Cash Still winning the Digital Payments Race?

The Plot

Demonetisation, which occurred five years ago, irreversibly altered the Indian payment environment. Indians had Rs 18 lakh crore in cash at the time. It had dropped to Rs 8 lakh crore by the end of January 2017, barely two months later. The repercussions were immediate and severe. And it seemed as though this was the start of the end for currency.

They said that cash was extinct.

What's more, guess what? That was not the case. Instead, the total amount of currency in circulation as of today is above Rs 28 lakh crore. Granted, this figure seems to be enormous. However, it may also be deceiving. The economy is no longer what it was in 2016. Across the board, we've added value. As the economy grows, you may anticipate additional money to enter the system to compensate for the rise. As a result, it's preferable to utilise a different metric: the Cash in circulation (CIC) to GDP ratio. This allows you to determine whether the monetary effect is as large as the number suggests.

So, what can we deduce from this ratio?

The CIC to GDP ratio was 12 percent before demonetisation. It plummeted to 8% very immediately after that. It was back to 12 percent in March 2020 (just before the pandemic).

And it's already at a new high of 14.5 percent.

There's no denying that cash in circulation has increased in relation to the country's GDP. But why is this taking place?

To begin with, overall economic activity suffered as a result of Covid-19. As a result, the denominator suffered a blow, and the ratio had to suffer as well. Meanwhile, owing to a variety of causes, cash transactions started to increase. For starters, due to convenience alone, individuals are likely to have continued to use cash during the lockdown. They paid in cash while going back home, according to economist Vivek Kaul. When purchasing covid medicines on the illicit market, they had to pay in cash. When it came to admitting patients, hospitals required cash, therefore cash was king in many sections of the nation. However, it isn't only a pandemic issue. The Reserve Bank of India performed a research between 2018 and 2019 that yielded the following significant conclusions. Most individuals still prefer cash payments for everyday costs, according to the national bank. Especially for transactions with a value of up to $500. And keep in mind that the poll included major cities like as Delhi and Bengaluru.

In smaller cities, 90 percent of e-commerce transactions still rely on cash on delivery, while India's informal economy runs entirely on cash.

What about high-value payments, though? Isn't there anything they should be accountable for?

According to one poll, 70% of consumers who purchased a home in the previous seven years paid for it partially with cash. Over half of the money was paid in cash by 16 percent of the group. So, if you want to avoid paying taxes, you'll most likely choose cash as your principal method of payment. But how can you square these data points with the narrative about the booming digital payment environment that you hear every day? We just published this data illustrating how the overall amount of UPI transactions reached a new high last month. Isn't it true that cash reigns supreme as UPI transactions skyrocket?

Right???

UPI, on the other hand, is flourishing. But it's thriving because it's stealing market share from conventional digital payment methods like wallets and cards. In truth, the "value" of all digital transactions is the evidence of the pudding. It isn't only UPI.

And here's how things stand right now. While the quantity of digital payments increased dramatically between 2016 and 2020, the rupee value of such transactions only increased by 15.2 percent each year. To put it another way, the number of digital transactions may have increased from one to six. However, the transaction value has only increased from 1 to 1.5.

So, certainly, both stories are correct. As the amount of digital transactions grows, India is gradually becoming a digital first nation. By 2025, they might make up as much as 71 percent of all payments. However, the total value of digital transactions has only increased modestly, and cash continues to play an important role in the payment ecosystem.