Six years after demonetization, cash has roared back in India

The circulation of currency in India has jumped to a record high
Six years after demonetization, cash has roared back in India
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Six years ago, India’s demonetization campaign tried to erase hoards of unaccounted cash wealth by forcing Indians to exchange old currency notes for new ones. Instead, it crippled the economy, caused difficulties to millions of Indians, and failed in its chief objective.

Indians continue to hold huge stocks of undeclared, untaxed wealth. One measure of this is the volume of cash payments made as part of real estate transactions. In a survey conducted by the community-led social media platform LocalCircles, 44% of respondents who bought property over the last seven years said that they paid partly in cash.

The survey, which polled roughly 32,000 people across 342 districts in India, also revealed that 35% of respondents did not want to disclose how they paid for their property.

“Unfortunately, property transactions is one area where there have been literally zero reforms, so bribery is also rampant,” LocalCircles said in the survey document. “The original transaction of the land or property continues to be sizably in cash, as property owners want to avoid paying full taxes involved in the deal.”

India’s currency in circulation is at a record high

The volume of digital payments accelerated in India during the covid-19 pandemic, but a large section of the public still prefers to deal in cash.

In the fortnight ended Oct. 21, circulating currency in public hands stood at a record high of 30.88 lakh crore rupees (pdf) ($377.9 billion), according to data from the Reserve Bank of India (RBI). This number is 72% higher than the Rs 17.97 lakh crore registered on Nov. 4, 2016, a few days before demonetization was announced.

The jump is primarily driven by the need for cash by people in 2020 when the government imposed a stringent lockdown to curb the spread of the covid-19. People had begun accumulating cash to pay for essentials such as groceries, especially in smaller towns and rural districts where customers were still averse to making online payments in the early weeks of the pandemic.

The survey found that one reason for cash demand is “personal:” the immediacy and feel of money. Another reason, though, is the continued difficulties, among many segments of the population, in accepting and enabling digital payments.

This does not necessarily mean that digital payments are taking a backseat, though.

“Although digital payments have been growing gradually in recent years, both in value and volume terms across countries, data also suggests that during the same time, currency in circulation to GDP ratio has also increased in consonance with the overall economic growth,” an RBI paper on digital payments in 2019 (pdf) said.

“An increase in digital payments to GDP ratio over a period of time does not seem to automatically imply a fall in the currency to GDP ratio of the country,” the RBI added.