Indians are always comfortable with cash, no matter how digitalized the world becomes and this has been shown by the people. After demonetization also, the population seems to use cash which has also resulted in cash usage records increase in Gross Domestic Product after five years.
What led to the increase in GDP?
The first basic factor of why cash has record growth is because cash grows faster than normal GDP. The currency in circulation as a percentage of GDP is the key indicator of measuring cash in the system. As the economy grows, the currency also grows in the system.
The global pandemic i.e, the covid 19 has resulted in more usage of cash. According to data, the cash withdrawals have been growing at 16-17 percent year-on-year. In the last 18 months, people were also hoarding cash for medical and other emergency needs.
The second reason is the weak link coming from small cities having fewer accessibility problems, with lower income which makes a barrier in weak digital payments.
The vanishing of Rs. 2000 note acts as a major factor of cash usage after demonetization. Now no longer, high-value cash is found in ATMs or the market, making it easier for people to make or do the payments.
The other factor, which led to an increase in GDP is inadequate ATMs and POS machines.
The growth of ATMs has been abysmal for many years. For instance, there were around 2.13 lakh ATMs installed for the period ending March 2021 against 2.08 lakh ATMs five years ago. This lack of ATM infrastructure, especially in smaller towns, cities, and villages, forces people to withdraw high cash to keep their visits minimum as it involves time and cost to travel.
The point of sale (POS) machine infrastructure for debit and credit cards is also very low. While UPI payments are gaining momentum, there are security issues as people feel unsafe to link their bank accounts.
Again, The RBI-backed National Payments Corporation of India (NPCI) promotes retail payments in the country. The path-breaking tool of Unified Payments Interface (UPI) has already emerged as a universal payment mode for small value payments. But there are capacity issues and risks as UPI is dominated by Google pay and Phonepe. While the NCPI is working thoroughly to reduce risk in a market economy.
Post pandemic and usage of cash
As nations around the world announced lockdowns in February and the Indian government also prepared to announce lockdown, people began accumulating cash to meet their grocery and other essential needs that were being mainly catered by neighborhood grocery stores.
The post-pandemic or the global phenomenon that led to the increase in currency in circulation has been a global phenomenon, described as a ‘dash to cash’ under extreme uncertainty. There has been a rise in digital transactions. Besides this, there has also been a drop in fake currencies. Indicators show that the informal economy has shrunk to 20% of GDP from 40% a few years ago, according to SBI group chief economist Soumya Kanti Ghosh.
Thus, According to the Reserve Bank of India (RBI) data, for the fortnight ended October 23, 2020, the currency with the public rose by Rs 15,582 crore ahead of the Diwali festival. It rose by 8.5 percent, or Rs 2.21 lakh crore, on a year-on-year basis. Cash in the system has been steadily rising, even though the government and the RBI have pushed for a “less-cash society”, digitization of payments, and imposed restrictions on the use of cash in various transactions.