Sorry, cash isn’t going away anytime soon

The RBI’s annual report, released on Tuesday, says that as of March 2023, the currency in circulation (CIC) —the cash you and I have in our wallets, in our almirahs, and perhaps even under or inside our mattresses in a few cases—stood at 12.7 per cent of the GDP. The CIC also includes cash with banks.

Now, the CIC as of March 2022 and March 2021 had stood at 13.4 per cent and 14.4 per cent of the GDP, respectively. The main reason why the CIC reached a high of 14.4 per cent of GDP in March 2021 was that the GDP contracted in 2020-21 in comparison to 2019-20, pushing up the ratio.

The RBI would like us to believe that the CIC to GDP ratio, or the cash in the financial system, has fallen because “the digital payments in India” have “increased significantly”.

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Indeed, in comparison to the pandemic years, the cash in the financial system has fallen. Nonetheless, if we look at the period of 10 years before demonetisation, it averaged 12.1 per cent. Also, during this period, the cash varied from 11.6 per cent to 12.6 per cent. These figures are lower than the most recent reading of 12.7 per cent.

It’s too early to conclude that the rise of digital payments has led to cash in the financial system coming down. Common sense suggests that that should be the case, given that so many transactions all around us are now happening digitally, with the rise of the unified payments interface (UPI) system. Nonetheless, a bulk of these transactions are small transactions of up to Rs 100-200 in value.

The larger transactions continue to happen in cash. Many doctors insist on being paid in cash. So, do quite a few small hospitals, and even mom-and-pop retailers when the amounts aren’t small one-time purchases. Some of this cash ends up with the distributors and wholesalers.

The real estate sector continues to be a huge cash guzzler, especially in situations where the market price is higher than the circle rate. Of course, a lot of cash paid to the builders ends up with politicians who use it to fight elections. And as long as politicians need cash to fight elections in India, cash isn’t going anywhere. So, all the talk about digital transactions driving India towards a cashless society is basically bunkum.

Also, it needs to be understood that cash as a part of the financial system continues to remain high even in the rich/developed parts of the world. Take the Euro area—countries which are a part of the European Union and have adopted the euro as their currency—the CIC to GDP ratio, as of December 2022, stood at 12.1 per cent of GDP -- similar to India’s long-term average before demonetisation. Or take the case of Japan, where the cash in the financial system continues to be in the high teens as a percentage of GDP. Switzerland is another good example.

On the flip side, Nigeria, which is one of the most corrupt countries in the world, has a very low CIC to GDP ratio. And so do Sweden and Norway. At the same time, Sweden and Norway happen to be among the least corrupt countries in the world. So, for the corrupt to be corrupt, the amount of cash going around in the financial system isn’t really a problem.

Finally, cash is one wheel that keeps democracy going, and I am not being sarcastic here. Take the case of China. As Brett Scott writes in Cloudmoney: “The Chinese central bank…can gain access to the online payments data of people… to get more oversight of mobile payments.” And how does this help the central bank? As Scott writes: “This…coincides with the early stages of the Chinese Social Credit System, which is an attempt to bring together a constellation of currently fragmented citizen monitoring systems (from credit scores to traffic offence registers) into a totalising whole.” This is as Orwellian as it can get with Big Brother always watching.

To conclude, the rise of digital payments is equated with the end of cash. This is an equivocation fallacy, where those who benefit from the end of cash, have muddled our minds by equating the rise of digital payments to the end of cash. It is understandable why governments, financial institutions and many VC-backed firms want this, given that the quality of data they will have access to will improve dramatically. However, as citizens, this should have us worried. As Scott puts it: “Lifts have their use, but no responsible property developer would ever only install a lift without having emergency stairs.” The same is true about digital payments and cash.