Seven Years of Demonetization: Impact on Cash Usage, Digital Payments, and Economy

November 9, 2023

GS Paper III Indian Economy

Context:

The demonetisation exercise recently completed 7 years.

Seven Years After Demonetization: Digital Growth Amidst Surging Cash Circulation in India:

Seven years after Demonetization, UPI (Unified Payments Interface) and other digital payment mechanisms have reduced the number of cash transactions, but cash in circulation in the Indian economy has nearly doubled, a survey has found.

About Demonetization: It is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change in national currency.

The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins

About Demonetization in India:

Tackling black money: Demonetisation, announced in November 2016, was undertaken to weed out black money and nudge people to change their method of payment from cash to digital.
Stripping higher order currency: It included the scrapping of Rs 500 and Rs 1,000 notes, representing over 86 per cent of the currency in circulation by value.
Impact on black money: The Reserve Bank of India (RBI) announced that 98 percent of Rs 500 and Rs 1,000 notes were returned to the banking system, attracting mixed reactions from citizens, experts as well as politicians.
- Nearly seven years later, in 2023, the RBI announced its decision to withdraw the Rs 2,000 notes.
- As of October 31, 97 per cent of all Rs 2,000 notes in circulation have been returned.

India’s Digitalization Journey: UPI’s Dominance, Global Recognition, and the Dual Story of Cash Transactions

Rise in Cashless payments: As per a recent survey by LocalCircles, after the demonetisation, the circulation of cash in the Indian economy and the adoption of UPI has grown.
- In May 2023 for instance, UPI accounted for over 78 per cent of total retail digital payments in India.
- Only every four Indians used cash for over 25 per cent of their monthly household purchases in the past 12 months.
- As per the Hansa Research’s 2023 DigiPay CuES survey, 58 per cent of consumers have reduced cash transactions since the pandemic.
Global recognition: India’s expertise in digital transactions is gaining recognition in both Asian and European countries.
Increase in Cash transactions: While UPI and other digital payment mechanisms have reduced the number of cash transactions, cash in circulation in the Indian economy has increased from 17 lakh crores in November 2016 to 33 lakh crores in October 2023.
Sectors with prominence of cash transactions: The survey revealed that 82 per cent cash was used for purchases in the last one year to pay for groceries, eating out and food delivery.
- As per the survey, 76 per cent of those who bought a property in the last 7 years had to pay a component of the price in cash.