Cash still rules in India despite policies that were aimed at curbing its use

During demonetisation (2016), I heard several anecdotal stories about how the parents and grandparents of my friends and colleagues found a cache of hidden cash. The older generation had secretly tucked away dozens of older notes of ₹1,000 and ₹500 in jewellery boxes, between books, in trunks, and in odd hiding places that included steel utensils. For that generation, as also for many of us, cash is the comfort zone. We are happier when we have a few notes in our pockets and in our homes.

Imagine this was the situation 25 years after economic reforms, which aimed to enable most citizens to use bank accounts, cashless transactions, and plastic cards. Over time, these included digital deals that could transfer money at the click of a few buttons on the laptops and mobile phones. Yet, as demonetisation proved, cash was king. In the past few years after that disruptive event, the situation is the same. Despite digital democracy, we are still obsessed with paper money.

Nothing tells this story better than what happened in the past four years, between November 2016, when demonetisation took place, and January 2021, when the COVID-19 shock waves subsided. According to experts, the cash in the system, or currency notes in circulation, amounted to just over 12% of the GDP in late-2016. This dropped appreciably to less than 9% by March 2017. This was because we were forced to deposit the older ₹1,000 and ₹500 notes in our bank accounts.

In an unexpected fashion, the figure climbed over the next 36 months, and was back at 12% of GDP by March 2020. The viral attack exacerbated the situation. According to RBI data, currency notes in circulation grew by 13% between March 31, 2020, and January 1, 2021. The demand for cash, noted the RBI, was driven by “precautionary motive in uncertain times”. It added that Indians’ preference for cash was legendary, which got “reinforced in these circumstances”.

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What is surprising is that government policies, which aimed to curb the use of cash, encouraged the traditional practice. Demonetisation was followed by the introduction of notes of a higher denomination — ₹2,000 instead of the earlier ₹1,000. This implied that those who swore by cash, and were in the habit of storing it, had to keep aside ₹2,000 notes, rather than the earlier ₹1,000 ones. This possibly increased the amounts that were stashed away for rainy days.

Similarly, GST desired to curb tax evasion and avoidance, and aimed to tax the consumption end, rather than the production one. While the earlier regime encouraged a smaller set of producers to behave illegally and unethically, the GST rules pushed a larger base of retailers to profitably sell goods without bills and invoices. At the same time, small and medium businesses, apart from those in the unorganised sector, use cash for most of their purchases, including payments of salaries.

However, there are two myths that need to be dispelled over the overuse of paper notes in an economy. The first is the perception that if there is more cash in the system, it implies excessive corruption. This was indeed the case in the 1970s, 1980s, and even the 1990s – remember the ₹ 10 million that was stashed in a suitcase that was allegedly given to a Prime Minister? And, the millions that were found at the house of a minister in the latter decade. This is not true anymore, not in this century.

Several economists contend that the dishonest no longer keep their ill-gotten wealth in cash. In fact, Vivek Kaul, a Mumbai-based economist, feels, “The corrupt hold just 5% of their wealth in cash. A bulk of the wealth is held in the form of gold, land and flats.” More important, bribes these days are not given in notes, but in the form of assets. One of the best ways is to make illegal payments in the form of shares, whose valuations zoom within a few months and years.

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Modern theories assert that the more notes there are within the system, the healthier is the state of the economy. Cash keeps the machinery running. This is especially so in Asia, Latin America, and Africa. In the same vein, one can stipulate that the use of cash is related to traditions and beliefs. In economies that are rattled by financial irregularities and disruptions, people find it safer to hoard cash. The same is true for nations that thrive on neighbourhood businesses.

The second fiction that needs to be clarified is that mature economies and younger nations use less cash. In Japan, the currency in circulation, as a percentage of GDP, is almost double that of the figure for India. The use of notes in Singapore almost doubled between 2006 and 2016, and reached India’s level. During the same decade, although the percentages were lower in the case of Germany, Netherlands and the US, they showed upward trends, and threatened to reach India’s level.

Although India has one of the youngest populations in the world, digital is more of a state of mind. Over the past few years, financial inclusion has helped rural people to have bank accounts. But these are not used for cashless deals, but to withdraw and use cash. Similarly, the users of debit cards largely use the plastic to take money out from ATMs, and not to pay for their purchases and consumption. The use of payment gateways has taken off, but is restricted in certain geographies.

Fortunately, things have changed, and will evolve in the future. Experts feel that in cities and big towns, people are graduating towards the use of e-wallets to pay smaller bills (water and electricity) and for grocery purchases, and plastic cards for payments like EMIs and consumer appliances. In addition, the younger people are more adept at digital payments, even as the older generation stocks traditional cheques and cash. The middle-aged are caught in between.

The fact of the matter is that governments should not bother about the use of currency notes, and the country’s central bank should pump in cash as and when there is a semblance of a shortage. As long as the money travels through regular financial channels, like banks, it does not matter if it was earned or spent in cash. As long as the paper money leaves a distinct paper trail, it becomes a part of the monetary system. And, this is exactly what governments need to desire.

(With 35 years of experience, Alam Srinivas, an independent journalist, writer and researcher, has worked for premier global and Indian media organisations. He has authored several books on business and sports corruption)