.16 crores (a 93 percent increase from pre-demonetization levels;
~USD24,000) in non-cash sales value per day and column 2 shows an 84 percent increase in
quantity sold through non-cash payment modes post demonetization. We also observe a positive
20

and significant coefficient on the Non_Cash indicator, suggesting that the online marketplace had
digitally sophisticated customers even prior to demonetization.
V. D. Demonetization Effect on Customer Spending – Physical Marketplace
As seen in Table 4, a natural concern arising from analysis of an online grocery store is that the
sample may be biased with customers that are more digitally sophisticated ex ante and thus, not
representative of the general population. To mitigate this concern, we turn to a large supermarket
chain that is mostly a physical store. The acquired data structure is similar to the data from the
online grocery store and enables us to further decompose the non-cash payment modes into card
and e-wallet. In Figure 4, we plot the count and value of transactions by the three payment modes:
card, cash or e-wallet. The graph reveals an opposite pattern for cash and non-cash payment modes:
we observe a significant jump (2-3 times initial levels) for the card and e-wallet transactions in the
aftermath of demonetization, in terms of both transaction count and value. Moreover, they stay
well above the pre-demonetization levels even three months after demonetization. In contrast, cash
exhibits a persistent decline once demonetization begins and shows some recovery afterwards.
In Table 5, we examine how the adoption of different payment modes is associated with
demonetization. The estimates in Column 1 and 2 of Panel A are based on the sample aggregated
at the payment mode-month level while Columns 3 and 4 report results for the individual-level
sample aggregated at the customer-payment mode-month level. We first note that, during the pre-
demonetization period, cash transactions are the most common, followed by card and then e-wallet.
As expected, we find that pre-demonetization, cash transactions are the most common with the
intercept being significantly positive (857,542, significant at 1 percent). Card transactions are only
about 25 percent of cash transactions (a significantly negative β1 of -645,969) while e-wallet
transactions are less than 0.5 percent of cash transactions (a significantly negative β2 of -854,303).
In terms of amount spent (column 2), cash transactions account for more than INR22 crores
(~USD3.3mn; ~60 percent of total sales). The same number is INR15 crores (~USD2.2mn; ~38
percent of total sales) and INR2 crores (~USD300,000; ~2 percent of total sales). These results are
consistent with the existing levels of payment mode adoption in India, as discussed in section II.A.
and thus lend credence to the representativeness of customers being studied from the supermarket
chain.
As shown in Column 1, while the value of cash transactions experiences a 12 percent drop, this is
accompanied by a 1.53 times increase in card transactions (β4 is +324,158) and a 26 times increase
in e-wallet transactions (β5 is +105,303). The pattern persists when we examine the transaction
value in Column 2: card transactions double, increasing by INR17 crores (~USD2.5mn; β4) and e-
wallet sales jump 27 times to INR5.4 crores (~USD800,000; β5). We also evaluate the robustness
of these results using individual level data in Columns 3 and 4, where the sample size increases to
almost 15mn observations, and find similar results that are both statistically and economically
significant.
21

The bill value of a transaction can also influence a consumer’s choice of payment method as prior
studies document that consumer payments switch from cash to card as transaction size increases
(Klee, 2008). Thus, in Panel B of Table 5, we segregate the transactions by bill value into high
(>INR500) and low (<=INR500) and examine how the impact of demonetization varies with bill
size, using equation (5). Our results are in line with prior findings of switching with bill size: the
significantly positive coefficients for Bill>500 interacted by digital payment modes, Card and
PayTM shows that high value bills were paid for using digital modes more often even pre-
demonetization. Interestingly, we find a significant but negative coefficient on the triple interaction
terms, high bill value*post-demonetization*digital mode, especially when we look at the
transaction counts. This indicates that the use of digital payment modes increases more among low
bill value customers as compared to high bill value customers. This is expected given an existing
high level of pre-demonetization use of digital payments modes for high bill values.
Thus, examining the impact of demonetization from the supply side of payment options – debit
cards and e-wallets and the demand side of payments – online and physical marketplaces, we find
an economically and statistically significant shift towards payment digitization. This effect is
particularly strong for debit card usage which is the more traditional digital payment mode. The
shift is steep (given lower base values) and persistent for e-wallets as well.
V. E. Heterogeneity in Spending Pattern – Across Cities and Customers
V. E.1. Inferences based on State- and City-level Statistics
While economic factors, including adoption costs, level of income, education, economic growth
and human capital endowment, can influence one’s decision to adopt digital payment modes, it
may also depend on non-economic factors, like type of government, adoption of predecessor
technologies, social influence and culture (Rosenberg, 1972; Straub, Keil and Brenner, 1997;
Pohjola, 2003; Comin and Hobijn, 2004; Vicente and Lopez, 2006; Montazemi and Qahri-Saremi,
2015). We further explore in greater depth the spatial differences that may exist in the impact of
demonetization due to differences in economic and non-economic factors across three Indian
megacities – Bengaluru24, Chennai25 and Kolkata26.
24
Bengaluru is the capital of the State of Karnataka and is the 3rd most populous city by the Indian Census of 2011.
The city is known as the ‘Silicon Valley of India’ since it is India’s leading information technology exporter. As of
2014, the GDP (PPP) of the city was USD45,313mn (Refer to https://www.brookings.edu/research/global-metro-
monitor/, last accessed on 18th February 2018).
25
Chennai is the capital of the State of Tamil Nadu and is the 6th most populous city by the Indian Census of 2011.
The city is known as the ‘Health Capital of India’ as it attracts more than 40percent of India’ medical tourism (domestic
and international). As of 2014, the GDP (PPP) of the city was USD58,625mn (Refer to
https://www.brookings.edu/research/global-metro-monitor/, last accessed on 18th February 2018).
26
Kolkata is the capital of the State of West Bengal and is the 7th most populous city by the Indian Census of 2011.
The city was the former capital of India and is known as the ‘Cultural Capital of India’ because of its literary, artistic
and revolutionary heritage. As of 2014, the GDP (PPP) of the city was USD60,447mn (Refer to
https://www.brookings.edu/research/global-metro-monitor/, last accessed on 18th February 2018).
22

In Table 6, we provide some State- and city-level statistics that help gauge existing levels of
digitization and inform on the prediction of variations across the three megacities. We first compare
variables at the State-level (more frequent level of data capture for economic variables), and group
them into three categories as shown in Panel A. First, we find that West Bengal is relatively
underdeveloped economically with the lowest net domestic product (per capita) and highest
unemployment rate, compared to Karnataka and Tamil Nadu. Second, in terms of the level of
financial inclusion and technology infrastructure necessary for digital payment adoption, West
Bengal falls well behind. For example, West Bengal has far fewer issuances of Kisan Cards27 and
rather limited access to telephone and internet compared to the others.
Prior literature highlights the importance of demographic differences in adopting technology

(Rogers’ (2010) seminal work on diffusion of innovations). In particular a few studies identify
multiple demographic factors that contribute to the adoption of payment-based technologies 28 .
Demographics that are generally connected with more conservativeness, including being aged,
married, female and under-educated, are associated with lower levels of technology adoption.
Therefore, we also examine demographic characteristics and document that the average individual
in West Bengal is more likely to live in non-urban areas, receive lower education and be older,
married, and a female, as compared to Karnataka and Tamil Nadu. In other words, all examined
dimensions indicate a more conservative population for West Bengal. Overall, we would expect
the impact of demonetization on digital payment adoption to be the most muted in Kolkata (capital
of West Bengal) among the three megacities.
In panel B of Table 6, we examine some city-level demographic characteristics to further confirm

our prediction of the heterogeneity discussed above. First, we focus on some socio-economic and
demographic characteristics of the population and present data on age, urban households with
household heads aged below 60 (Ferro, Helbig and Gil-Garcia, 2011; Sathye, 1999), gender,
literacy and marriage. We also include variables generated from our proprietary datasets - a proxy
of customer’s loyalty (and more conservatism), measured as the number of months the customer
has been associated with the retailer, and expect the adoption of digital technology to be slower
among more loyal customers. The observations are largely consistent with the conclusion we draw
from the State-level analysis: the more conservative population in Kolkata is most likely to weaken
the positive impact of demonetization on digital payment adoption.
V. E.2. Spatial Heterogeneity in the Demonetization Effect
27
The Kisan Credit Cards (KCC) scheme was introduced by Indian banks in 1998 to provide financial support to the
agricultural sector. Refer to https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=11034, last accessed on 19th
February 2018.
28
Yang (2005), in a study on mobile commerce in Singapore, finds consumer age, gender, past adoption behaviour
and technology cluster adoption impact adoption behavior. Similarly, Tan and Teo (2000) and Vicente and Lopez
(2006) document the role of demographics in adoption of information and communication technologies in Singapore
and the European Union respectively.
23

We formally test the predictions discussed above by re-estimating the impact of demonetization
on digitization for the three cities separately. We follow similar specifications to the analyses
undertaken across sections V.A. to V.D. and present the relevant figures and results (Figures 5 to
8 and Tables 7 to 10). Overall, our results are in line with the expectations set by our analyses.
First, demonetization leads to higher level of debit card usage across all three cities and for both
high and low users. However, with respect to e-wallet usage, while Bengaluru and Chennai display
a significant increase, we find much lower usage levels over time and demonetization-led growth
in Kolkata. The analysis of spending at both the online and physical marketplaces reveals similar
empirical patterns. We observe the switching from cash to non-cash payment is more prominent
for customers in Bengaluru and Chennai than Kolkata. Analysis of the marketplace data also
reveals the lowest post-demonetization coefficients for card and e-wallet payments in Kolkata.
Interestingly, Figure 8 suggests that, while customers continue using non-cash payment modes in
Bengaluru and Chennai, customers in Kolkata are found to revert to cash in about two months after
the demonetization ends.
VI. Additional Tests
In this section, we extend our analysis to study the robustness of our results and uncover more
insights into the influence of demonetization.
We first verify the impact of the demand and supply shock on average product prices. If product
prices did not change significantly during the period of demonetization, we can rule out any effect
of price increase confounding our results. Here, we focus on staple products (fruits and vegetables)
categorized into fast moving and slow moving. We plot the general price levels, averaged across
all 18 products for the 12-month sample period (refer to Figure 3). The plot reveals no significant
deviation around the event window. The regression results also confirm the absence of a price
movement due to demonetization (included in Table 4).
Next, we examine the impact of demonetization on consumption and prices of luxury products.
We first procure data from a retailer of electronic products for a year before and after the event.
We define luxury products as items priced above INR50,000 (~USD750). We find a 10-15 percent
decline in the number of customers purchasing luxury products (refer to Appendix C, Panel A).
We then, using housing prices data from an online real estate aggregator and information source,
examine the effect on pricing of luxury properties. Based on different definitions of luxury housing,
we find an 11-18 percent decline in prices post-demonetization (refer to Appendix C, Panel B).
Overall, staple products show no change in price, while luxury products experience a price and
demand decline. Despite this, we find an increase in the number and value of transactions by digital
payment modes in our main results.
We also use stock market data to verify whether the market expected banks to benefit as a result
of demonetization. Using a 500-stock broad based index that accounts for more than 95 percent of
24

market capitalization, we find significantly positive cumulative abnormal returns for banking
stocks. This result does not exist for non-banking stocks. However, the plots also show that the
abnormal returns mostly disappear within 15 days post-demonetization. This supports our
expectation of customers shifting to digital payment modes like e-wallets and credit cards instead
of traditional modes like debit cards and net banking
VII. Conclusion
This paper combines four large proprietary datasets on consumption and payment patterns to
analyze how the November 8, 2016 demonetization announcement impacted digitization in the
Indian economy. The unanticipated and unique policy experiment by the Indian Government
allows us to examine how the unavailability of cash affects a consumer’s spending behavior and
choice of spending mechanism in a cash-based economy. We use a difference-in-difference
framework to estimate the magnitude and persistence of the use of digital payment channels post
the announcement.
We first study the impact, from the supply side, on payment modes by examining data on debit
card (traditional) and e-wallet (non-traditional) users and find a significant announcement impact
post demonetization. The debit card data reveals an increase in usage post-demonetization, among
existing users (transaction volume rising by almost 28 percent) and new adopters (transaction
volume rising by almost 400 percent). The increase in usage is particularly at retail Point-Of-Sale
machines and on e-wallets. We then analyze data on e-wallet transactions and also find a significant
increase. Segregating the data by transaction-type shows an 82 percent rise in the amount of money
added to the e-wallet, 745 percent growth in person-to-person transfers to individuals and a 405
percent increase in person-to-person transfer to retailers.
We also use customer-level data from two retailers to examine the impact from the demand side –
one an e-grocer and the other a physical marketplace. Both the analyses show a major shift towards
non-cash transactions. The online store saw an increase of 93 percent in value and 84 percent in
quantity of sales. The physical store dataset allows us to segregate the data further by more granular
payment modes. We find a 2 (1.80) times and 38 (50) times increase in number (value) of card and
e-wallet payments respectively post-demonetization. High bill value customers are found to be
more frequent debit card users ex-ante while low bill value customers show a significant shift to
card usage ex post. For e-wallets, we find adoption among both high and low value customers.
Thus, we see a significant post-demonetization move to digital payment modes across retailer kinds
and irrespective of initial digitization levels.
Our analysis of the heterogeneity in spatial and individual response to the consumption shock
provides additional insights. We find that demographic characteristics like age and marital status
and the exiting level of digitization and infrastructure for adoption of digital means have a
significant impact on the magnitude and persistence of the demonetization effect.
25

Our main contributions to extant literature are the following. We are the first to document the
digitization impact of a demonetization announcement. We are also the first to document the effect
of this particular demonetization announcement on spending behavior in India. Second, the
segregation of the consumption response by payment mode and the corroboration of the effect from
both demand and supply sides provides a more complete understanding and estimation of the
consumption shock. Third, our data richness allows a heterogeneity analysis that helps identify
various factors impacting the adoption and growth of digital payment channels across India. The
use of multiple datasets also provides additional credibility to the result that demonetization or the
sudden withdrawal of currency in circulation induces a shift towards a digital economy. The
magnitude and the persistence of this shift is enhanced when the economy is digital ready.
26

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29

Table 1: Summary Statistics
This table presents summary statistics of the four datasets used in this paper. Panel A reports numbers
of observations, mean and standard deviation for measures of total and sub-category debit credit
transactions. Panel B, C, D present similar statistics for main variables in the e-wallet, online and
physical marketplace data, respectively.
Variable Mean Standard Deviation

Panel A: Account-level Variables – Debit Card Data [N = 894,945; Number of Customers (59,663)
Number of Months
x (15)]
# Transactions 2.114 3.899
Transaction Amount 3,825.41 10,394.98
e-Wallet (#) 0.381 1.598
Retail (#) 1.394 2.931
e-Shop (#) 0.34 1.169
e-Wallet (Amount) 202.837 1,608.21
Retail (Amount) 3,076.13 9,436.56
e-Shop (Amount) 546.452 3,124.03
PreD_high 19872 (33.3%) NA
PreD_high # Transactions (Monthly) 4.106 4.565
PreD_high Transactions Amount 7525.3 13586.2
(Monthly)
D 0.333 0.471
Panel B: Account-level Variables - e-Wallet Data [N = 150,000; Number of Customers (10,000) x
Number(15)]
Months of
Adding Money (#) 1.956 4.064
e-Commerce (#) 0.194 0.941
P2P – Individual (#) 0.553 5.587
P2P – Retail (#) 0.137 0.984
Adding Money (Amount) 2,969.49 28,954.90
e-Commerce (Amount) 496.235 4,552.55
P2P – Individual (Amount) 340.351 1,661.20
P2P – Retail (Amount) 63.55 554.271
D 0.333 0.471
Panel C: Account-level Variables – Online Marketplace (e-Grocer) Data [N = 730; Number of Payment
Modes (2) x Number of Days (365)]
Sales Amount 17,98,756.00 9,32,899.20
Sales Quantity 64,112.40 31,466.63
Average Price 28.115 3.964
non_cash 0.5 0.5
D 0.641 0.48
Panel D: Account-level Variables – Physical Marketplace (Supermarket Chain) Data [N = 72; Number
Payment Modes (3) x Number of BillofTypes (2) x Number of Months (12)]
# Sales 1,57,634 2,07,470
Sales Amount 578,25,217 527,02,002
Card # Sales 136,388.1 64,179.87
Card Sales Amount 89,366,708 57,109,157
e-Wallet # Sales 2,569.13 2,321.56
e-Wallet Sales Amount 979,086.4 562,659.6
Bill>500 # Sales 61,400.14 48,639.01
Bill>500 Sales Amount 75,953,228 61,766,381
30

% # Sales 0.177 0.353
% Sales Amount 0.175 0.362
D 0.417 0.493
31

Table 2: The Response of Debit Card Usage to Demonetization
Panel A of the table studies the response of debit card usage to demonetization for customers with
varying ex ante digitization levels. Panel B investigates the impact across two specific types of vendors
– e-wallet and retailers. The response is measured in terms of either number (# Transactions) or amount
(Transaction Amount) of transactions undertaken. D is a dummy variable that identifies the post-
demonetization period. Pre D Status: High indicates those customers with high level of debit card usage
(more than five transactions) pre-demonetization. Please refer to Appendix A for the variable definitions.
*, **, and *** represent the significance at the 10%, 5%, and 1% level, respectively.
Panel A: Impact on the Overall Usage of Debit Card

# Transactions Transaction Amount
(1) (2) (3) (4) (5) (6)
Intercept 1.65*** 2.86*** 0.24*** 3209.13*** 4,326.72*** 969.68***
(0.01) (0.01) (0.01) (13.41) (21.62) (19.60)
Pre D Status: High 0.54*** 2.57*** 1,435.61*** 4,054.50***

(0.01) (0.01) (16.07) (26.38)
D 1.38*** 0.90*** 1848.86 ***
1,397.78***
(0.01) (0.01) (23.23) (33.95)
D * Pre D Status: High 0.88*** 816.69***
(0.02) (45.68)
Observations 894,945 894,945 894,945 894,945 894,945 894,945
Adjusted R2 0.03 0.13 0.16 0.01 0.04 0.05
Panel B: Impact on Usage of Debit Card across Vendors

# Transactions Transaction Amount
e-wallet Retail e-wallet Retail
(1) (2) (3) (4)
Intercept 0.01*** 0.17*** 23.86*** 802.85***
(0.003) (0.01) (3.10) (17.91)
Pre D Status: High 0.64*** 1.44*** 276.71*** 3,130.16***
(0.004) (0.01) (4.17) (24.09)
D 0.08*** 0.76*** 53.78*** 1,250.25***
(0.01) (0.01) (5.37) (31.01)
D * Pre D Status: High -0.07*** 0.93*** 44.62*** 693.19***
(0.01) (0.01) (7.22) (41.73)
Observations 894,945 894,945 894,945 894,945
Adjusted R2 0.04 0.14 0.01 0.04
Table 3: The Response of e-wallet Usage to Demonetization
32

The table shows the impact of demonetization on four categories of e-wallet usage: (1) adding money;
(2) e-commerce; (3) Peer-to-peer (P2P) – individual; (4) Peer-to-peer (P2P) – retail. We employ two
measures of e-wallet usage: (1) #, the number of transactions; (2) Amount, the transaction amount in
INR. D is a dummy variable that identifies the post-demonetization period. Please refer to Appendix A
for the variable definitions. *, **, and *** represent the significance at the 10%, 5%, and 1% level,
respectively.
Adding Money E-commerce P2P - Individual P2P - Retail

# Amount # Amount # Amount # Amount
(1) (2) (3) (4) (5) (6) (7) (8)
*** *** *** *** *** *** *
Intercept 1.82 2,580.10 0.22 505.92 0.32 149.83 0.01 2.64
(0.01) (91.55) (0.003) (14.40) (0.02) (5.18) (0.003) (1.73)
D 0.42*** 1,168.15*** -0.07*** -29.07 0.69*** 571.55*** 0.39*** 182.74***
(0.02) (158.56) (0.01) (24.94) (0.03) (8.98) (0.01) (3.00)
Observations 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000
Adjusted R2 0.002 0.0004 0.001 0.0000 0.003 0.03 0.04 0.02
33

Table 4: The Digitization Response to Demonetization at an Online Marketplace
The table presents how demonetization affects the sales and average price for transactions made through
cash and non-cash mode at an online grocery store. We use two measures to capture the sales impact:
(1) Sales Amount in INR; (2) Sales Quantity. D is a dummy variable that identifies the post-
demonetization period. Non-Cash is an indicator variable that equals one for transactions paid for by
non-cash mode and zero otherwise. Please refer to Appendix A for the variable definitions. *, **, and
*** represent the significance at the 10%, 5%, and 1% level, respectively.
Sales Amount Sales Quantity Average Price

(1) (2) (3)
Intercept 1,432,411.00*** 53,345.36*** 27.33***
(47,040.18) (1,506.82) (0.34)
Non-Cash 259,165.40*** 10,650.33*** -0.43
(66,524.85) (2,130.96) (0.48)
D -421,778.80*** -18,423.15*** 1.42***
(58,749.94) (1,881.91) (0.43)
Non-Cash X D 1,582,175.00*** 53,823.09*** 0.28
(83,084.96) (2,661.42) (0.60)
Observations 730 730 730
Adjusted R2 0.67 0.70 0.03
34

Table 5: The Digitization Response to Demonetization at a Physical Marketplace
The table shows how demonetization affects the quantity and amount of sales across three payment
modes: cash, card and payTM (e-wallet) at a physical supermarket chain. D is a dummy variable that
identifies the post-demonetization period. Card and PayTM are indicator variables that equal one for
transactions paid for by card and e-wallet respectively, and zero otherwise. The data has been
aggregated at payment mode-month level for columns 1 and 2 and the spending response is measured
as transaction count (# Sales) and amount (Sales Amount). In columns 3 and 4, data is aggregated at
customer-payment mode-month level and the spending response is measured as a percentage of the
customers’ total transaction count (% # Sales) and total transaction amount (% Sales Amount). Panel
B measures the demonetization impact by payment mode and two types of customers based on bill
value – high value (bill>500) and low value (bill<=500). Please refer to Appendix A for the variable
definitions. *, **, and *** represent the significance at the 10%, 5%, and 1% level, respectively.
Panel A: Across Payment Modes

Payment Mode-Month Customer-Payment Mode-Month
# Sales Sales Amount % # Sales % Sales Amount
(1) (2) (3) (4)
Constant 857,542.70*** 225,022,415.00*** 0.382*** 0.356***
(16,903.78) (6,248,779.00) (0.0002) (0.0002)
Card -645,969.00*** -72,884,988.00*** -0.252*** -0.206***

(23,905.55) (8,837,108.00) (0.0003) (0.0003)
PayTM -854,303.60*** -223,535,031.00*** -0.381*** -0.355***

(23,905.55) (8,837,108.00) (0.0003) (0.0003)
D -99,510.91*** -52,398,485.00*** -0.069*** -0.077***

(26,187.22) (9,680,567.00) (0.0003) (0.0003)
Card X D 324,158.40*** 166,264,892.00*** 0.177*** 0.193***

(37,034.32) (13,690,389.00) (0.0004) (0.0004)
PayTM X D 105,303.20*** 54,092,771.00*** 0.072*** 0.080***

(37,034.32) (13,690,389.00) (0.0004) (0.0004)
Observations 36 36 14,822,316 14,822,316
R2 0.99 0.98 0.175 0.146
Adjusted R2 0.98 0.97 0.175 0.146
35

Panel B: By Payment Mode and Bill Value
# Sales Sales Amount
(1) (2)
Constant 751,673.30*** 103,937,893.00***
(10,563.32) (3,457,258.00)
Bill>500 -645,803.90*** 17,146,629.00***
(14,938.79) (4,889,301.00)
Card -631,962.70*** -72,916,513.00***
(14,938.79) (4,889,301.00)
PayTM -749,514.10*** -103,598,362.00***
(14,938.79) (4,889,301.00)
Bill>500 * Card 617,956.40*** 72,948,037.00***
(21,126.65) (6,914,515.00)
Bill>500 * PayTM 644,724.70*** -16,338,307.00**
(21,126.65) (6,914,515.00)
Post D -70,953.49*** -19,395,206.00***
(16,364.63) (5,355,961.00)
Bill>500 * Post D 42,396.06* -13,608,074.00*
(23,143.08) (7,574,472.00)
Card * Post D 231,581.70*** 55,192,323.00***
(23,143.08) (7,574,472.00)
PayTM * Post D 76,194.54*** 20,271,813.00***
(23,143.08) (7,574,472.00)
Bill>500 * Card * Post D -139,005.00*** 55,880,246.00***
(32,729.26) (10,711,921.00)
Bill>500 * PayTM * Post D -47,085.91 13,549,146.00
(32,729.26) (10,711,921.00)
Observations 72 72
R2 0.99 0.98
Adjusted R2 0.99 0.98
36

Table 6: State- and City-level Statistics
The table shows some State- and city-level socio-economic and demographic statistics. Panel A presents
State-level statistics for Karnataka, Tamil Nadu and West Bengal while Panel B presents the city-level
statistics for the capital cities of the three states which are Bengaluru, Chennai and Kolkata respectively.
Please refer to Appendix A for the initions. *, **, and *** represent the significance at the 10%, 5%,
and 1% level, respectively.
(1) (2) (3)

Panel A State-level Statistics
Karnataka Tamil Nadu West Bengal
Overall Economic Development

State NDP at FC 46012 62361 36293
Unemployment Rate 1.8 3.6 5.2
Financial Inclusion and Technology Infrastructure
Number of Kisan Card 4127443 2514067 3494516
Kisan Card Amount (in millions) 398920 168870 101390
Kisan Card Average Amount (in '000s) 96.65 67.17 29.01
Internet Subscribers 20.1 24.14 11.19
Mobile Towers 381 327 163
Non-telephone Villages 0 113 487
Demographics
PPF/ Internet Banking 0.09 0.14 0.68
% Population in Urban 38.6 48 31.9
Education 0.661 0.683 0.527
Education Rank 5 3 31
Age 35.4 36.6 39.7
Married 0.36 0.45 0.52
Panel B City-level Statistics
Bangalore Chennai Kolkata
PPF/ Internet Banking 0.07 0.31 0.59
Total Population 8495492 4646732 4496694
Population Rank 5 6 7
Literacy (%) 88.71 90.18 86.31
Sex Ratio 922 989 908
Urban Household Head’s Age (%) 85.55 81 72.33
Age 35.0 37.3 41.9
Married 0.33 0.50 0.56
Months on Book 25.33 27.89 31.05
37

Table 7: Heterogeneity in the Response of Debit Card Transactions
The table presents the spatial heterogeneity in the response of debit card usage to demonetization across
three Indian megacities. Panel A studies the impact on the overall usage and Panel B the impact across
two types of vendors – e-wallet and retailers. D is a dummy variable that identifies the post-
demonetization period. Pre D Status: High indicates those customers with high level of debit card usage
(more than five transactions). Usage is measured as number (#) and value (Amount) of transactions.
Please refer to Appendix A for the variable definitions. *, **, and *** represent the significance at the
10%, 5%, and 1% level, respectively.

Panel A: Impact on the Overall Use
# Amount # Amount # Amount
(1) (2) (3) (4) (5) (6)
Intercept 0.23*** 958.77*** 0.23*** 960.84*** 0.25*** 1,090.28***
(0.05) (130.42) (0.07) (173.08) (0.03) (72.01)
Pre D Status: High 3.64*** 5,608.14*** 3.35*** 5,377.61*** 2.59*** 4,073.03***
(0.06) (163.84) (0.09) (215.79) (0.03) (96.88)
***
D 0.65 955.40*** 0.79*** 1,177.77*** 0.56*** 1,025.18***
(0.08) (225.89) (0.12) (299.79) (0.04) (124.72)
D * Pre D Status:
1.58*** 864.05*** 1.27*** 199.43 0.40*** 149.14
High
(0.11) (283.79) (0.15) (373.75) (0.06) (167.81)
Observations 43,965 43,965 18,675 18,675 56,670 56,670
2
Adjusted R 0.16 0.04 0.15 0.05 0.16 0.05
Panel B: By Vendor Type
e-Wallet Retail e-Wallet Retail e-Wallet Retail
(1) (2) (3) (4) (5) (6)
Intercept 15.21 717.94*** 21.71 791.20*** 15.31 986.02***
(13.95) (123.95) (19.44) (161.91) (10.77) (67.02)
***
Pre D Status: High 207.81 5,015.39*** 144.00*** 4,817.09*** 248.08*** 3,215.10***
(17.52) (155.72) (24.24) (201.86) (14.49) (90.17)
D 1.26 963.31*** -6.37 1,135.31*** 28.33 899.35***
(24.16) (214.68) (33.67) (280.44) (18.65) (116.07)
D * Pre D Status:
119.19*** 585.72** 7.42 102.52 12.58 97.76
High
(30.35) (269.71) (41.98) (349.64) (25.10) (156.17)
Observations 43,965 43,965 18,675 18,675 56,670 56,670
2
Adjusted R 0.01 0.04 0.003 0.05 0.01 0.04
38

Table 8: Heterogeneity in the Response of e-Wallet Transactions
The table shows the impact of demonetization on the four categories of e-wallet usage: (1) adding
money; (2) e-commerce; (3) Peer-to-peer (P2P) – individual; (4) Peer-to-peer (P2P) – retail, across three
Indian megacities. We employ two measures of e-wallet usage: (1) #, the number of transaction; (2)
Amount, the transaction amount in INR. D is a dummy variable that identifies the post-demonetization
period. Please refer to Appendix A for the variable definitions. *, **, and *** represent the significance
at the 10%, 5%, and 1% level, respectively.
Adding Money E-commerce P2P - Individual P2P - Retail

# Amount # Amount # Amount # Amount
(1) (2) (3) (4) (5) (6) (7) (8)
***
Intercept 1.79 1,863.37*** 0.21 ***
450.39*** 0.18 ***
80.30*** 0.01 2.32
Bangalore
(0.06) (75.57) (0.01) (70.51) (0.05) (17.03) (0.02) (9.13)

D 1.14*** 1,615.28*** -0.10*** -68.66 0.75*** 502.47*** 0.85*** 241.98***
(0.11) (130.89) (0.02) (122.13) (0.08) (29.50) (0.04) (15.81)
Intercept 1.58*** 1,772.69*** 0.18*** 358.01*** 0.13*** 63.41*** 0.002 0.18
Chennai
(0.07) (129.43) (0.01) (51.70) (0.02) (14.43) (0.01) (6.71)

D 0.41*** 1,321.21*** -0.08*** -163.70* 0.23*** 225.22*** 0.13*** 69.55***
(0.12) (224.18) (0.02) (89.55) (0.03) (24.99) (0.01) (11.62)
Intercept 2.87*** 3,838.37*** 0.39*** 556.71*** 1.00*** 551.92*** 0.08* 19.95
(0.13) (233.32) (0.04) (138.15) (0.13) (81.08) (0.04) (18.35)
Kolkata
D -0.14 788.86* -0.29*** -264.58 0.58** 480.20*** 0.30*** 145.64***

(0.23) (404.12) (0.07) (239.28) (0.23) (140.43) (0.07) (31.78)
39

Table 9: Heterogeneity in Digital Payment Adoption at an Online Marketplace
The table presents the impact of demonetization on non-cash payment adoption at an e-grocer across
three Indian megacities. The dependent variable is the transaction amount. D is a dummy variable that
identifies the post-demonetization period. Non_Cash is an indicator variable that equals to one for
transactions paid for by non-cash mode and zero otherwise. Please refer to Appendix A for the variable
definitions. *, **, and *** represent the significance at the 10%, 5%, and 1% level, respectively.

Dependent: Transaction Amount
(1) (2) (3)
Intercept 949,168.80*** 307,342.80*** 87,554.32***
(32,349.12) (8,386.19) (7,609.71)
Non_Cash 289,614.50*** 20,215.59* -22,307.16**
(45,748.56) (11,859.87) (10,761.75)
D -327,591.60*** -130,913.30*** 60,960.49***
(40,401.82) (10,473.78) (9,504.00)
Non_Cash X D 1,141,840.00*** 293,132.20*** 78,922.38***
(57,136.81) (14,812.16) (13,440.69)
Adjusted R2 0.72 0.63 0.27
40

Table 10: Heterogeneity in Digital Payment Adoption at a Supermarket Chain
The table presents the spatial heterogeneity in the response of digital payment adoption across three
payment modes: cash, card and payTM (e-wallet). D is a dummy variable that identifies the post-
demonetization period. Card and PayTM are indicator variables that equals to one for transactions paid
for by card and e-wallet respectively, and zero otherwise. Panel A measures response in terms of number
of transactions while Panel B measures it in transaction amount. Please refer to Appendix A for the
variable definitions. *, **, and *** represent the significance at the 10%, 5%, and 1% level, respectively.

(1) (2) (3)
Panel A: Dependent Variable - Transaction Count
Constant 369,396.40*** 192,169.90*** 144,124.30***
(7,390.55) (4,456.66) (4,282.45)
Card -272,132.30*** -133,570.10*** -109,615.90***
(10,451.81) (6,302.67) (6,056.30)
PayTM -368,122.10*** -191,170.10*** -143,461.40***
(10,451.81) (6,302.67) (6,056.30)
D -35,026.43*** -41,893.26*** -13,807.49**
(11,449.39) (6,904.23) (6,634.35)
Card * D 144,821.50*** 98,971.54*** 44,703.46***
(16,191.88) (9,764.05) (9,382.39)
PayTM * D 38,738.54** 42,479.74*** 14,792.23
(16,191.88) (9,764.05) (9,382.39)
2
Adjusted R 0.98 0.98 0.96
Panel B: Dependent Variable - Transaction Amount
Constant -15,737,329.00*** -8,807,238.00*** -23,292,926.00***
(3,457,241.00) (2,165,453.00) (2,340,207.00)
Card -17,691,705.00*** -17,595,691.00*** -9,175,010.00***
(3,787,218.00) (2,372,135.00) (2,563,568.00)
PayTM -74,833,982.00*** -51,707,172.00*** -56,913,636.00***
(3,457,241.00) (2,165,453.00) (2,340,207.00)
Post D 62,136,545.00*** 46,568,057.00*** 36,042,261.00***
(5,355,935.00) (3,354,706.00) (3,625,433.00)
Card * Post D 18,571,068.00*** 17,701,230.00*** 9,695,496.00**
(5,355,935.00) (3,354,706.00) (3,625,433.00)
PayTM * Post D 75,317,499.00*** 52,203,325.00*** 57,264,895.00***
(2,444,639.00) (1,531,207.00) (1,654,776.00)
2
Adjusted R 0.97 0.98 0.97
41

Figure 1: Time Series of Number of Unique Vendors and Debit Card Transactions
Panel A of the figure plots the time series around the demonetization period: total number of unique
vendors accepting debit cards and number of vendors by type (POS retail, e-wallet or e-shop). Panel B
shows the weekly plot of the number of transactions and amount of debit card transactions for all
vendors as well as, segregated by the three categories.
(a) Number of Unique Vendors
42

(b) Number and Amount of Debit Card Transactions
43

Figure 2: Time Trend of e-Wallet Transactions
The figure presents the monthly plot of the number and amount of e-wallet transaction for all vendors
and across four categories of transactions: (1) adding money; (2) Peer-to-peer (P2P) – retail; (3) Peer-
to-peer (P2P) – individual and (4) e-commerce.
44

Figure 3: Time Series of Transactions at the Online Marketplace, Across Payment Modes
The figure plots the daily time series of the average sales value, quantity and price for transactions made
at the online grocery store across two payment modes: cash and non-cash.
45

Figure 4: Time Series of Transactions at the Physical Marketplace (Supermarket Chain), Across
Payment Modes
The figure plots the time series of the count and amount of transactions made at the supermarket chain
via three payment modes: card, cash and e-wallet (PayTM).
46

Figure 5: Time Series of Debit Cards Transactions across Cities
(a) Number of Debit Cards Transactions
47

(b) Value of Debit Cards Transactions
48

Figure 6: Time Series of e-Wallet Transactions, Across Cities
The figure presents the monthly plot of the number and amount of e-wallet transactions across four
categories of transactions: (1) adding money; (2) Peer-to-peer (P2P) – retail; (3) Peer-to-peer (P2P) –
individual and (4) e-commerce, across cities.
49

Figure 7: Time Series of Transactions at the Online Marketplace, Across Cities
The figure plots the daily time series of the average sales volume (Amount, Quantity Sold) and price for
transactions entered into at the e-grocer across two payment modes: cash and non-cash, across cities.
50

Figure 8: Time Series of Transactions at the Physical Marketplace (Supermarket Chain), Across
Cities
The figure plots the time series of the count and amount of transactions made over the supermarket chain
across three payment modes: card, cash and e-wallet (PayTM).
Bangalore
Chennai
Kolkata
51

Appendix A. Trends in Currency
Extract from the 2015-16 Annual Report of the Reserve Bank of India
Banknotes in Circulation
VIII.1 At end-March 2016, the value of banknotes in circulation was ₹16,415 billion showing an increase of 14.9 per
cent as against 11.4 per cent in 2014-15. The volume of banknotes increased by 8.0 per cent as against 8.1 per cent in
2014- 15. In value terms, ₹500 and ₹1,000 banknotes together accounted for 86.4 per cent of the total value of
banknotes in circulation; by volume, ₹10 and ₹100 banknotes constituted 53.0 per cent of the total banknotes in
circulation (Table VIII.1).
Table VIII.1: Banknotes in Circulation

Volume Value
Denomination
(million pieces) (₹ billion)
(₹)
Mar-14 Mar-15 Mar-16 Mar-14 Mar-15 Mar-16
2 and 5 11,698 11,672 11,626 46 46 45
(15.1) (13.9) (12.9) (0.4) (0.3) (0.3)
10 26,648 30,304 32,015 266 303 320
(34.5) (36.3) (35.5) (2.1) (2.1) (1.9)
20 4,285 4,350 4,924 86 87 98
(5.5) (5.2) (5.4) (0.7) (0.6) (0.6)
50 3,448 3,487 3,890 172 174 194
(4.5) (4.2) (4.3) (1.3) (1.2) (1.2)
100 14,765 15,026 15,778 1,476 1,503 1,578
(19.1) (18.0) (17.5) (11.5) (10.5) (9.6)
500 11,405 13,128 15,707 5,702 6,564 7,854
(14.7) (15.7) (17.4) (44.4) (46.0) (47.8)
1,000 5,081 5,612 6,326 5,081 5,612 6,326
(6.6) (6.7) (7.0) (39.6) (39.3) (38.6)
Total 77,330 83,579 90,266 12,829 14,289 16,415
Note: Figures in parentheses represent the percentage share in total.
52

Appendix B. Variable Definition
Panel A: Account-level Variables – Debit Card Data

# Transactions Total count of transactions by customer in a particular month
Transaction Amount Total amount of transactions done by customer in a particular month
e-Wallet Indicator variable; 1 if vendor type is e-wallet, 0 otherwise
Retail Indicator variable; 1 if vendor type is retailer (POS), 0 otherwise
e-Shop Indicator variable; 1 if vendor type is e-commerce website, 0 otherwise
PreD_high Indicator variable; 1 if customer has used debit card >= 5 times pre-demonetization, 0 otherwise
D Indicator variable; 1 if the month is post-demonetization, i.e., after November 2016, else zero
Panel B: Account-level Variables - e-Wallet Data
# Total count of transactions by customer in a particular month
Amount Total amount of transactions done by customer in a particular month
Adding Money Indicator variable; 1 if transaction type is adding money to the e-wallet, 0 otherwise
e-Commerce Indicator variable; 1 if transaction type is e-commerce purchase, 0 otherwise
P2P - Individual Indicator variable; 1 if transaction type is peer to peer (individual – organized/unorganized vendors)
P2P - Retail Indicator otherwise1 if transaction type is peer to peer (retail – organized vendors) transfer, 0
transfer, 0variable;
D otherwise
Indicator variable; 1 if the month is post-demonetization, i.e., after November 2016, else zero
Panel C: Account-level Variables – Online Marketplace (e-Grocer) Data
Sales Amount Total sales on a particular day
Sales Quantity Total quantity sold on a particular day
Average Price Average price of total quantity sold on a particular day
non_cash Indicator variable; 1 if payment mode is non-cash, else zero
D Indicator variable; 1 if the day is post-demonetization, i.e., after 8th November 2016, else zero
Panel D: Account-level Variables – Physical Marketplace (Supermarket Chain) Data
# Sales Total count of transactions by in a particular month
Sales Amount Total amount of transactions in a particular month
Card Indicator variable; 1 if payment mode is card, else zero
e-Wallet Indicator variable; 1 if payment mode is e-wallet, else zero
Bill>500 Indicator variable; 1 if bill value > 500 (high value bill), else zero (low value bill)
% # Sales Number of transactions in a month by payment mode for a customer as a Percentage of total number
% Sales Amount of transactions
Amount by the customer
of transactions in a month by payment mode for a customer as a Percentage of total amount
D of all transactions
Indicator variable;by
1 ifthe
thecustomer
month is post-demonetization, i.e., after November 2016, else zero
Panel E: State-level Variables
State NDP at FC Per Capita State Net Domestic Product at Factor Cost (2013-14, base year 2004-05)
% Population in Urban Percentage of population in urban areas
Education Education Development Index
Education Rank Education Development Index Rank across all Indian states
Unemployment Rate Unemployment rate based on Usual Principal Status (%; 2014-15)
Internet Access Number of internet subscribers (2015, Rural + Urban, in million)
Mobile Towers Mobile towers commissioned (2010)
Non-Telephone Villages Uncovered villages without telephone facilities (2016)
Number of Kisan Card Kisan Credit Cards issued (2015)
Kisan Card Amount Kisan Credit Cards amount outstanding (2015, in millions)
Kisan Card Average Kisan Credit Card amount outstanding per card (in '000s)
Amount
English Speaking English speaking population as percentage of total India population (2001 census)
53

PPF/ Internet Banking PPF/ Internet Banking Enabled
Age Average age
Married Percent of Population that are married
Panel F: City-level Variables
Total Population Total Population (As per 2011 Census)
Population Rank All India Rank by Population
Literacy Percentage of literate population
Sex Ratio Number of females per 1000 males
Urban HH_Age Urban households with household head’s age < 60 years
PPF/ Internet Banking Customer accounts with Public Provident Fund or Internet Banking enabled; proxy for customer
Age dependence
Average ageand loyalty
Married Percent of married population
Months on Book Number of months enrolled as a customer; proxy for customer loyalty
54

Appendix C. Additional Results (Extracts)
Panel A of the table studies the impact of demonetization on the purchase of luxury products. Using data
from an Indian retail chain for consumer electronics and durables, we identify luxury purchases as
transactions with purchase value over INR50,000 (~USD757). We then examine how the number of
customers making luxury purchases changes post-demonetization. D is a dummy variable that identifies the
post-demonetization period. Luxury indicates purchases > INR50,000. Column 1 presents the results for a
longer sample period while Column 2 presents the results for a 15-month period around demonetization,
similar to the main results. We use city and month fixed effects. *, **, and *** represent the significance at
the 10%, 5%, and 1% level, respectively.
Panel A: Impact on Number of Customers Purchasing Luxury Goods

# Customers
Long Sample
Short Sample
(January 2015 –
(January 2016 – March 2017)
October 2017)
Intercept 68.32*** 73.22***
(1.29) (1.98)
Luxury -33.34*** -37.09***
(0.61) (0.94)
D 1.18*** 5.39***
(0.48) (1.13)
D * Luxury -5.28*** -3.71***
(1.30) (2.13)
Observations 202,974 85,748
55

Panel B of the table studies the impact of demonetization on housing prices. Using data from an Indian
website that is an aggregator in the real estate space and provides information on the industry, we identify
luxury properties as properties with average price per square feet above the 75th percentile. We then examine
how the maximum (max_price) and average (avg_price) property prices change post-demonetization. D is
a dummy variable that identifies the post-demonetization period. Luxury indicates properties with average
price > 75th percentile of average prices. Column 1 presents the results for all properties while Column 2
presents the results for only luxury properties. *, **, and *** represent the significance at the 10%, 5%, and
1% level, respectively.
Panel B: Impact of Demonetization on Housing Prices

Price
All Properties Luxury Properties
Intercept 2667.84*** 3169.22***
(101.95) (466.65)
D 314.17*** 1290.94***
(21.24) (67.41)
Max_price 2386.89*** 4385.98***
(14.65) (47.25)
D * Max_price -258.07*** -1381.73***
(25.21) (68.83)
Avg_price 1173.32*** 2666.28***
(14.65) (48.40)
D * Avg_price -145.82*** -1258.55***
(25.21) (74.12)
Observations 19,194 5,334
56

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Demonetization and Digitization*

Key words: Digitization, Payment Method, Demonetization

JEL Code: G02, G10, Q5

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We therefore, examine the impact of demonetization on digitization to ascertain possible positive

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II. Institutional Background

II.A. Digitization in India

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The staggered development of payment digitization in India can be attributed to a number of

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II.B. Demonetization in November 2016

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III.A. Debit Card Data

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III.B. e-Wallet Data

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III.C. Online Marketplace Data

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III.D. Omni-Channel Physical Marketplace Data

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IV. Empirical Methodology

Usagei,t = β0 + β1 * Dt + Xi,t + εi,t (1)

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Usagej,t = β0 + β1 * preD_highj + β2 * Dt + β3 * Dt * preD_highj + εj,t ----- (2)

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IV.B. Demand-Side of Digital Payments

Salesk,t = β0 + β1 * Non_cashk + β2 * Dt + β3 * Dt * Non_cashk + εk,t ----- (3)

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Salesk,t = β0 + β1 * Dt + β2 * Cardk + β3 * e-Walletk

salesp,q,t = α + β1 * Dt + β2 * Cardp + β3 * e-Walletp + β4 * Dt * Cardp + β5 * Dt* e-Walletp +

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IV.C. Heterogeneity Analysis

V. Effect of Demonetization on Payment Digitization

V.A. Demonetization Effect on Traditional Digital Payment Mode – Debit Cards

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V. B. Demonetization Effect on Non-Traditional Digital Payment Mode – e-Wallets

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V. D. Demonetization Effect on Customer Spending – Physical Marketplace

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Prior literature highlights the importance of demographic differences in adopting technology

In panel B of Table 6, we examine some city-level demographic characteristics to further confirm

V. E.2. Spatial Heterogeneity in the Demonetization Effect

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VI. Additional Tests

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Variable Mean Standard Deviation

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Panel A: Impact on the Overall Usage of Debit Card

Pre D Status: High 0.54* 2.57* 1,435.61* 4,054.50*

Card -645,969.00* -72,884,988.00* -0.252* -0.206*

PayTM -854,303.60* -223,535,031.00* -0.381* -0.355*

D -99,510.91* -52,398,485.00* -0.069* -0.077*

Card X D 324,158.40* 166,264,892.00* 0.177* 0.193*

PayTM X D 105,303.20* 54,092,771.00* 0.072* 0.080*

D -0.14 788.86* -0.29* -264.58 0.58 480.20* 0.30* 145.64***