Cash Remains Dominant Despite India’s Digital Payment Growth

Source: Indian Express
GS III: Indian Economy

Why in the News?

Ten Years after demonetization, India’s dependence on cash remains significant despite the growth of digital payments. Currency held by the public has more than doubled, while the currency-to-GDP ratio has returned to its pre-demonetization level, raising questions about its long-term effectiveness in reducing cash dependency.

News in Brief

• On November 8, 2016, the Union Government announced the demonetization of existing ₹500 and ₹1,000 currency notes, which accounted for approximately 86% of the currency in circulation at that time.
• The measure aimed to curb black money, counterfeit currency and illegal financial activities while promoting digital payments and formalization of the economy.
• Despite the expansion of digital transactions, currency held by the public increased from ₹17.97 lakh crore in November 2016 to ₹42.55 lakh crore as of October 15, 2026.
• India’s currency-to-GDP ratio, which declined after demonetization, has recovered to 12.1% in 2025–26, indicating the continued importance of cash in the economy.

Demonetization and its Objectives

• On November 8, 2016, Prime Minister Narendra Modi announced that the existing ₹500 and ₹1,000 currency notes would cease to be legal tender from midnight.
• These notes represented approximately 86% of the currency in circulation at that time.
• The major objectives included:- Curbing black money and corruption.
  • Eliminating counterfeit currency.
  • Restricting the financing of illegal activities.
  • Encouraging digital payments and financial inclusion.
  • Promoting formalization of the Indian economy.

Impact on the Economy

• The sudden withdrawal of high-value currency created a severe cash shortage, disrupting everyday economic activities.
• Small businesses, particularly those dependent on cash transactions, faced difficulties due to reduced liquidity.
• Long queues at banks and ATMs affected individuals and businesses.
• The disruption in demand contributed to economic difficulties, with GDP growth declining by nearly 1.5 percentage points.
• Many small businesses experienced financial stress and some were forced to shut down.

Recovery in currency circulation

Despite the initial decline, currency circulation gradually recovered.

• Currency held by the public declined from ₹17.97 lakh crore on November 4, 2016, to ₹7.8 lakh crore in January 2017.
• It subsequently increased to ₹42.55 lakh crore as of October 15, 2026.
• This represents an increase of nearly 137% over the pre-demonetization level.
• Currency in circulation has continued to increase alongside economic growth.

India’s Currency-to-GDP Ratio

• India’s currency-to-GDP ratio declined to 10.7% in 2017-18 following demonetization but gradually increased to 14.4% in 2020-21, largely due to precautionary cash holdings during the COVID-19 pandemic.
• It subsequently level of 12.1% recoded in March 2-16.
• This indicates that cash continues to remain important in India’s economy despite the expansion of digital payments.

Why does cash continues to remain important?

Despite the rapid expansion of digital payments, cash continues to play an important role in the Indian economy due to several factors.

• Economic growth: Higher economic activity increases the demand for currency to facilitate transactions.
• Preference for physical currency: People continue to prefer cash for everyday transactions and personal financial security.
• Informal economy: A significant section of small businesses and informal workers continues to depend on cash.
• Rural dependence: Limited digital infrastructure and varying levels of digital literacy sustain the use of physical currency.
• Precautionary savings: Uncertainty encourages households to maintain cash reserves.

Impact of COVID-19 on cash holdings

• Currency holdings increased sharply during 2020-21 following the nationwide lockdown.
• Uncertainty and restrictions encouraged households to accumulate cash for essential requirements.
• Increased spending on groceries, medical bills and other necessities contributed to higher cash demand.
• This pushed the currency-to-GDP ratio to 14.4% in 2020-21.

India’s position compared to other countries

India’s currency-to-GDP ratio remains relatively high compared to several major economies.

The comparison indicates that physical currency continues to be an important component of India’s monetary system, even as digital payment infrastructure expands.

Digital Payments in India

India has witnessed significant growth in digital payment infrastructure through initiatives such as;

• Unified Payments Interface (UPI): Enables instant bank-to-bank transactions through mobile applications.
• RuPay: India’s domestic card payment network.
• Aadhaar Enabled Payment System (AePS): Facilitates basic banking transactions using Aadhaar authentication.
• Immediate Payment Service (IMPS): Enables instant electronic fund transfers.
• Digital India Programme: Promotes digital infrastructure and digital service delivery.

Significance for the Indian Economy

• Digital payments promote financial inclusion by improving access to formal financial services.
• They enhance transparency through traceable transactions, encourage businesses to join the formal economy and improve tax compliance through better financial records.
• They also reduce transaction costs and make payments more convenient, contributing to economic efficiency.

Challenges and Concerns

• Despite the growth of digital payments, continued dependence on cash reflects the persistence of informal economic activities.
• Uneven digital literacy and internet connectivity, particularly in rural areas, limit adoption.
• Cyber fraud and digital payment vulnerabilities also affect public confidence.
• Further, small businesses and vulnerable sections face difficulties in transitioning to digital platforms.
• The continued rise in currency circulation raises questions about the long-term effectiveness of demonetization in reducing cash dependency.

Way Forward and Conclusion

India should strengthen digital payment infrastructure, particularly in rural and underserved areas, while improving digital literacy and awareness of safe online transactions. Robust cybersecurity mechanisms, wider banking access and simplified tax compliance can further encourage small businesses to adopt digital payments and become part of the formal economy.

Demonetization highlighted the challenges of reducing cash dependency in a largely informal economy. Rather than replacing cash entirely, India should adopt a balanced approach that promotes digital transactions, financial inclusion and transparency while ensuring the continued availability of physical currency.

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