Despite the rise in digital payments, cash is still king in India

 Despite the rise in digital payments, cash is still king in India

India abruptly demonetized two bank notes in November 2016, which together made up 86% of the country's currency in circulation. The goal was to fight corruption and reduce riches that was hiding.

The currency prohibition, known as "demonetization," caused havoc outside of banks and cash machines. Critics said that the action harmed low-income Indians and undermined the country's sizable black market, where cash transactions predominate. The currency embargo has "helped reduce black money (undisclosed money), increase tax compliance and formality, and promote transparency," according to Prime Minister Narendra Modi, who has continuously defended the decision.

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However, cash still has the upper hand seven years later, casting further doubt on the need of the divisive currency prohibition. In contrast to the average annual growth rate of 12.7% during the previous ten years, the Reserve Bank of India (RBI) reports that the economy's cash circulation increased by more than 16.6% in 2020–21. The usual measure of a nation's cash use, the amount of currency in circulation as a percentage of GDP, peaked at over 14% in 2020–21 and fell to 13% in 2021–2022.

The increased usage of debit cards and smartphones, as well as the expansion of social benefits distribution, are contributing factors to the growth in digital transactions.

The Unified Payments Interface (UPI), a framework that enables smooth and almost instantaneous account-to-account transfers via fintech applications, has been the driving force behind this growth. Over $1 trillion worth of UPI transactions were made last year, which is equal to one-third of India's GDP. ACI Worldwide and Global Data 2023 report that India is the country that generates 46% of the world's digital payments, with 89 million of those transactions occurring there.

It is well recognized as the "currency demand" conundrum that both cash and digital payments are growing at the same time. "Since cash and digital modes are generally expected to replace each other, a simultaneous increase in both appears counterproductive," reads the most recent annual report from the RBI.

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Cash velocity, or the speed at which consumers and companies move money in an economy, has slowed and cash withdrawals from cash machines have declined.

However, cash is still a crucial "precautionary" financial reserves and a store of wealth for the majority of Indians, whose families keep cash on hand for unexpected expenses. Large denomination money, such as the Rs. 500 and Rs. 2,000 notes, accounted for more than 87% of the total amount of bank notes in circulation as of March 31, according to the RBI. (The central bank removed the Rs 2,000 notes, which was the largest denomination released after the 2016 currency ban, in May.)

Studies conducted before to the pandemic revealed that digital methods were favoured for bigger transactions while cash prevailed for smaller ones. According to a recent study conducted by the community social media site LocalCircles, the majority of participants preferred to pay with cash for things like groceries, takeout, eating out, personal services, hiring assistance, and home repairs.

The RBI report suggests that the increased desire for cash might be attributed to a number of factors, including declining interest rates on bank accounts, a sizable informal and rural economy, and the growth of direct benefit cash payments during the epidemic.

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Real estate and politics follow.

During elections, unaccounted money keeps finding its way into political parties' campaign accounts. (Recently, income tax officials discovered 3.5 billion rupees, or $42 million (£33 million), from a complex connected to an opposition member of parliament.) The administration of Mr. Modi released interest-free, time-limited electoral bonds in 2018. showcased. Denominations: purportedly to filter out black money and increase transparency in political funding. Opponents contend that it has had the opposite effect and that the bonds are obscure.

"Black money" is mostly invested in real estate. According to a November poll by LocalCircles, 76% of participants who purchased real estate in India within the previous seven years did so with cash, and 15% paid more than half the total cost in cash. Just 24% of respondents said they were not required to pay with cash, down from 30% two years before. According to a research by Devesh Kapoor and Milan Vaishnav, developers' reliance on the endorsement and favors of elected officials is correlated with the significance of cash transactions in the real estate industry.

India is by no means an exception when it comes to the simultaneous expansion of physical cash and digital money.

The European Central Bank discussed the "banknote paradox" in a study from 2021, noting that "the use of banknotes for retail transactions has reduced while the demand for euro banknotes has steadily increased in recent years." Although the survey projected a fall in retail payments as a result of the growing digitization, it found an unexpected trend: there is less desire for cash. Actually, since 2007, there has been a steady growth in the quantity of euro banknotes in circulation. Sweden, Nia, is a striking exception, with a society that is mostly cashless.

Cash will continue to be the primary source of support for the majority of Indians in the meantime. According to Delhi-based auto-rickshaw driver Atul Sharma, "the majority of my customers still pay fares in cash." "Cash will always be there."