Six years on, cash still rules

Clearly, the appetite for currency has been on the rise. And given that the RBI revealed that neither black money nor an abnormal amount of counterfeit currency was unearthed, it can be assumed that the demand is genuine and people like cash.

Madan SabnavisUpdated: Saturday, November 12, 2022, 08:57 AM IST
Six years on, cash still rules | File Picture

Nov 8, 2016, was a chilling evening and will be remembered by the entire nation. This was when the infamous demonetization exercise was announced, which literally brought the economic system to a standstill with high denomination notes of Rs500 and Rs1000 being demonetized. The ostensible reasons for announcing the move was to get hold of black money, curb terrorism and identify counterfeit currency.

Along the way, as individuals and bankers struggled to meet the norms for exchange, which changed by the day, it was argued that demonetization would help in digitization. While this argument appeared to be an afterthought, several changes have taken place in the way in which business is transacted.

The curious thing about demonetization was that the logic of big denomination notes being responsible for black money was defied when the Rs2,000 note was introduced, as it makes it easier for black money to be stored.

There were other reforms brought in like GST, which sought to ensure that all businesses were registered, rules put in place on the maximum amount of currency that can be used for purchase transactions, and so on. Simultaneously, the Government propagated the trinity of JAM, which included a Jan Dhan account, Aadhaar card, and mobile phone which helped in making direct transfers.

The UPI system for payments has now become a household term which has been made popular through incentives rather than threats, as the consumer so far does not pay for the transaction made. This has led to multiple-level growth in the volume of transactions both in terms of number as well as value. Clearly there is a revolution taking place at a pace never seen anywhere in the world. And the reason is definitely not demonetization.

With six years now having passed, the apologists for demonetization use the proliferation in use of digital payments as vindication of the process. If that were the case, then are we holding less currency today than we did in 2016? This is pertinent, because if everyone is using the digital mode, then logically the RBI should be printing less currency than it did earlier. In this context it would be instructive to look at some data.

As of Nov 4, which was just before the announcement was made, currency in circulation was Rs17.74 lakh crore. As old notes were exchanged and limited quantities were made available by the RBI, it came down to a low of Rs9.92 lakh crore in January 2017.

In January 2022, which is a five-year period, it had grown to reach Rs30.04 lakh crore and rose further to Rs31.82 lakh crore by October 2022. The average compound annual growth rate for the period January 2017 to January 2022 was 24.8%.

The growth rate of currency in circulation in the five years preceding Nov 4, 2016, was 12.2%. Clearly, the appetite for currency has been on the rise. And given that the RBI revealed that neither black money nor an abnormal amount of counterfeit currency was unearthed, it can be assumed that the demand is genuine and people like cash.

Interestingly if the CAGR is reckoned for the first three years, which was before Covid-19 struck and the lockdowns were imposed, the growth rate was as high as 32%. This means the demand for currency was increasing at a greater pace immediately after demonetization.

However, after the lockdown, when people perforce could not move out at various points of time and going to banks was arduous, digital modes became more popular. For the two-year period from January 2020 to January 2022, growth averaged 14.7%.

Why is it that even while people are using digital modes of transactions, currency is still in demand? The first reason is that people are just more comfortable using cash and this has a generational bias.

Second, after the pandemic, the precautionary motive has become important and everyone would like to keep a certain amount of currency at home for emergencies. In fact, even today surgeons charge separately in cash for high-level operations even in top starred hospitals.

Third, several enterprises in the unorganised sector, which include the kirana stores, prefer cash because once they come under the composition scheme, GST filing is not required. Here they would prefer business transactions to be kept opaque.

Fourth, most real-estate transactions of the non-corporatised entities are conducted partly in cash as the argument given is that the seller has normally paid cash when acquiring land or the house and hence needs an offset through partial cash payment.

Fifth, small, unbranded jewellers deal primarily in cash and prefer not to accept digital payments. Often when digital payment is permitted, a premium is charged.

Sixth, professionals like doctors, lawyers and accountants often accept only cash to have control over their taxable income. Lastly, even today people have to pay bribes in cash when dealing with any state department, whether it be a simple police verification for a passport or any dealing at the housing counter. Therefore there will be an ambivalent structure in the country where currency and digital modes of transaction will coexist.

The RBI has already introduced its digital currency (CBDC) at the wholesale level and while it will permeate the retail layer at some point of time, it may become a substitute for UPI/e-wallets rather than for currency.

Digital transactions look large because the new generation has taken to these alternatives with ease and will continue to do so. The volumes are large because even small transactions of less than Rs100 can be done through UPI. But businesses that are opaque will continue to deal in cash as it is a win-win situation.

Madan Sabnavis is Chief Economist, Bank of Baroda, and author of Lockdown or Economic Destruction.

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