Opinion

Dash For Cash

Digital transactions are yet to break India’s love affair with cash. Here’s why.

Dash For Cash
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Circulation of currency grew by 13%

  • March 31, 2020 Rs 24,47,312 cr
  • January 1, 2021 Rs 27,70,315 cr

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Love for cash seems to know no bounds in India. Two events within a short span of time–demonetisation announced in November 2016, which led to long queues outside ATMs, and then the Covid-induced lockdown in March-June 2020—have reaffirmed that “cash is king”. The latest report of the country’s central bank, the Reserve Bank of India, states that currency in circulation grew by around 13 per cent in the first three quarters of the current fiscal. From Rs 24,47,312 crore on March 31, 2020, it went up to Rs 27,70,315 crore on January 1, 2021. The trend was already hinted at in the RBI’s Annual Report 2019-20, which said that demand for currency started to increase in the wake of heightened uncertainty due to the pandemic. “The main driving factor is the precautionary motive in uncertain times. Also, Indian preference for cash is legendary and it gets reinforced in these circumstances,” says CARE Ratings chief economist Madan Sabnavis. “Real India has been and will continue to use cash, while digital transactions will move in parallel. Several low volume transactions will be done through e-wallets, although the number of transactions will be high.”

Cash withdrawals from ATMs have been growing over the past five years, with India next only to China. This is despite India’s ATM penetration relative to population being one of the lowest among emerging markets and the fact that less than a fifth of the ATMs are in rural areas. Market experts believe India’s spending behaviour has been very ­predictable, especially in the past few years. E-wallets are being used for paying bills and small purchases like grocery, while credit cards, debit cards and EMIs are used for larger expenses. Retail business, especially in the MSME segment, still works on cash. “India’s small and medium businesses still ­prefer cash,” a senior official from the State Bank of India, who didn’t wish to be identified, tells Outlook. “Salaries to employees and ­payments from clients—most of it is done in cash due to the credit system followed in the Indian market, where payments are made in tranches.” Digital payment has been ushered in, but there are several expenses of which people don’t want to keep a record or pay taxes on. One of the classic examples is gold, which traded at an all-time high during the pandemic in 2020. “Indian consumers were going bullish on it and a lot of purchases were off the books, where people bought it from goldsmiths and traders without billing and evading GST,” says the bank official, adding that he knows several clients who withdrew money to do such transactions.

“For a bottle of 20 litres that costs around Rs 70-90 to a ­consumer and which is mostly delivered at home, no billing is done. It doesn’t make business sense to issue receipts for such small volume,” says Anurag Dwivedi, a water-bottle refiller and trader in Delhi-NCR region. Anurag is part of India’s retail business, which is still largely unorganised and prefers cash. India’s currency in circulation includes ­banknotes and coins. At present, the RBI ­issues notes in denominations of Rs 2,000, Rs 500, Rs 200, Rs 100, Rs 50, Rs 20, Rs 10, Rs 5 and Rs 2, and coins in denominations of Rs 20, Rs 10, Rs 5, Rs 2, Re 1 and 50 paise.

Banking and market experts believe mass layoffs of workers also brought more cash into circulation due to payments made to them. “There is a classic age divide in consumer trends in India—while the youth prefer digital transactions, the elderly believe in age-old systems of cheque and cash, and the middle-­aged Indian is still evolving,” says a senior government official requesting anonymity. “But the fact is that the Indian mindset is still hooked on to cash hoarding due to several ­reasons. An average Indian housewife doesn’t want to disclose the savings she makes from money set aside for household expenditures. When it comes to household labour like maids, drivers and cooks, everyone prefers cash. Rural India still doesn’t have proper access to the banking system. Our social fabric is such that people won’t budge despite the government pushing digital transactions in form of RuPay card or UPI. It is a failure of the banking system that it hasn’t been able to reach out to the masses despite several opportunities provided by successive governments.”

A peek into the demonetisation phase gives a glimpse of India’s cash ­reserves. On November 8, 2016, when PM Narendra Modi announced demonetisation of Rs 500 and Rs 1,000 notes, the decision stripped currency worth Rs 15.41 trillion (86.9 per cent of the total) of legal status. In 2018, the RBI reported that Rs 10,720 crore did not return to the banking system.

After demonetisation, the central government made several efforts to support digitisation by promoting mobile wallets, ­enabling non-banking players like Google, Paytm and PhonePe for UPI transactions, introducing schemes like Jan Dhan Yojana and Aadhaar-based ­payments of scholarships and subsidies. India remains largely a cash economy, and is still emerging as a market where new ­digital-transaction technologies targeting youth are launched. According to the RBI, digital transactions have been growing and total non-cash retail ­payments increased to 97 per cent during 2019-20, up from 95.4 per cent in the previous year.

In the years to come, the e-wallet segment and non-banking players would be in ­competition with technologies like tap-and-go, which doesn’t need internet and pre-paid cards. They are expected to gain traction in the years ahead for overcoming internet connectivity ­issues and encouraging more contactless ­payments. The prepaid card segment can be used to keep a check on overspending and also ensure an account of what is being spent on. They can be used at POS terminals and ­prevent exposure of bank accounts to public networks, bringing in additional security. Market experts say a India has huge appetite to accommodate new payment technologies, but cash will ­remain king.

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