Editorial: Resilient cash

Despite the rapid growth in digital payments over the last few years, cash remains the king in India. As a proportion of the gross domestic product (GDP), Indians still hold a relatively large share of cash, one of the highest in the world. The Currency in Circulation (CiC), as a proportion of GDP, has grown […]

Despite the rapid growth in digital payments over the last few years, cash remains the king in India. As a proportion of the gross domestic product (GDP), Indians still hold a relatively large share of cash, one of the highest in the world. The Currency in Circulation (CiC), as a proportion of GDP, has grown from 8.7% in 2016-17 to 13.7% in 2021-22. When the NDA government announced demonetisation in 2016, the biggest change that it expected to see was consumers shifting from cash to cashless mode of payments. In fact, a survey by the Reserve Bank of India (RBI) suggests that despite the increase in digital payments in India, a large group of people still prefer cash over digital payments. About 54% of those interviewed by the central bank said they preferred making cash payments. There are multiple reasons why a number of people continue to prefer and demand cash. And not all of them are reasons of practicality or usage. Instead, the reasons are more personal, such as the immediacy and feel of money, or the difficulties of accepting and enabling digital payments. Despite a massive campaign by the government on how to use e-wallets or digital payments, there are many who find the process confusing or tough. While the volume of UPI transactions rose over threefold in the last two years to touch 46 billion in 2021-22, cash remains surprisingly resilient.

India is not alone in witnessing this trend. A study by the Asian Development Bank (ADB), covering 11 advanced economies, showed that Japan, Singapore, South Korea and the United States showed a rising trend in CiC to GDP ratio. Big shocks such as Covid or the 2008 financial crisis trigger a sense of risk aversion among people. This leads to an increase in cash holding. According to a 2019 report by the RBI, cash accounts for nearly 50% of all transactions in the country. Since cash transactions play a key role in the accumulation of black money, the government has imposed various restrictions on cash transactions. The RBI estimates the annual currency requirement based on the economic growth rate forecast, inflation rate and disposal of soiled notes. Since 2019, India’s inflation trajectory has trended upwards, which may partly explain why CiC to GDP ratio quickly overshot the pre-demonetisation level. In addition, Covid may have triggered precautionary holding of cash. Above all, cash has a psychological hold that seems to defy financial logic. The allure of currency is a puzzling phenomenon in India. Perhaps, the dominance of the informal economy can partially explain this trend. There is no doubt that the digital payments landscape has undergone a major transformation in the last few years.

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