When the announcement was made on the withdrawal of the ₹2,000 notes in May, it was clearly stated that this measure was part of the ‘clean notes’ policy being pursued. Hence these notes which came in post-demonetisation in 2016-17 had to be taken out of the system.

The latest release from the central bank states that only around ₹14,000 crore of these notes have not come back to the system and that ₹3.42-lakh crore has either been exchanged or deposited with banks.

Of this, it can be assumed that 87 per cent has been put in deposits as per the September 1 press release. This means around ₹3-lakh crore of currency has been taken out from the system.

Interestingly compared with March-end, ₹89,000 crore has been the decline in currency in circulation. Hence if ₹3- lakh crore was returned as deposits, there would have been an infusion of ₹2.11-lakh crore as fresh currency. This number would be second highest accretion of currency during the first half of any year following demonetisation. In FY21 there was an increase of ₹2.36-lakh crore as the pandemic forced people to hold on to cash.

Cash rules

Therefore, people still prefer to deal in cash. Even while people deposited cash with banks there were additional withdrawals taking place thus increasing the demand for currency. Why is this case when online and digital modes of payments have been gaining momentum over the last few years?

The first is that while digital mode has caught on there is still a very large cash economy especially in the rural areas where people prefer to use the physical notes. Low levels of connectivity as well as erratic power supply can be the factors contributing to this. Transacting in currency notes is also more convenient.

The fear of online frauds can also deter people from digital transactions.

Second, the precautionary motive has also become important where households typically want to keep cash at home for emergency purposes. This has picked up since the pandemic where one was unsure of the expenses that had to be incurred for medical purposes.

Third, there are still transactions that take place in cash despite reforms measures like GST. This includes land sale or even dwellings where the seller insists on part cash payment to cover for the currency used for the purchase of land. Builders often take part of the payment in cash to grease palms to hasten clearances. This cost is often passed on to the buyer, which increases his price.

Fourth, there is a large underground market for gold that has built up over the years. As tax laws become stringent in any area, it leads to proliferation of the grey market.

The government’s efforts to create an audit trail for for such transactions is often subverted by “cash only deals”.

This way there is no identification of the persons involved in the deals. Also as limits have been placed beyond which identification of the buyer has to be provided, cash becomes a convenient mode of payment.

Political arena

Fifth, and probably the most significant factor today is the upcoming elections. In the build-up to the elections, the demand for cash increases as all political parties need cash for campaigning. This includes holding rallies, where people have to be ferried to the venue and provided with snacks. Often cash incentives have to be provided to induce them to attend. Further, gifts can also be distributed in the form of sarees or dhotis to incentivise them to vote for a candidate.

Money also has to be spent on posters, leaflets, advertisements on radio and TV channels, newspapers etc. While there can be cheque payments made for some of them, often cash is used especially for campaigning in the rural or semi-urban hinterland.

There is always fear of audit of accounts post elections as there are limits placed on how much can be spent by candidates. It has been fixed at ₹70-95 lakh for the Lok Sabha and ₹28-40 lakh for assembly elections and hence the use of cash helps them to avoid the audit trail. These limits may be too low in several constituencies especially where there are multiple strong candidates. Electoral bonds that have been subscribed to can cover a significant part of the expenses, but cannot adequately cover all; and hence cash payments will be required.

So the payments system is quite complex and shows even contradictory trends. The big digital push is a reality which is accelerating across the country with most businesses accepting these modes of payments.

At the same time the use of cash remains fairly dominant and as has been seen is increasing at regular pace. This will probably continue as long as sectors such as real estate and gold have an incentive to accept cash due to the skewed regulatory system. The concept of having an audit trail opens a second road for payments.

Similarly the fear of coming clean and being questioned by the enforcement agencies also creates incentives for greater cash use as it has the advantage of anonymity. The same problem exists with electoral reforms which have tried to formalise the entire flow of funds which in turn engenders the informal channels. Such are the ironies of reforms which help to sustain the anonymous economy which has cash as its centrepiece.

The writer is Chief Economist, Bank of Baroda. Views expressed are personal

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