UPI Vs ATM: India’s Digital Revolution

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.

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