Lingering notes: Cash seems to have a logic-defying appeal. Digitisation may eventually lessen that

Source: The post is based on the article “Lingering notes: Cash seems to have a logic-defying appeal. Digitisation may eventually lessen that” published in “The Times of India” on 5^th July 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization of resources, and growth.

Relevance: To understand India’s increasing cash holding.

News: In the last two years, the volume of UPI transactions rose over threefold to 46 billion in 2021-22. But concurrently, Indians still hold a relatively large share of the cash.

Why India’s cash holding is significant, and what are the global trends?

RBI estimates the annual currency requirement based on the forecast economic growth rate, inflation rate and disposal of soiled notes, among other things.

Present India’s cash holding is one of the highest in the world in relation to GDP. For instance, India’s currency per capita of Rs 22,752 is about 13% of per capita GDP. Currency in Circulation (CiC) as a proportion of GDP has also grown from 8.7% in 2016-17 to 13.7% in 2021-22. 

A paper by ADB on the trend over 2000-18 in 11 advanced economies showed that Japan, Singapore, South Korea and the US showed a rising trend in CiC to GDP ratio. However, Denmark, Norway and Sweden deviated from this trend.

What is the reason for increased cash holding in India?

1) Big shocks such as Covid or the 2008 financial crisis trigger risk aversion among individuals. A consequence is an increase in cash holding, 2) Since 2019, India’s inflation trajectory has trended upwards. This may partly explain the increase in CiC to GDP ratio to the pre-demonetisation level.

What should be done to reduce cash holding?

RBI should increase its focus on the digital payments landscape. Its policies should continue to be transformative at the grassroots level. Progress in digital mode will eventually loosen the grip of physical currency in payments.