Cash's the king despite rise in digital payments

Mumbai: As the country completes five years after demonetisation on November 9, 2021, cash in circulation in India has surged to a record Rs29.4 lakh crore as on October 29 as per Reserve Bank of India (RBI) data. As a percentage of gross domestic product (GDP), it rose to a record 14.5 per cent for the fiscal 2020-21. The surge comes despite increased penetration of digital payments.

It is a noteworthy fact is that RBI's digital payments index, which has 2018 as the base year at 100, has risen to 270. The index also captures the spread of digital, taking into account growth in the payments infrastructure. Recent data shows although there has been a resurgence in economic activity, there has not been a proportionate increase in currency in circulation. The high level of digitisation has given the economy capacity to grow without a corresponding increase in cash.

Anand Kumar Bajaj, founder, MD & CEO, PayNearby, a leading fintech and branchless banking network of India, says: "Demonetisation brought about transformational changes in the way India deals with money. It was pivotal in steering a permanent increase in using digital payments that, in turn, has made India a less cash-based economy. The digital payments market is far more robust today than it was five years ago – an effect that was seen even during and post the pandemic. During the pandemic, the government offered direct assistance to the financially disadvantaged, and its advocacy of digital payments led to the advent of alternative payment options in the fintech space."

Demonetization has enabled the masses to transact through digital platforms, including contactless payments like touch-based cards, UPI, QR payments, etc. From a macro perspective, demonetisation also ushered in structural changes in the industry, such as fast-tracking, the adoption of fintech solutions and fostering collaboration between banks and fintechs - all of which will have a significant and long-term impact on the economy, he added.

It was on November 8, 2016, when the Government of India announced the demonetisation of all Rs 500 and Rs 1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new Rs 500 and Rs 2,000 banknotes in exchange for the demonetised banknotes. While making an announcement, Prime Minister Narendra Modi had claimed that the action would curtail the shadow economy, increase cashless transactions and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.

The pandemic has impacted digital transformation in a range of ways. Payment links via SMS or WhatsApp have emerged as the front runner in contactless payments

Ketan Patel, CEO, Mswipe said, "Small businesses especially Kirana stores began to truly consider cashless operations only after demonetisation when they realised that customers lacked cash in their hands and their sales started to get impacted.

Since then, they have started to invest in a digital payment infrastructure which allows them to diversify their means of collecting payments. The pandemic further gave this a push and we

witnessed increased adoption of contactless payments. At Mswipe, merchants saw a surge in digital payments through with a total of 1,103 cr under Pay By Link service and 2,355 cr under UPI payments for the duration Oct 2020 to Sep 2021 alone."

With time, customers as well as merchants have started to realise that contactless payments offer convenience, flexibility as well as a seamless purchase experience. However, this adoption is largely witnessed only in metro cities while smaller towns still lack awareness as well as infrastructure to adopt digital payments.

In the years to come, he went on, with technology innovation by Fintech companies, we are only set to see a surge in the acceptance of digital payments.

The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy. People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

According to a 2018 report from the Reserve Bank of India, approximately 99.3 per cent of the demonetised banknotes, or Rs 15.30 lakh crore (15.3 trillion) of the Rs 15.41 lakh crore that had been demonetised, were deposited with the banking system, leading analysts to state that the effort had failed to remove black money from the economy. The move reduced the country's industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost. The

move also saw a significant increase in digital and cashless transactions throughout the country.

Initially, the move received support from several bankers as well as from some international commentators. The move was also criticised as poorly planned and unfair, and was met with protests, litigation, and strikes against the government in several places across India.