Making sense of the cash imperative

By: |
November 25, 2021 4:50 AM

Five years after DeMo, despite the digital-transactions boost, currency in circulation is high. Demographics, uncertainty in pandemic times have contributed

Bear in mind, it has also been argued that DeMo needn’t have been the chosen route to expedite digitisation, and providing incentives could have been the logical way to get there.Bear in mind, it has also been argued that DeMo needn’t have been the chosen route to expedite digitisation, and providing incentives could have been the logical way to get there.

Demonetisation (DeMo) seems a distant memory, five years after, with Covid eclipsing all such travails. But, it is interesting to check if demonetisation was helpful in particular ways.

DeMo was announced to unearth black money and weed out counterfeit currency, apart from squashing terror-funding. One can’t be sure of the circulation of black money, but the introduction of GST has certainly brought about formalisation of the economy and, to that extent, has reduced overt black money formation. RBI data did not show any significant counterfeit currency being brought out and, hence, it stands to reason that there was not much in circulation. Arguably, terror activity has reduced at the borders, but this can be attributed more to remarkable patrolling by security forces. A later-endorsed objective was digitization; the afterthought turned out to be quite significant, as subsequent developments show. Bear in mind, it has also been argued that DeMo needn’t have been the chosen route to expedite digitisation, and providing incentives could have been the logical way to get there.

Digitisation eases transactions and makes them more transparent. Just like it is with GST, it becomes easy to trace and track large transactions, and, hence, is useful for the taxman. In Covid times, the push given to digitisation earlier proved largely beneficial as households were able to transact in a contactless manner, using forms ranging from cards to mobile options. Using currency would have been fraught considering there was the scare initially that the virus could travel through currency notes; indeed, this had brought on a virtual ban on newspapers, too. Hence, it can be said that the big push given to digitisation made life easier for all as it had become a habit by then.

But, has this led to a decline in the demand for currency? Not really, as the currency in circulation has increased to an all-time high of Rs 29.62 lakh crore (November 5, 2021). In October 2016, it was Rs 17.54 lakh crore; over Rs 2.4 lakh crore of currency has been added on an annual average over the last five years compared to an average of Rs 1.5 lakh crore in the previous quinquennium. Hence, there has been a simultaneous increase in demand for holding currency.

In fact, digital transactions have increased in volume as even low denomination transactions are being conducted through mobile banking as the handset has virtually become a bank account. Even rudimentary transactions like commuting tickets are being conducted through the digital mode. Therefore, to an extent, the volume of transactions may not be the right metric to be used when reconciling with the same demand for currency. This does beg the question why people are demanding more currency.

There are two motives for holding currency: transactions and precautionary considerations. The first motive is driven by two factors. One is that age still matters. While the youth have taken to technology easily and, hence, have moved more or less completely to digital transactions, the older age groups (likely, the above-40) still prefer the use of cash, with the propensity to use cash to transact tending to increase as age increases. There is still a modicum of suspicion on the use of cards and wallets, as remembering passwords and tracking one’s account can prove onerous. The other is that there are still several transactions of high-value like land, houses, jewellery, social functions that involve cash payments. Often, the seller of a house has paid partly in cash for land and bribes to get clearances from various quarters and, hence, insists on some cash payment. For social gatherings like marriages, there is a lot of cash which is given as gifts as formal payments would attract attention. The same holds for jewellery where the smaller dealers still sell on cash basis. This holds in both rural and urban areas.

The second motive has played a bigger role post demonetisation. As a rule, households do keep a certain sum of money at home for dealing with contingencies. The intensity of this motive increased post-Covid, when households have had to spend considerable money on healthcare wherein cash payments was a norm in most healthcare centres as the government had come down heavily on the rates charged and the caregivers insisted on cash payments for admission. In fact, even those with insurance policies were not provided cashless hospitalisation and had to pay in cash.

With the uncertainty levels increasing in these times, there is certainly an incentive to hold on to more cash.

It does look like that there is a place for cash in our country, notwithstanding the spread of digitisation. While the latter will grow at a higher rate, the supply of currency will continue in parallel. With growing uncertainty on the health front, there will be an incentive to accumulate cash to use on a rainy day.

The author is Independent economist

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