In a bold move in November 2016, India invalidated two banknotes, comprising a staggering 86% of the total currency in circulation. Termed “demonetisation,” the government aimed to combat corruption and rein in undeclared wealth. Despite causing chaos outside banks and ATMs, Prime Minister Narendra Modi staunchly defended the decision, asserting that it had successfully reduced undeclared wealth, boosted tax compliance, and enhanced transparency.
Seven years on, cash remains resilient, challenging the necessity of the contentious currency ban. The Reserve Bank of India reported a growth of over 16.6% in cash circulation during 2020-21, surpassing the average annual growth rate of 12.7% over the previous decade. Simultaneously, digital transactions, particularly through the Unified Payments Interface (UPI), soared, reaching a trillion dollars last year—equivalent to a third of India’s GDP.
This coexistence of expanding cash use and surging digital payments has created a “currency demand” paradox, as acknowledged by the RBI’s latest annual report. While cash withdrawals have declined, cash continues to serve as a valuable precautionary financial saving for most Indians, especially for minor purchases, according to a Local Circles survey. Factors such as falling interest rates, a large informal economy, and increased direct benefit cash transfers during the pandemic have contributed to the enduring preference for cash. Additionally, unaccounted-for cash continues to play a role in political financing during elections, and real estate transactions in India still predominantly involve cash payments, as revealed by a recent LocalCircles survey.
This concurrent growth in both physical cash and digital currency is not unique to India. The European Central Bank observed a similar trend, labeling it the “paradox of banknotes,” noting that despite the rise of digital transactions, the demand for physical banknotes has consistently increased. In this global context, while digital payments are on the rise, cash remains an integral part of daily life for many Indians,symbolizing stability and resilience.
