Cash Use Grows In India Despite "Demonetization" Move

Physical cash use and digital payments are both growing in India, but for different reasons.

How easy is it to ban cash?

The growth of digital payments and a crackdown by the authorities have not undermined the popularity of cash in India.

Back in 2016, India withdrew two higher-value banknotes that accounted for over 85% of all cash in circulation. The intention was to reduce black market transactions and increase tax compliance. The result was chaos, since a large amount of savings were held as cash, and those on lower incomes dealt almost exclusively with cash.

Cash Is Still King

Despite these unpopular measures, cash has not fallen from favor. The Reserve Bank of India (RBI) reports that cash in circulation grew by almost 17% in 2020-21, while the average annual rate of growth for the previous decade was below 13%. 

Nonetheless, digital payments are soaring in popularity, thanks largely to the increase in credit card and smartphone payments, and the use of digital payments for welfare. Incredibly, India accounted for almost half of all real-time transactions worldwide in 2022: 77% year-on-year growth.

Physical Cash: Savings And Emergencies

Strangely, then, both cash use and digital payments are gaining in popularity at the same time in India, when it's generally the rule that one replaces the other. While there are multiple factors that might explain this, one answer is that physical cash is being held as savings and used for smaller purchases, while digital transfers are preferred for larger payments. Households also prefer to hold physical cash for emergencies.

However, the attractions of the black economy are significant, and there are certain use cases where cash still holds sway, even for large purchases. One survey found that over three-quarters of respondents who bought real estate in India over the last seven years used cash for at least part of the purchase, and 15% paid more than half of the sum in cash. Such a practice would be unthinkable in the US or much of Europe, where large sums of cash cannot be deposited or withdrawn from banks without extensive questioning and investigations.

Interestingly, a similar "paradox of banknotes" appears to be occurring in Europe. The ECB recently commented that "the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased".

The obvious explanation is that high-value banknotes are being favored for savings and transactions that the users do not want recorded officially.

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