Currency in people’s hands rose to a new high of Rs 30.88 lakh crore on 21 October, illustrating that cash use is still robust even six years after demonetisation. At Rs 30.88 lakh crore, the currency with the public is 71.84% higher than the level for the fortnight that ended on 4 November 2016. On 8 November 2016, Prime Minister Narendra Modi had announced the decision to withdraw Rs 500 and Rs 1,000 denomination notes with the ultimate aim of reducing corruption and black money in the economy.
The intention behind the move, criticised by experts for poor planning and execution but relished by the poor and the lower middle class, seeing the meltdown of the rich, was to make India a “less cash” economy.
According to the fortnightly data on money supply released by the RBI on Friday, the currency with the public increased to Rs 30.88 lakh crore as on 21 October. The central bank data for Reserve Money had put the currency in circulation at Rs 17.7 lakh crore on 4 November 2016.
Currency with the people refers to notes and coins used by people to transact, settle trades, and for buying goods and services. The figure is arrived at after deducting cash with banks from the currency in circulation.
How people managed to have more cash since 2016, even after 2019-21 pandemic
Cash use has been steadily rising in the economy, even as newer and far more convenient digital alternatives of payments have become popular. The Covid-19 pandemic, which laid an emphasis on contactless transactions, also gave a fillip to such digital modes.
In 2018, India’s cash economy had mostly bounced back but the ATM network was not strong enough yet. At that point, an expert explained how Indians were ending up with more cash.
“Demonetisation has changed consumer behaviour in both good and bad ways. I am happy about the flows into the equity markets which should help drive savings growth for Indians over the long term. It has also helped in understanding the weaknesses of our currency circulation systems and steps are being taken to fix these. The unfortunate fallout has been the ATM channel. What was perceived as ‘Any Time Money’ became less dependable. Consumers are less confident about when an ATM will work and dispense cash. So, people have started withdrawing more cash per ATM transaction (18-20% growth). It has also been observed that people are keeping more cash reserves at home for emergencies than they did before,” Rajiv Kaul, the executive vice-chairman and CEO of CMS Info Systems, a cash management company that handled more than 57,000 ATMs and 34,000 retail points across the country, said.
A 2019 RBI study on digital payments had partly addressed the issue. “Although digital payments have been growing gradually in recent years, both in value and volume terms across countries, data also suggests that during the same time, currency in circulation to GDP ratio has also increased in consonance with the overall economic growth,” it had said.
“… an increase in digital payments to GDP ratio over a period of time does not seem to automatically imply a fall in the currency to GDP ratio of the country,” it had said.
The RBI study had said that after demonetisation, India has witnessed a significant increase in digital transactions, although the digital payments to GDP ratio in the country had been low.
In a recent note, economists at SBI said that the currency in circulation (CIC) declined by Rs 7,600 crore in the Diwali week, which was the first such decline in nearly two decades if one were to exclude the 2009 festivities, which saw a marginal dip due to the global financial crisis.
Is the Indian currency use level abnormal?
No. Japan has 18% cash to GDP compared to 12% in India. Germany has 75-80% retail cash transactions compared to 85-90% in India. The stock of currency grew in a developed economy like the US by 7% in the last five years (11-12% in India, pre-demonetisation). So, there is a need for cash as a preferred medium of transaction. Digital and cash will co-exist as they do everywhere in the world.
Pros and cons of cash, digital transactions
There are various pros and cons for both cash and digital transactions. The most common risk in cash transactions is that of counterfeiting. Management of cash is still very inefficient and time-consuming. However, the cost of a cash transaction is the lowest, at about 0.25% versus the 1.5-2% credit card charge.
For digital payments, key issues are a higher risk of fraud, higher transaction cost (each time you transact) and lack of privacy.
Trust is a major factor here. The increasing number of reports of online fraud and data breaches have heightened consumer worries. The trust factor extends beyond digital payments as well. India has experienced a number of prominent e-commerce frauds where customers have received something other than what they ordered. Thus, a common solution to avoiding this is cash-on delivery—making the payment after an item is delivered. A poor telecom network only aggravates these issues. Finally, if you remove the extraordinary level of cashback, consumers realise there is a higher cost of digital transactions.