There is much ado about digitisation in the country and a strong view is that thanks to demonetisation we have all gone digital. This is true, as there is a large volume of such transactions taking place and the number has increased in the pandemic, as people were forced to shop online. However, an interesting observation is that while digitisation has thrived, people still prefer to hold on to cash.
In March 2020, the total currency in circulation was Rs 24.13 lakh crore, which rose to Rs 28.31 lakh crore by March 2021. By April-end, it went up further to Rs 28.87 lakh crore - an increase of around Rs 56,000 crore over March. In March 2017, which was just after the demonetisation programme ended, the currency in circulation was Rs 13.10 lakh crore. This means that in just four years, the amount more than doubled. This is interesting because it does mean that people have a proclivity to continue holding on to cash. Why should this be so?
Currency, always trending
Currency is considered dependable, as it is something which one can feel and touch. Currency is held for two main reasons. The first is for transactions and the second, as a matter of precaution. These two motivations need to be examined.
While online transactions, the use of wallets, bank transfers and plastic (cards) swipes have grown in number, as all online transactions virtually prefer such modes of payment even though cash on delivery is also an option, there is a large section of the population which still prefers to use cash. This is not withstanding the fact that there is a lot of inconvenience involved when the volumes are large. In fact, the government has put several restrictions on the use of cash for high-volume cash transactions and hence, ideally, this should have come down.
Two things are possible here. The first is that people just like using cash for their transactions, which holds for the older population which is more comfortable. In fact, they would typically use cheques for payment, in case there are government restrictions. The other is that there is a significant black market, where property and gold witness partial payments in cash. While the RERA seeks to check such transactions, understatement by smaller builders is prevalent in the country, not just in smaller towns but also metro cities.
Cash and clear
There is an explanation given here. When builders or developers have to buy land, they have to pay in cash to get clearances, which cannot be paid by any other means. This has to be recovered through cash payments from the buyers. Similarly, there is still a tendency for significant costs of marriages in India to be settled in cash. If such ceremonies are not held in the large hotels, there is a scope for understatement of costs with an upfront cash payment. These are the big-ticket transactions.
Here too, there is an economic rationale, as people do realise that if large payments are made in the digital mode there is an audit trail which could lead to further enquiries by the authorities. Hence, to escape this process, it makes sense to transact in cash.
Nest egg
The other is the precautionary motive. Theoretically, people hold on to cash for the rainy day. During the pandemic, any day could be a rainy day and people prefer to hoard cash. Here too, it has been found that the smaller nursing homes and hospitals would take upfront cash payments in distress, when the patient had few options. There were no receipts provided for such transactions. Therefore, the increase of over Rs 4 lakh crore in 2020-21 could be attributed to this fear factor. This will continue into 2021-22 too, as the second wave has been even more debilitating and has struck a larger swathe of the population.
Therefore, the combination of both these factors have kept the cash in circulation high. Given the Indian set-up, it does not look likely that digital transactions could replace cash. The cash to GDP ratio was 12 per cent before demonetisation and came down to 8.5 per cent in FY17. However, it has been rising continuously, to 10.6 per cent in FY18, 11.9 per cent in FY20 and jumping to 14.5 per cent in FY21 (partly due to the fall in the GDP) – it would still have been around 12.5 per cent had there been normal growth in nominal GDP, of around 12 per cent.
Can anything be done here? First, there is the preference of an individual and the government cannot force people to digitise. Second, while tracking an audit trail sounds like a good objective, the fear of harassment is real and the government needs to assure people that this will not be done. Third, the precautionary motive will always be strong, as long as the government is not able to provide universal free healthcare to all. Healthcare must be free and not a case of paying first and then waiting for reimbursement. As none of these are going to change, we need to accept that cash and digital currency will coexist.
The writer is Chief Economist, CARE Ratings, and author of: Hits & Misses: The Indian Banking Story. Views are personal
