The Central Government recently announced an incentive scheme for promotion of RuPay debit cards and low-value BHIM-UPI transactions (person-to-merchant) for the current FY 2022-23, with an outlay of ₹2,600 crore. The scheme will also promote UPI Lite and UPI 123PAY, introduced a few months back.

The decision to provide financial incentive to acquiring banks was prompted by some concerns expressed by the RBI and the NPCI, the operator of UPI suite of products, IMPS, NACH, ABPS, AePS and the RuPay payment system. Continuing its upward march, UPI clocked 782.9 crore transactions with a value of ₹12.82-lakh crore in the month of December 2022 compared with 62 crore transactions valued ₹1.03-lakh crore, four years back, in the same month of 2018.

Digital payments are gaining a lot of ground. Cash has not fallen behind, either.

Cash, cash everywhere

Currency in circulation, which was ₹18.04-lakh crore at end-March 2018, jumped to ₹31.34-lakh crore at end-March 2022 and further to ₹32.42-lakh crore as on December 23, 2022. The trend in currency-to-GDP ratio reveals that there has been an overall increase in the last decade from 12 per cent in 2012-13 to 13.7 per cent in 2021-22.

What is baffling about the huge demand for cash is that it persists and grows despite proliferation of alternative payment mechanisms. Physical currency not only continues to be relevant, but the demand is also growing as the cash-GDP ratio shows. Probably realising the staying power of currency, the Bank Note Paper Mill India Pvt. Ltd, a joint venture of the Government and the RBI, is planning to set up a bank note paper plant at Balasore in Odisha, closer to the RBI’s note printing press at Salboni in West Bengal.

India’s shadow economy — production of and trade in goods and services that are deliberately concealed from public authorities — requires cash to survive and prosper. The share of cash in the total volume of expenditure is on a steady decline in the formal economy but it is still used in a big way for small transactions, especially in rural and semi-urban areas.

According to ‘The 2020 McKinsey Global Payments Report’, about 89 per cent of all transactions by volume in India were estimated to be cash-based. A study by San Francisco-based Narvar says that a massive 65 per cent of all deliveries received by e-retail platforms in India are cash on delivery (COD), going up to 80 per cent in tier 1 and 2 cities despite the ongoing push for digital payments. Cash continues to be a preferred payment method for most shoppers, and e-commerce businesses risk losing volume if they were to discourage COD.

A field research by 1Bridge, India’s leading village commerce network, published in April 2022 reveals that a mere 3-7 per cent of rural India actively uses any UPI platform to make payments.

“When we look at the current UPI, there are about 250 million registered with us now…. and CIC will reduce only when a third of the population starts using digital payment alternatives”, says Dilip Asbe, MD and CEO of NPCI. Findings from the Global Findex 2021 published by the World Bank reveal that we still have an unbanked adult population of 22 per cent and only 35 per cent of adults used their accounts to make or receive a digital payment in 2021. Further, India shows a significant gender gap in payment use, as women are 13 per cent less likely than men to make or receive digital payments.

Unaccounted money

The use of unaccounted money — mainly cash — in our electoral system has been well-documented. Record seizures amounting to ₹6.6 crore in cash were made in one single assembly constituency in Telangana a few months back. In the recently conducted elections in Himachal Pradesh (HP) and Gujarat, the EC had stated that there had been a five-fold increase in seizures in HP compared to that in the 2017 polls. The Supreme Court was recently told by the EC that it was “seriously concerned about increasing use of money power in elections.”

Real estate deals are difficult to cut without cash. A survey recently conducted by LocalCircles, a community social media platform, revealed that property transactions were the top area of cash usage. As many as 8 per cent of the respondents surveyed had paid over 50 per cent in cash. Nearly 15 per cent had paid 30-50 per cent of the transaction amount in cash; 13 per cent had paid 10-30 per cent cash and remaining 8 per cent had paid up to 10 per cent of the value in cash, bringing the total to 44 per cent who had paid cash in property deals.

Undertaking cash transactions to avoid payment of GST is all very familiar. The Central Board of Indirect Taxes & Custom has booked over 8,200 cases involving revenue over ₹62,000 crore since the inception of GST till date.

The culture of cash has deep roots in India and tax avoidance became a habit among its wealthiest and well-off chiefly because of the steeply progressive tax rates in the earlier decades. Habits like hiding income from the government to avoid paying taxes change slowly. Worse still, it may not change given the direct tax rates and the compliance burden imposed by GST.

Paper currency has many virtues: preserving privacy, dealing with power and network outages and other emergencies, security from cybercrime, providing a medium of exchange for unbanked low-income individuals and achieving real-time clearing of transactions. There is still no fully satisfactory substitute for cash.

“Phasing out currency may open a door to unrestricted negative rates that central bank may someday be tempted to walk through”, writes Kenneth Rogoff, a Harvard Professor and former Chief Economist of the IMF, in ‘The Curse of Cash’. Currency note is a product of history, nay it is history. It is too early to write its epitaph.

The writer is a former central banker. Views expressed are personal