One of the (after-thought) goals of demonetisation was to reduce the cash intensity of the economy by encouraging people to shift to non-cash modes of payments. Supporting ‘digitisation’ of payments as it is otherwise known. And almost three years into this journey, some contradictory and perplexing trends have emerged. In this piece, I take stock of some of them.
Overall currency in circulation (CIC) continues to increase well above the nominal GDP growth even though we are almost three years into demonetisation. In the June quarter, CIC grew at almost 13 percent YoY, well above the nominal GDP growth of 8 percent during that quarter. And in the September quarter too, CIC has grown at a similar pace with nominal GDP growth likely to remain at a similar level. In a sense, remonetisation of the economy is still underway! Therefore, the cash intensity of the economy has now reached back above 11 percent, broadly the same as the average in 15 years preceding demonetisation. Clearly, cash intensity of the economy has not seen any material change due to demonetisation.
But, as this is where the contradictions start, even as CIC has (almost) reached the pre-demonetisation level, non-cash transactions have accelerated. In the last two years (FY17-19), non-cash retail payments in value terms have grown by 28 percent YoY as against just 11 percent YoY in the two financial years (FY14-16) preceding demonetisation. And this is true even in volume terms, growth in non-cash retail transactions have accelerated by 12ppt in the same period. Thus, the usage of cash for transactions has reduced even as the stock of CIC has reverted to the long-term average. So, if people are using less cash for transactions, why are they holding the same physical cash as before?
One reason could be for rebuilding the cash hoards which were destroyed during demonetisation and the Rs 2,000 currency notes are making it easier (relative to Rs 1,000 currency note before). But, the supply of Rs 2,000 denomination notes has been kept in control and in the last 2 years, the supply of Rs 2,000 denomination notes has remained unchanged. So, post the first few months after demonetisation, there has been no net increase in the circulation of Rs 2,000 notes. Consequently, the share of high denomination notes in CIC has fallen sharply. Whereas at the end of FY16, 85 percent of the CIC composed of high denomination notes (Rs 500 and Rs 1,000), at the end of FY19, high denomination notes constituted just 81 percent of CIC. Within that, Rs 2,000 denomination notes account for just 31 percent of CIC today as against 38 percent CIC made up by Rs 1,000 denomination notes. So hoarding cash is that much more difficult now given the higher circulation of lower denomination notes. And in any case, given the progress in non-cash payments, people would have to hoard more cash than before for CIC to be back at long-term average.
Newer modes of payments
But this also raises another contradiction. One of the reasons attributed for demonetisation and the subsequent remonetisation (with the Rs200 denomination note) was people should be able to continue to do smaller ticket transactions using cash and the Rs200 denomination note (and the constrained supply of Rs 2,000 denomination note) was to further that aim. The usage of cash should reduce when it comes to larger ticket payments. But most of the incremental non-cash payments are through smaller ticket size payment categories like credit/debit cards or UPI or wallets as against larger ticket size payment modes like NEFT. Growth in the value of payments through these modes has more than doubled in the last two years to 75 percent YoY compared to the two years before demonetisation (FY14-16). Consequently, the average size of retail non-cash payments has declined from Rs 25,600 in FY16 to Rs 14,800 in FY19 (and to less than Rs 12,000 in the first 4 months of current year). So effectively, it is smaller ticket payments being routed through newer modes of payments in lieu of cash rather than larger ticket payments.
Old-fashioned paper cheques
Lastly, within the larger ticket retail payments (RTGS excluded) it is not the digital payments that have accelerated. Instead, people have shifted to the old-fashioned paper cheques. Payments through cheques were, not surprisingly, declining before demonetisation. Between FY14-16 overall cheque payments were declining by around 6 percent per year. Post demonetisation though their decline has been arrested and payments through cheques have remained largely flat (growing at 1 percent pa) between FY17-19. In contrast, payments through NEFT has seen no acceleration post demonetisation. Thus, when it comes to larger ticket size retail payments (the average transaction size of an NEFT transaction and cheque payment are comparable), people have incrementally preferred to use (physical) cheques to (digital) NEFT. That said, payments through NEFT are still growing much faster than through cheques. It is just that demonetisation has made no difference to payments for payments being made through NEFT whereas, in case of payments through cheques, there is a clear change in trajectory. In a sense, demonetisation delayed the death of physical cheques as a mode of payment!To sum, the story, so far, of digitisation post demonetisation is as follows:
Cash intensity of the economy has gone back to pre-demonetisation levels. At the same time, there has also been a surge in non-cash retail payments. So, cash is both losing and gaining attractiveness at the same time! The increase in CIC back to pre-demonetisation levels has happened despite the constrained supply of Rs 2,000 denomination notes. Rs 2,000 denomination notes account for just 31 percent of CIC today vs 38 percent (for Rs 1,000 denomination notes) before demonetisation. Despite the increased supply of lower denomination currency notes, the increase in non-cash retail payments has been driven by lower ticket payment modes. The average size of non-cash retail payment has almost halved in the last three years. Physical cheques have been a surprising beneficiary of the shift to non-cash modes of payment. Within the higher ticket non-cash retail payments, incrementally people have preferred to use physical cheques rather than an electronic mode like the NEFT. Ashutosh Datar is the Founder of IndiaDataHub.com, an online platform that brings together all the public data (economic, social, financial) concerning India in an user-friendly analytical app. Before founding IndiaDataHub, he was with IIFL Institutional Equities for over a decade as their Strategist and Economist. Read Ashutosh Datar's columns