Policymakers trying to transition India to a less-cash economy have been confounded by a peculiar phenomenon — currency in circulation growing right alongside rising digital adoption. With the mushrooming of mobile wallets, QR-based apps and the Unified Payments Interface (UPI), the volume of digital transactions leapfrogged from 293 crore in March 2020 to 799 crore by March 2022, as per RBI data. But CIC (currency in circulation) as a proportion of GDP has been rising too. After hovering at 11-12 per cent until FY20, it hit 14 per cent in FY21 and remained at 13 per cent in FY22. CIC in developed economies tends to be in the single digits. But a recent study by SBI Ecowrap offers hope that digital payments may finally be reducing the need for hard cash, in some respects. For the first time, the Diwali week this year saw a dip in CIC as opposed to sharp spikes witnessed in the last 20 years.
The lower need for cash can mainly be traced to the widespread adoption of UPI. As SBI notes, should UPI manage to materially reduce the need for the public to deal in cash, this could usher in many advantages to the economy. UPI use prompts bank account holders to hold larger balances in their savings accounts, providing banks with a low-cost source of funds and a higher CASA cushion for lending. Substitution of anonymous cash payments with digital ones also allows for greater traceability of transactions for the taxman looking to widen the tax base. Should the demand for paper currency diminish, banks would save on the logistics costs involved in safely storing and transporting paper currency and regularly refilling their ATMs. But despite affluent consumers embracing them in a big way, digital payments are still far from ubiquitous. In an interview this July, the NPCI chief pointed out that digital payment services like UPI were currently used by just a fifth of the population. Unless a third adopted it, cash in circulation would not see a durable reduction.
Policymakers may need to address two stumbling blocks to further the reach of digital payments. With options such as mobile wallets, payment apps and QR code readers available only on smartphones, feature phone users who make up roughly half of India’s mobile subscriber base have been left behind. RBI is trying to remedy this with the launch of UPI123PAY for feature phones. But the launch needs to be accompanied by a widespread awareness campaign to educate users about the safe use of UPI and the convenience it brings. Digital payments are currently characterised by high transaction failure rates. This requires users to be given access to more channels beyond the app providers themselves, to seek redress. Banks and other ecosystem participants also need to make adequate investments in backend infrastructure to keep up with burgeoning transaction volumes. On this score, it is imperative that RBI and the Centre quickly arrive at an understanding on the issue of charging for UPI services.
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