In today’s Finshots, we’re trying to solve a riddle — what explains a record surge in cash when we’re seeing massive growth in digital payments?


The Story

5 years ago, demonetisation changed the face of the Indian payment ecosystem forever. At the time Indians held cash worth Rs 18 lakh crore. By the end of January 2017, just 2 months later, it was down to Rs 8 lakh crore. The impact was immediate and it was quite massive. And it seemed as if it were the beginning of the end for cash.

Cash is dead, they proclaimed.

But guess what? That didn’t happen. Instead, as of today, the cash in circulation tallies at over Rs 28 lakh crore. Granted, this number looks massive. But it can also be slightly misleading. The economy isn’t the same as it was back in 2016. We’ve added value across the board. So as the GDP keeps chugging along, you’d expect more cash to enter the ecosystem to account for this increase. Which is why it’s better to use another metric — the Cash in circulation (CIC) to the GDP ratio. This way you can see if the impact of cash is sizeable as the figure denotes.

So what does this ratio tell us?

Before demonetisation, the CIC to GDP ratio stood at 12%. Immediately after that, it dropped to 8%. By March 2020 (right before the pandemic), it was back at 12% again.

And today, it’s at a record high of 14.5%.

So cash in circulation, relative to the country’s GDP has been on the up and there’s no two ways about it. But why is this happening?

Well for starters, total economic activity tanked in the aftermath of Covid-19. So the denominator took a hit and the ratio had to follow suit. Meanwhile cash transactions began to see an uptick due to a whole slew of factors. For starters, people probably kept using cash all through the lockdown owing to convenience alone. As the economist Vivek Kaul wrote — They paid in cash while moving back home. They had to pay in cash while buying covid drugs on the black market. Hospitals demanded cash when admitting patients and so naturally cash was king in many parts of the country. But it’s not just a pandemic thing. Here are some key findings from a study conducted by the Reserve Bank of India between 2018 and 2019. According to the central bank, most people still preferred cash payments for regular expenses. Especially for small value transactions up to ₹500. And mind you, the survey covered big cities like Delhi and Bengaluru as well.

Elsewhere, in smaller cities, 90% of e-commerce transactions still use cash on delivery for payments, while India’s informal economy chugs on cash alone.

But what about high value payments? Shouldn’t they account for something?

Well, according to one survey, 70% of the people who bought a property in the last 7 years paid for it partly using cash. 16% paid over half the sum in cash alone. So  if you want to evade taxes, you’re still likely going to adopt cash as your primary source of payment. But how on earth do you reconcile these data points with the narrative you keep hearing all day long — about the burgeoning digital payment ecosystem. Just a few days ago, we put out this chart showing how the total value of UPI transactions hit a record high last month. It can't be that cash is still king while UPI transactions continue to soar, right?


Well, the thing is — UPI is booming. But it's booming because it took a lion's share away from other modes of digital payment methods including wallets and cards.  So in reality, the proof of the pudding is in the actual “value” of all digital transactions. Not just UPI.

And here’s how things look on that front. Between 2016 and 2020, while the number of digital payments rose sharply, the rupee value of such transactions has only compounded by 15.2% every year. Simply put, the number of digital transactions may have gone up from 1 to 6. But the value of those transactions have only moved from 1 to 1.5.

So yes, both narratives are accurate. India is slowly transitioning into a digital first country as the volume of digital transactions begin exploding. And by 2025 they may even account for as much as 71% of all payments. However, the total value of digital transactions have only seen modest gains and as such, cash is still an integral part of the payment ecosystem.

Until next time…

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