Is cash still King in India?

A riddle wrapped in a mystery inside an enigma – something which is extremely difficult to understand or predict.

This statement was made by Winston Churchill back in 1939 about Russia as the Western world failed to understand the motivation behind Russia’s actions (the Soviet Union then) during World War II.

We have a similar feeling about cash in India today. 

Six years back on November 8, Prime Minister Narendra Modi appeared on national television and announced that all the ₹500, and ₹1,000 notes will turn invalid by midnight. This move was aimed at killing black money or the money hidden from the income tax department, squash terror funding and weed out fake currency. As a result, 86% of the currency in circulation became invalid in a matter of hours!
Quite naturally, utter confusion followed. Demonetization (DeMo) caused a lot of hardships for the common man. The negative impact was felt across all segments of the economy.

DeMo seems like ages ago as Covid has literally wiped off all our memories of pre-covid times. But, was all the trouble it caused even worthwhile?

Did we kill Black Money?

No, we couldn’t. As per RBI, almost the entire chunk of money (99%+) that was demonetized made its way back into the banks and wasn’t invalidated as desired. Although the introduction of GST has definitely led to a more formalised economy and reduced black money formation to an extent.

Did we squash terror funding?

Hard to say. Terror activity has reduced at the borders, but this can be due to excellent patrolling.

Did we weed out fake currency?

Not really. No significant counterfeit currency was reported to have been brought out after DeMo.
We are however not debating here whether DeMo achieved its intended results.

We instead want to focus on an unintended objective of DeMo which is digitisation and moving towards a cashless economy. We did see Indians rapidly adapting to the newer digital modes of transacting post DeMo. The pandemic further boosted digital transactions, as online shopping was the most convenient and contactless option for fellow Indians.

So much has been the rise in digital transactions that we now see QR codes at even the smallest of vendors and at every mom-and-pop shop.

UPI turned out to be the biggest gainer. UPI payment volume stood at 4400+ cr (Oct 2022 end) up from a mere 1.8 cr in FY17.

But has this led to a decline in demand for hard cash? Nope, not at all.

Cash rules. It is still the king.

The currency in circulation puzzle

The dependence on cash has not come down. Currency in circulation or the cash with public, which was ₹17 trillion just before DeMo, increased to ~₹31 trillion at October end. This meteoric rise in currency in circulation is quite a puzzle amidst rising digital payments and weak rural demand.

It is not that people have lost trust in banks and withdrawn cash and put it under their mattresses. Bank deposits are also growing healthily at around 10%.

So, why do we Indians love cash?

Clearly, the word on the ground is that we simply love cash transactions. But it would be wrong to assume that this situation is unique to India. Cash is still king, not just in emerging countries like India, but even in developed countries like Germany and Japan (look at the graph below, although slightly dated).

So coming back to the question, why do we like cash so much?

We could identify 3 prime motives for holding cash:

Old habits, die hard

While the Indian youth have adapted to changing technology easily, the older age groups still prefer to use cash. There is still an element of discomfort and suspicion about the use of digital modes like cards and wallets. Remembering passwords and keeping a track of all accounts often seem daunting for them. Moreover, several high-value transactions like purchases of jewellery, and gifts in social functions majorly involve cash payments.

In rural areas, cash is still the bedrock of daily existence because of a lack of facilities and awareness.

Even when it comes to online shopping, Indians are more comfortable with cash-on-delivery (65% of orders currently) rather than the digital mode of payments.

Lack of trust

Rising cases of data breaches, cyber frauds and poor financial literacy are other deterrents. This is why, despite having a debit card, Indian customers have more faith in cash withdrawals. Ironically, the demonetization exercise also created so much chaos for the aam junta that a lot of them lost trust in the most credible institution of India, the RBI.

Rainy days

Indians are known to stash money at home for dealing with contingencies. This has gained importance post-covid when households had to spend considerable money on healthcare. Rise in uncertainty levels and limited mobility during those rainy days had forced many to hold on to more and more cash.

Conclusion

While the government may continue its push towards digitisation, the move would only happen once Indians, largely the dominant rural population, are made aware of the advantages and feel secure about paying through phones. Until then, cash would still be the undisputed king.

Cheers,

Ruchi Mehta

https://www.linkedin.com/in/ruchimehta-tavaga/

Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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