Explainer- Why cash rules despite rise in digital payments

The dominance of cash is partly driven by limitations of digital payments on the supply side, including inadequate dispute resolution mechanism, transaction failures and limited accessibility in rural areas.

Quick and decisive policy interventions by the government, duly supported with monetary measures by the central bank, have enabled the economy to stage a smart rebound, the CEA said

Even though UPI (Unified Payments Interface) transactions  hit a record Rs10.4 trillion in May, having more than doubled from a year before, Indians’ penchant for cash remains intact. Banikinkar Pattanayak examines the trend

Why is cash still the king, despite growing digital transactions?

Consumption expenditure has been inching up since last fiscal, albeit at a slower-than-expected pace, after a Covid- induced compression in FY21. This has somewhat discouraged the precautionary hoarding of cash, especially during the first Covid wave, for emergencies. However, as a share of GDP, the cash-in-circulation (CIC) this fiscal is still lower than the pandemic year of FY21.

The dominance of cash is partly driven by limitations of digital payments on the supply side, including inadequate dispute resolution mechanism, transaction failures and limited accessibility in rural areas.

How does current cash use compare with the pre-demonetisation level?

As of end-March, the CIC made up 13.2% of the budgeted FY22 nominal  GDP, way above the pre- demonetisation level (November 4, 2016) level of 11.7%. Of course, the ratio was lower than 14.5% at the end of FY21.

How has been the cash use during the pandemic?

People hoarded less cash during the more severe second Covid wave than the first one. From Rs 24.1 trillion as of March 20, 2020 (just before the pan-India lockdown was imposed from March 25, 2020), the CIC shot up to Rs 26.9 trillion by September 18, 2020, a day after the first wave peaked. It rose further to Rs 27.7 trillion as of January 1, 2021 (by when the first wave had substantially subsided). In contrast, the CIC rose just over Rs 1 trillion between February 26, 2021 (before the second wave gained pace) and May 7 (when the second wave peaked) to Rs 29.4 trillion.

Why did the CIC surge during the first wave?

Analysts attribute the spike in cash hoarding/pre- cautionary savings in the wake of the first wave to heigh- tened uncertainties around medical expenditure and income losses. So, the CIC shot up despite the fact that both supply and demand sides of the economy were battered by Covid (real GDP shrank 6.6% in FY21). Also, curbs on mobility & shop- ping were most stringent then.

Will CBDC help reduce cash use?

The Central Bank Digital Currency, when launched, can potentially reduce cash use, provided it offers the same anonymity in tran- sactions. For this, authorities must guarantee this under a law

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