Editorial. Digital transition should not choke bonafide cash users

The Reserve Bank of India’s Annual Report 2022-23 highlights the policy dilemma of managing the demand for currency in a rapidly digitising economy. The RBI’s management of the currency in circulation suggests that some fine-tuning might be in order. While digitisation has been a success story at the bottom of the socio-economic pyramid, the role of cash as a medium of exchange and a store of value should not be entirely overlooked in the journey towards going ‘cashless’.

It is notable here that the increase in currency in circulation has been almost entirely on account of the ₹500 note, with the ₹10 and ₹50 notes in decline and ₹100 note value unchanged. The value and volume of all banknotes in circulation increased by 7.8 per cent and 4.4 per cent, respectively, during 2022-23 as compared with 9.9 per cent and 5 per cent, respectively, during 2021-22, the spike in FY22 being induced by Covid-related uncertainty. However, the value of the ₹500 notes went up 14 per cent and 18 per cent in FY23 and FY22. It accounts for 77 per cent of the total currency in circulation of ₹33-lakh crore. The ₹20 note’s circulation has risen slightly. The other notes, it seems, are being gradually withdrawn from circulation, as the disposal of soiled notes here exceeds the numbers being printed. Despite digitisation, the pace of such withdrawal should be reviewed.

Meanwhile, the digitisation story is remarkable: UPI accounts for 73 per cent of the volume or number of digital transactions and less than 7 per cent of the transactions by value. Meanwhile, large value RTGS accounts for over 70 per cent of digital transactions by value and less than one per cent by volume. Digital payments recorded a robust growth of 57.8 per cent in terms of volume during FY23 on top of the expansion of 63.8 per cent recorded in the previous year. Despite these developments, it is to be noted that low value notes have their uses, as do the ₹500 notes whose circulation has rightly been ramped up to stave off any prospect of currency shortage.

The demand for small denominations among retail users should be met, even as they are nudged to go digital. There could be unexpected constraints to adopting the latter, be it internet connectivity or the user’s comfort with technology. Cash is also a unique requirement of micro businesses, and this should not necessarily be viewed with suspicion. The coexistence of cash and the digital space reflects the complexity of India’s economy and the level of informalisation among businesses below the GST turnover threshold. However, it is necessary to be vigilant about any sudden spike in the circulation of say, ₹500 denomination notes. The RBI has cited studies to say that the demand for cash is positively linked to income levels and negatively to interest rates. This is perhaps inaccurate; it should develop a clearer view on the role and uses of cash in India.

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