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Five years of demonetisation: Cash still king, but record highs for digital transactions

A record 4.21 billion transactions were recorded on UPI in October

bank-rupee-cash-rupee-cash-2000-notes-india-rbi-currency-shut Representational image | Shutterstock

November 8, 2016, would have been like any other normal day. But, Prime Minister Narendra Modi, in a surprise televised address at 8 pm, announced that Rs 500 and Rs 1,000 currency notes would no longer be legal tender from that midnight. The Rs 500 and Rs 1,000 notes had accounted for close to 86 per cent in currency in circulation (in value) at the time and so the move shocked the entire nation.

What followed that night was a huge rush to markets to buy anything people could with the notes in hand, which would soon become worthless. Many supermarkets and jewellers remained open till late hours in the wake of the rush. For weeks that followed, people had to queue up outside banks for hours to get their notes exchanged. There were long queues outside ATMs, too, for withdrawal of cash.

Currency in circulation, which stood at Rs 17.97 lakh crore as of November 4, 2016, just before demonetisation, had dropped to Rs 9.41 lakh crore by December 23, 2016, according to Reserve Bank of India data. Supporters of demonetisation saw it as a big step towards making India a less-cash and more transparent society.

However, five years on, cash is back and how. As of October 29, 2021, currency in circulation stood at Rs 29.44 lakh crore That is a staggering 64 per cent jump since November 2016. It is almost 14.5 per cent of 2020-21 GDP now, according to some estimates.

While this data may indicate that cash is once again the king, what’s interesting is that digital transactions, too, have surged and hit new records in the same period. For instance, according to National Payments Corporation of India (NPCI) a record 4.21 billion transactions were recorded on the unified payments interface (UPI) in October. The total transaction value stood at Rs 7.71 lakh crore, also a record.

Interestingly, UPI was also launched in 2016. While it was slow to take off, it crossed a billion transactions only in 2019, and it has picked up pace rapidly since. The next billion transactions milestone came in just a year and the next one billion in less than a year.

The increasing penetration of smartphones and the internet has fuelled the growth in digital transactions. Digital transactions have also become a convenient way to pay during the pandemic.

Today, even the neighbourhood grocery store or vegetable seller has a QR code, which one can scan and make UPI payments in a snap. Now one can even apply for IPOs (initial public offers) of companies via UPI.

“UPI enabled customers across a variety of use cases, from subscribing for an IPO to making recurring payments. UPI is making digital payments uncomplicated and accessible to all, whether person-to-person or person-to-merchant, and to a large degree, it has been effective in propelling India towards less-cash economy,” said Mandar Agashe, founder, vice-chairman of Sarvatra Technologies, a banking technology provider.

Other digital transactions, including credit and debit cards, too have risen over the last few years. According to Statista, there were 43.71 billion digital transactions in the year ended March 2021, a three-fold jump compared with 14.59 billion transactions in 2017-18.

So, if digital transactions have grown rapidly, why is cash also at record levels?

“People like to hold on to cash for two reasons. One is for transactions and the second is as a precautionary motive. Today, lots of people are holding on to cash for a precautionary motive. There is still a lot of uncertainty (due to COVID-19). People are spending a lot on healthcare. In this kind of situation, people would like to hold on to cash,” explains Madan Sabnavis, chief economist at CARE Ratings.

As COVID-19 led to lockdowns and social distancing became important, digital transactions, be it for online bill payments or shopping on e-commerce platforms to even person-to-person money transfers, got a big boost. However, for big-ticket purchases, especially in areas like real estate and jewellery, cash still seems to be key.

“In the lockdowns, when we had to order a lot of things online, automatically we used digital modes of payment. But, when you see real estate sales and gold jewellery have gone up, even today lot of these transactions are carried out partly in cash.

“Notwithstanding demonetisation and all the rules put in place by the government, a lot of smaller jewellers are willing to do transactions in cash. It's a similar case with real estate; if you want to buy a property and not go to a big builder, part of the transaction may be in cash,” said Sabnavis.

Millennials have taken to digital transactions in a big way. According to a recent report by Shopify, a retail tech platform, over 53 per cent of millennial shoppers from non-metros preferred shopping online. But, the elderly still prefer to do transactions via cash, given many are not comfortable transacting digitally.

So, while digital transactions are expected to continue gaining currency, one may not be able to do away with cash anytime soon. 

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