Cash usage continues to rise even after 5 years of demonetisation, at an all-time high

5 years of Demonetisation: Five years after the announcement of demonetisation by the Government of India on November 8, 2016, the cash with the public continues to increase. Cash still remains the preferred method of payment. According to media reports, cash with the public remained at a record high of Rs 28.30 lakh crore for the fortnight ended October 8, 2021. This is 57.48 per cent more than the cash available on November 4, 2016 at Rs 10.33 lakh crore. If you compare this with the cash available on November 25, 2016 for the announcement of demonetisation, then this increase is 211 percent. The cash available on November 25, 2016 was 9.11 lakh crores.

According to media reports, according to the Reserve Bank of India (RBI) data, for the fortnight ended October 23, 2020, the cash with the public before the Diwali festival increased by Rs 15,582 crore. It grew by 8.5 per cent or Rs 2.21 lakh crore on a year-on-year basis.

After the withdrawal of Rs 500 and Rs 1,000 notes in November 2016, the currency with the public, which stood at Rs 17.97 lakh crore on 4 November 2016, declined to Rs 7.8 lakh crore in January 2017. Although cash in the system continues to grow, the government and RBI have insisted on a “less cash society”, digitization of payments and a ban on the use of cash in various transactions.

Cash increased after Kovid crisis
The increase in cash with the people was mainly seen in 2020 when the government implemented strict restrictions to deal with Kovid. Countries around the world announced lockdown in February and the Indian government also prepared to announce a lockdown, meanwhile people started hoarding cash to meet their grocery and other essential needs.

As per the definition of Reserve Bank of India, currency with the public is calculated after deducting the cash from the total currency circulation (CIC) with the banks. CIC refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.

The sudden withdrawal of notes in November 2016 shook the economy, slashed demand, crippled businesses and led to a nearly 1.5 percent drop in gross domestic product (GDP) growth. After demonetisation, many small units were badly affected and closed down. It also created liquidity crunch.

The cash to GDP ratio has been around 10-12 per cent till FY20. However, the CIC to GDP is expected to grow by 14 per cent by FY25, due to increased liquidity in the ecosystem after the Covid-19 pandemic.

RBI’s own view of CIC suggests that there is little or no correlation between CIC and digital payment penetration and that CIC will grow in line with nominal GDP. Although digital payments have been growing slowly in recent years, data shows that the currency in circulation to GDP has grown in line with overall economic growth during this period, according to a study on digital payments by RBI.

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