Digital payments may be a worthy challenger, but cash is still the king

In times of crisis, they say cash is the king. Perhaps, the Reserve Bank of India’s (RBI) justification for the increased cash intensity in the economy in the previous year is built on this premise.

In its annual report for 2019-20 published last week, the central bank said the year ended with a surge in pandemic-related ‘rush to cash’. It noted that the currency-GDP ratio increased to pre-demonetisation level of 12 per cent in 2019-20 from 11.3 per cent a year ago.

The RBI said the rise in cash-intensity in the economy indicated a response to the pandemic which reflected in the form of a ‘dash to cash’ situation under extreme uncertainty.

Preference for notes

However, a closer look at RBI’s periodical data on CiC (cash in circulation) and availability of cash in the system reveals that despite all the excitement over the growth of digital payments and the rise of the cashless economy, people’s preference for physical currency is still intact and the pandemic, in fact, has only accelerated this trend further.

After hitting a low of 8.7 per cent (due to demonetisation) in 2016-17, India’s currency-GDP ratio rose to 10.7 per cent in 2017-18. This was attributed to the re-monetisation process. It further increased to 11.2 per cent in 2018-19 to reach 12 per cent observed in 2012-13.

“Even before the demonetisation, people were keeping ₹1-2 lakh at home as a precaution and that is one of the reasons why the moment currency came back to circulation, there was a sudden spike. A year or more later, we have probably reached the same level,” said Madan Sabnavis, Chief Economist at CARE Ratings.

“Currently, the cash (in the economy) is going up due to the precautionary motive. Everybody would like to have more cash to feel more secure, so people are withdrawing more cash and keeping it at home,” he added.

Access to digital infra

The spike in CiC in the previous year assumes significance because people in the pre-demonetisation era did not have widespread access to digital infrastructure like they have now.

Besides, the RBI’s argument that the ‘rush for cash’ is on account of pandemic is also debatable. According to RBI’s data on CiC, the highest monthly increase of cash in the system (₹99,075 crore) in FY20 was witnessed in March 2020. However, the impact of the pandemic and the consequent nationwide lockdown (effective March 24) became more pronounced only in the subsequent months. Even in March, ₹61,354 crore or 67 per cent of total withdrawals during the month happened between March 6-20, much earlier than the lockdown was announced.

However, economic experts say digital payments and currency in circulation may not be inversely proportional and with the expansion of the economy, the currency in circulation is bound to go up.

“The economy, as a whole, has been growing over the last few years. As a result, the overall requirement of funds in the economy also goes up,” Krishnan Sitaraman, Senior Director, Crisil Ratings said, adding, “the RBI has also been infusing more liquidity in the system over the last one to one-and-a-half years, so when the central bank infuses liquidity into the market, the cash in the system seems to go up.”

The currency in circulation went up ₹24.47 lakh crore as of March 2020 to ₹26.88 lakh crore for the fortnight ended August 21. On the digital side, the total value of UPI transactions fell to ₹1.51 lakh crore in April from ₹2.06 lakh crore as of March. It then bounced back and was nearing an all-time-high of ₹3 lakh crore as on August.