Five years after demonetisation, the cash in the system is back at a much higher level. The government had demonetised the high-value notes of Rs 500 and Rs 1,000 to formalise the economy and to tackle the counterfeit market. Despite the digitisation of payments in the last few years, the cash levels are at a record high level.
1) Cash growth faster than nominal GDP
The currency in circulation as a percentage of GDP is the key indicator of measuring cash in the system. As the economy grows, the currency also grows in the system. In the period (two years) prior to demonetisation, the currency, as well as the nominal growth in the economy, was in the range of 10-12 per cent. But in the last two years, currency in circulation has grown by 14-16 per cent whereas the nominal GDP growth has been lower. At present, currency in circulation is at 14 per cent of GDP as compared to around 11-12 per cent during the pre-demonetisation period.
The big reason is the Covid-19 pandemic as the RBI had to infuse more liquidity into the system. At the same time, the GDP, or the denominator, plunged. The second metric for measuring cash levels is the value of ATM withdrawals against the growth in nominal GDP. According to data, the cash withdrawals have been growing at 16-17 per cent year-on-year. In the last 18 months, people were also hoarding cash for medical and other emergency needs.
2) Lower-income levels and weak digital payments
The lower income levels and education also come in the way of digital payments, which are mainly growing in metro and urban areas in terms of the value of transactions. The smaller towns and cities are actually the weak link coming in the way of the faster digital payments rollout.
Most merchants in semi-urban and rural areas deal only in cash. The higher cash levels are also because of unorganised or informal sectors where payments are always in cash. Today, a large percentage of people are employed in the informal sector.
3) Vanishing Rs 2,000 notes
The revival of the black money market after demonetisation is also contributing to higher cash. Post demonetisation, the RBI had issued high-value notes of Rs 2,000, with a value of Rs 6.72 lakh crore. These high-value notes are no longer available in ATMs or in the market. There is a strong possibility that these notes are kept as black money and circulated in the black economy because of their high value. In fact, the estimates for black money before the demonetisation was around Rs 5 lakh crore.
4) Inadequate ATMs, POS machines
The growth of ATMs has been abysmal for many years. For instance, there were around 2.13 lakh ATMs installed for the period ending March 2021 against 2.08 lakh ATMs five years ago. This lack of ATM infrastructure, especially in smaller towns, cities and villages, forces people to withdraw high cash to keep their visits minimum as it involves time and cost to travel.
Similarly, the point of sale (POS) machine infrastructure for debit and credit cards is also very low. There is also no incentive for banks and other players to deploy the POS machines, which are costly. While UPI payments are gaining momentum, there are security issues as people feel unsafe to link their bank accounts.
5) Capacity issues at NPCI level
The RBI-backed National Payments Corporation of India (NPCI) promotes retail payments in the country. The path-breaking tool of Unified Payments Interface (UPI) has already emerged as a universal payment mode for small value payments. But there are capacity issues and risks.
First, the UPI payments system is dominated by GooglePay and PhonePe. Imagine if there is any technical glitch or outage, it could cause major disruption. The NPCI is already addressing this issue by capping the market share of third-party apps at 30 per cent. The other big capacity issue is the reliance on a single payment facilitator like NPCI, which is also a risk. The RBI has already allowed new players for setting up a new umbrella entity (NUE) for retail payments. The objective of NUE is to reduce the concentration risk in the market.
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