OVER THE LAST five years, November 8 has become a day for NDA government’s critics to remind about the alleged harmful effects or futility of demonetisation carried out by Prime Minister Narendra Modi that day in 2016. The government had given several reasons to justify demonetisation of high-value currency notes. But one that is questioned year after year is its claim that demonetisation was aimed at reducing India’s cash economy. Looking at absolute numbers, one might think the critics have a point, as currency in circulation (CIC), which was ₹16.63 lakh crore in FY16, dropped to ₹13.35 lakh crore (post demonetisation) in FY17, but has been going up every year since then. In FY18, CIC was ₹18.29 lakh crore. It rose to ₹21.36 lakh crore in FY19, and ₹31.33 crore in FY22.

However, nothing could be more erroneous than assuming that India’s cash economy is growing. Quoting absolute CIC to prove growth of cash economy is absurdity, Soumya Kanti Ghosh, group chief economic advisor of State Bank of India (SBI), said in a recent tweet. “Many of us expected that CIC could come down because of demonetisation and Covid-19. In fact, a substantial reduction was expected due to Covid-19,” says N.R. Bhanumurthy, vice chancellor, Dr. B.R. Ambedkar School of Economics University, Bengaluru. He believes the best way to see the impact of demonetisation and Covid-19 on cash economy is to make a counterfactual argument. “If not for demonetisation and Covid-19, how much money would have been in circulation? That is what we need to assess. Otherwise, it (looking at absolute CIC numbers in isolation) will lead to a partial assessment. Once you look at the issue that way, it becomes clear that the digital part of transactions has increased substantially. Large transactions are happening through digital platforms. You can see reduction of CIC in growth of digital transactions,” he says. Bhanumurthy says one should expect CIC to increase as nominal GDP expands. “Money supply growth should be equal to nominal GDP growth. That is the logic. In particular, M3 (paper notes, coins, etc, held by public) growth should be equal to nominal GDP growth. Money supply growth is not on a par with nominal GDP growth because of substantial increase in digital transactions,” he says.

Incidentally, RBI, in its Concept Note on Central Bank Digital Currency released in October 2022, explained why India is unique in seeing a rise in absolute CIC despite rapid digitisation of payments. “The growing use of electronic payments has not yet resulted in reduction in demand for cash. The percentage increase in value of banknotes in FY21 and FY22 was 16.8% and 9.9%, respectively, and percentage increase in volume of banknotes was 7.2% and 5%, respectively. The year (FY22) witnessed a higher-than-average increase in banknotes in circulation primarily due to precautionary holding of cash due to second wave of the Covid-19 pandemic,” says the paper. It also refers to the findings of a survey on retail payment habits of individuals in six cities between December 2018 and January 2019 to suggest that cash remains the most preferred mode of payment for receiving money for regular expenses. While on one hand, cash is preferred for small transactions (amounts up to ₹500), the Reserve Bank Digital Payment index demonstrates significant growth in adoption of digital payments across the country. The index has grown almost three and a half times since March 2019.

SBI’s Ghosh says jump in digital payments has significantly slowed CIC growth. As percentage of GDP, CIC is now at 13.24%, less than 14.41% in FY21, he says, adding that it has been growing significantly lower than nominal GDP. “For the first time, in two decades, CIC was down in a strong Diwali week. Innovations in technology have changed the Indian payments system. The Indian cash-led economy has changed to a smart phone-led payment economy,” he says.

In its November report, the SBI Research team headed by Ghosh also mentioned retail digital transactions data to point out that while NEFT holds a 55% share of digital transactions, payments through smart phones via UPI, IMPS and e-wallet are catching up—their shares being 16%, 12% and 1%, respectively. “The trends are revealing, as share of CIC in payment systems has declined from 88.74% in FY16 to 20% in FY22 and is estimated to go down further to 11.15% in FY27. Consequently, the share of digital transactions has been continuously increasing, from 11.26% in FY16 to 80.41% in FY22, and is expected to touch 88% in FY27,” says the report.

Meanwhile, those criticising demonetisation are using the latest fortnightly data on money supply released by RBI in first week of November to point out that currency with public was ₹30.88 lakh crore on October 21, almost double than six years ago.

Perhaps, it is time to look at the numbers holistically, and argue that the digital push was bound to happen, with or without demonetisation.

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