In 2016, India suddenly stopped using two types of banknotes, which made up 86% of all the money in use. This was done to fight corruption and hidden wealth.
Known as Demonetisation, this action led to chaos at banks and ATMs. Critics argued it harmed those with low incomes and disrupted India’s large cash-based economy. Prime Minister Narendra Modi stood by the decision, stating it reduced hidden wealth, improved tax adherence, and enhanced transparency.
Seven years after the ban, cash is still widely used in India, raising questions about the effectiveness of the move. The Reserve Bank of India reports that in 2020-21, the amount of cash in use grew by 16.6%, which is higher than the 12.7% average growth rate of the previous ten years. The cash-to-GDP ratio, a measure of cash usage, reached over 14% in 2020-21 before dropping slightly to 13% in 2021-22.
Meanwhile, digital payments are also increasing, helped by more people using smartphones and debit cards, and the government’s digital distribution of welfare benefits.
The rise in digital payments in India is mainly due to the Unified Payments Interface (UPI). This system allows quick and easy transfers between bank accounts using financial apps. In the last year, the value of UPI transactions exceeded one trillion dollars, which is about a third of India’s total economy. India saw an impressive 89 million transactions, making up 46% of all digital payments worldwide, as reported by ACI Worldwide and Global Data in 2023.
The fact that both cash and digital payments are growing at the same time is often called a “currency demand” paradox. The Reserve Bank of India’s latest annual report explains that this is surprising because cash and digital payments are usually seen as alternatives to each other, so their simultaneous increase doesn’t seem to make sense. People are using ATMs less and the speed at which money is being passed around in the economy has decreased.
Despite this, many in India still see cash as an important way to save for emergencies and as a way to keep value. As of March 31, the larger currency notes (500 and 2,000 rupees) made up over 87% of all banknotes in use, as per the Reserve Bank of India. Interestingly, the central bank stopped using the 2,000-rupee note, the highest value note, which was introduced after the 2016 currency ban.
Before the pandemic, a study showed that people liked using cash for small buys and digital methods for bigger ones. A recent survey by LocalCircles, a community social media platform, revealed that many people prefer cash for things like buying groceries, eating out, takeaways, paying for help, personal services, and home repairs.
According to a paper by the Reserve Bank of India, the greater preference for cash could be due to lower interest rates on bank savings, the extensive informal and rural sectors, and more direct cash benefits given during the pandemic.
Politics and real estate also play a role in the ongoing use of cash. Undeclared money is still a significant source of funding for political parties during elections. For instance, income tax authorities recently discovered about 3.5 billion rupees (around $42 million) at locations connected to an opposition MP. In 2018, Prime Minister Modi’s administration introduced electoral bonds, which are limited-time, interest-free bonds of set values, with the aim of reducing illegal cash and increasing transparency in political funding. However, critics argue that these bonds have actually reduced transparency due to their secretive nature.
Most of the undeclared wealth is still found in the real estate sector. A survey by LocalCircles in November reported that 76% of people who purchased property in India over the past seven years used cash for the transaction, with 15% paying more than half of the total amount in cash. Only 24% stated they didn’t use cash, compared to 30% two years earlier. The importance of cash in real estate deals is linked to property developers depending on the backing and favour of politicians, as discovered in a study by the Financial Experts
India isn’t alone in seeing both digital and physical cash grow together. The European Central Bank, in a 2021 report, mentioned a “paradox of banknotes”. They observed that although the usage of banknotes for shopping appears to be declining, the demand for euro notes has been rising continuously. Despite expectations of a decrease due to more digital payments, the actual demand for cash hasn’t fallen, with the number of euro notes increasing since 2007. Sweden stands out as an exception, being the world’s leading cashless society.
In India, cash is still a fundamental part of daily life for many. Seena, an auto-rickshaw driver in Bangalore, notes, “Most of my customers still pay in cash. Cash will never disappear.” (IPA Service)
(The author is a Defence, Aerospace & Political Analyst based in Bengaluru.)
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