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UPI Vs ATM: India’s Digital Revolution
22 Sep 2025
The Indian economy has seen rapid spread of digital payments across all income groups.
Formalisation of the Economy
Informal Economy: The Informal Economy consists of unregistered firms and workers who are not in government records and do not pay tax.
Formal Economy: The Formal Economy includes registered firms that pay taxes and whose employees are covered by provident fund schemes such as EPFO and ESI.
Achieving Formalization:Formalization can be achieved through three ways: firms registering themselves (e.g., GST), workers gaining social security coverage (e.g., EPFO/ESI), and digital transactions.
Role of Digital Payments: When firms use digital payment methods, they automatically enter government records, contributing significantly to formalization. The Unified Payments Interface (UPI) has been a key driver of this third method.
The Growth of UPI
UPI Transaction Volume: Between April and June 2025, the Unified Payments Interface (UPI) recorded 34.9 billion transactions.
Total Transaction Value: The total value of these transactions was ₹20.4 lakh crore, representing 40% of India’s total private consumption, up from 24% two years prior.
Sectoral Penetration:UPI is used across all sectors, from small vegetable stalls to filling stations, utility payments, and clothing purchases. Approximately two-thirds of all digital transactions now occur via UPI.
High-Value Transactions:UPI handles substantial financial amounts, including ₹857 crore in loan payments (July 2025) and nearly ₹61,000 crore invested in the share market and mutual funds.
About the Cash Paradox
Cash Paradox: The Cash Paradox is the phenomenon where, despite high levels of cashless transactions via UPI, the overall cash in the economy has not drastically reduced.
Global Trend: Other developed nations, like Germany, also maintain high cash levels alongside extensive digital usage.
Precautionary Saving: People continue to hold cash at home as a safety net against uncertainty, performing a “store of value” function.
Informal Big Transactions:Cash remains dominant in the black market and for large deals such as real estate, where a substantial portion of payments is made off the books.
Evidence of Change: Although total cash hasn’t fallen dramatically, consumer behaviour is shifting. The number of ATM transactions has halved between 2019 and 2025, even as the economy doubled in size.
Cash used for saving purposes has dropped from 12.5% (2020–21) to 3.4% (2023–24), as people increasingly prefer investing in mutual funds or the share market over storing cash at home.
India’s Digital Payments Shift– From Cash-Heavy to Less-Cash Economy
Inflection Point: Given the integrated data—high UPI usage, low ATM withdrawals, and reduced share of cash in savings—India is now at an inflection point, which in mathematics refers to a point where a curve’s direction changes.
Transition to Less Cash Economy: The currency in circulation is expected to decline, indicating that India will soon transition from a cash-heavy economy to a “Less Cash” economy, driven by the adoption of digital payment systems like UPI.
Advantages of Digital Payments in Formalisation of the Indian Economy
Data as a Tool for Formalisation: Nandan Nilekani, architect of Aadhaar and UPI, stated that “Data is the new oil.”
UPI has converted every small transaction into data, serving as the most effective tool for formalisation.
Simplification for Citizens: Digital transactions have simplified life for citizens by easing payments and financial access.
Reduced Cash Dependency: Increased digital adoption has lowered reliance on cash in day-to-day transactions.
Broadened Tax Base: Formalisation of transactions has expanded the tax base, making tax evasion more difficult.
Way Forward
Curbing the Black Economy: The government must gain control over the black economy, particularly in real estate and elections, to further reduce cash usage.
Promoting Financial Literacy: Citizens need to be encouraged to invest or deposit money in banks rather than storing cash at home where it loses value.
Tracking Currency-GDP Ratio: The currency-to-GDP ratio has already declined from 12.9% in 2022 to 10.9% in 2025, and continued monitoring will be essential for sustaining formalisation.
Comprehensive coverage with a concise format Integration of PYQ within the booklet Designed as per recent trends of Prelims questions हिंदी में भी उपलब्ध
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Comprehensive coverage with a concise format Integration of PYQ within the booklet Designed as per recent trends of Prelims questions हिंदी में भी उपलब्ध
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