Three years after the government announced the demonetisation of Rs 500 and Rs 1,000 notes on November 8, 2016, the currency in circulation (CIC) has jumped by 25.63 per cent to a record high of Rs 22.57 lakh crore as on November 1, 2019, from Rs 17.97 lakh crore as on November 4, 2016.
The Rs 4,60,000-crore rise in the currency in the system in the past three years indicates that cash is still ruling the roost in the financial system despite the big push in digital transactions and less cash economy. CIC has increased by Rs 2,84,799 crore in the last 12 months alone, as per the data available from the Reserve Bank of India (RBI).
After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, CIC fell to around Rs 9 lakh crore in January 2017. Cash in the system has been steadily rising even though the government and the RBI pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions.
After the notes were withdrawn from circulation on November 8, 2016, nearly all of that money came back to the banking system. The RBI received Rs 15.310 lakh crore of Rs 500 and Rs 1,000 notes, or 99.3 per cent of the Rs 15.417-lakh crore worth of notes, which were in circulation as on November 8, 2016.
Nowhere near a ‘less cash’ society
The Rs 4,60,000-crore rise in the currency in the system in the past three years indicates that cash is still ruling the roost in the financial system despite the big push in digital transactions and less cash economy. Cash in circulation has increased by Rs 2,84,799 crore in the last 12 months alone, as per the data available from the Reserve Bank of India.
However, a senior banker said the rise in CIC in absolute numbers is not the reflection of reality. “What needs to be taken into account is the currency to GDP ratio, which had come down after demonetisation. But this would have gone up of late with the decline in the growth,” he said.
According to a recent RBI study on digital payments, although digital payments have been growing gradually in recent years, both in value and volume terms across countries, the data suggests that during the same time CIC to GDP ratio has increased in consonance with the overall economic growth.
“Several anomalies, however, are visible in the trend: first, the spread and intensity of use of digital payments does not seem to have any specific relationship with how developed a country is,” it said.
“An increase in digital payments to GDP ratio over a period of time does not seem to automatically imply a fall in the currency to GDP ratio of the country,” the RBI study said. Currency to GDP ratio, which dipped below 10 per cent after demonetisation, had gone above 12 per cent as of March 2018.
Moreover, the RBI’s Vision Document on payment systems says, “While no specific target is considered for CIC, the enhanced availability of PoS (point of sale) infrastructure is expected to reduce demand for cash and thus over time achieve reduction in CIC as a percentage of GDP.”
The sudden withdrawal of notes in November 2016 roiled the economy, with demand falling, businesses facing a crisis and GDP growth declining nearly 1.5 per cent. Many small units were hit hard and shut shutters after the note ban. It also created a liquidity shortage.
Cash transactions through ATMs were also rising steadily. From Rs 2,00,648 crore in January 2017, debit card transactions through ATMs and PoS terminals rose to Rs 2,95,783 crore in January 2018, Rs 3,16,808 crore in January 2019 and Rs 3,45,492 crore in August 2019, as per the RBI data. Significantly, as much as Rs 2.87 lakh crore was cash withdrawal through ATMs in August.
Ramaswamy Venkatachalam, MD-banking and payments, FIS, said: “The real challenge in the digital payments network is to create a trustworthy robust ecosystem for our consumers. While we are making efforts to move towards a cashless economy, we have to ensure that we back the innovations with robust security infrastructure.
While we need innovations to continue our march towards a cashless economy, we have to ensure secure and safe transactions to keep the transaction volume growing.”
Experts are expecting a boom in the digital payment industry. “From being primarily a cash-obsessed economy, India’s digital transformation story is new but exciting. The evolution of the industry has been triggered by increasing internet and smartphone penetration,” said Jasal Shah, managing director and CEO, Velocity MR.
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