Between December 2018 and January 2019, the Reserve Bank of India (RBI) surveyed half a dozen major cities to gauge the prevalence of digital payments two years after the country demonetised about 86 per cent of its currency overnight. The survey sought to gauge people’s level of awareness about digital payments and the challenges they faced while using payment cards, mobile banking, net banking, and Unified Payments Interface (UPI). It threw up a list of pain points of which the main ones were a lack of point-of-sale (PoS) machines, trust issues, complicated digital processes, and transaction charges.
That pretty much sums up the reasons for a stubbornly high level of cash in the system despite the surge in digital transactions since demonetisation and the spur from the Covid-19 pandemic.
India’s currency in circulation (CIC) touched 14.6 per cent of its gross domestic product (GDP) in 2020/21, much higher than the 12 per cent before demonetisation in November 2016.
The RBI’s studies have concluded that the CIC ideally should grow slower than nominal growth in order to reduce cash flowing through the system. The CIC— a universal indicator of measuring the cash in the system—is around 8 per cent in the US and about 9 per cent in China, which does the highest number of digital transactions globally.
For the past two years, the cash in circulation in India has been growing faster than the nominal GDP. Before demonetisation, the currency was growing at around 1011 per cent, below the nominal GDP growth of over 11-12 per cent. In the last two years, the CIC’s growth has sped up to 14-16 per cent, outpacing the nominal GDP growth rate. The RBI-appointed committee to deepen digital payments in India has said cash should grow slower than nominal GDP, with the CIC ideally tending towards the global average of 7 per cent. Currently, India’s cash in the system is double of that number. As much as more cash is the problem, so too is the slowdown in GDP growth, which started much before Covid hit the economy.
The second way of measuring cash levels is the value of ATM withdrawals against nominal GDP. Cash withdrawals have been consistently growing at 16-17 per cent of nominal GDP for the last six years. ATM operators have observed that there have been fewer withdrawals in absolute numbers post Covid, but a higher average ticket size per withdrawal maintained the elevated cash levels. The RBI’s own analysis has found that despite the increase in digital payments, cash levels stayed high, which is contrary to what is happening elsewhere. For instance, digital payments surged in Mexico, Brazil, and Saudi Arabia between 2007 and 2016, but there was hardly any change in cash levels. This means there are other structural factors hindering India’s efforts to limit the use of cash.
Big Cash Drivers
The extraordinary increase in cash levels—from 12 per cent of GDP to over 14 per cent—during the first year of the pandemic was probably since people hoarded a lot of cash for emergency and healthcare needs, says Saugata Bhattacharya, Chief Economist, Axis Bank. Another reason for the surge is because people accumulated cash in anticipation of more stringent lockdown measures post the second wave, says Anand Kumar Bajaj, Founder, MD & CEO, PayNearby, which partners with Kirana stores in tier I, tier II and rural towns.
Rural ATMs were flooded with people withdrawing cash during the pandemic. That was down to the government increasing the spend on schemes such as MGNREGA to generate rural employment, PM Kisan Yojana for farmers, and LPG subsidies. “The government spending in rural schemes has also seen a higher outgo,” says Bhattacharya. In 2020/21, the government made a huge direct benefit transfer (DBT) of ₹2.96 lakh crore, which people promptly withdrew as cash and stored it for consumption. “The lower the income level and education, the lower is the awareness of digital payments,” says Sunil Rongala, Vice president of strategy, innovation, and analytics at payments solution provider Worldline India.
Smaller towns and cities are the weak link in the panIndia digital payments chain. There is a lot of catching up to do. “If one looks at the number of small merchants in India, there is a huge opportunity in the payments space,” says Bhasker Chatterjee, Head of Products Ezetap, a digital payments company.
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