Ajit Ranade: What’s behind India’s cash upshoot and what does it tell us about the economy?

At first glance, it looks like a contradiction: How can India be ‘digitizing’ and ‘recashing’ at the same time? It isn’t, though, because while the digital payments revolution is real, India’s cash-loving political economy is also part of the stark reality.

The apparent paradox of the usage of both rising is a warning that we are settling into a hybrid equilibrium: digital for convenience, cash for avoidance or for those excluded from UPI’s digital infrastructure. UPI is for the honest and cash usage is for the anxious and those who want to hide. And when the cash stock expands faster than nominal GDP, it usually means something deeper is happening than “people like cash.”

First, a bit of caution. Remember that UPI is a flow, while CiC is a stock. Hence even in a fast digitizing economy, the cash stock can rise as the economy grows. But why is it rising so fast now? There are many explanations, some of them uncomfortable.

There are many factors pushing CiC up. For instance, as interest rates go down, the opportunity cost of holding cash goes down, so more cash lies outside banks. Also, if inflation is expected to rise, the transaction demand for cash goes up. There are four other troubling factors that may be contributing to higher cash usage.

The first is a fear of UPI as a trap for small traders. Its digital trail exposes them to be caught in the taxman’s net. Research from State Bank of India confirmed this causality: ATM cash withdrawals rose after income tax notices to small traders in Karnataka based on their UPI transaction volume. The remedy is to remove this fear that UPI is a ploy to entrap sellers in the informal sector.

A second driver could be the explosive growth of unconditional cash transfers, estimated at around 2% of GDP across 15 states. These schemes are large enough to impact household liquidity behaviour and state budgets.

Some of this transferred money will stay digital. But some will inevitably leak into currency because of local cash markets, because recipients budget in cash, connectivity is unreliable and cash payments are behind a big part of consumption in rural and informal India.

The more states expand transfers without building complementary supply-side capacity—skills, jobs, local services—the more we should expect cash demand to rise. When the welfare state expands in a low-formality economy, cash is often the medium through which that expansion is monetized.

The third driver is the rising use of money power in elections. The Election Commission routinely seizes cash during the campaigning phase of state and national polls. What is seized is just a tiny fraction of the actual cash being distributed, as estimated by observers and the press. The accumulation of cash for illegitimate disbursal can now precede elections by several months.

There is little conclusive, legally tenable evidence of vote buying, leave aside rule enforcement. But this is an open secret and is not likely to decline in the foreseeable future. This has a concomitant demand for cash generation by the black-money economy.

A fourth driver is the rise of ₹500 notes. UPI replaces small-ticket cash usage very well and solves a problem of small-change. But if households and businesses treat cash as a privacy-preserving store of value, then UPI does not automatically shrink the cash stock. This is the part of the story that most techno-optimists miss: digital rails replace transaction cash faster than they replace hoarding cash.

As if to illustrate the current cash spike, a video went viral of a wedding where the couple was showered with crores of cash. It shows that cash is not just a payment method. It is a social custom, for celebration at best and ostentation at worst. Nobody questions the origin of this stash. In India, weddings, real estate, local contracts and informal labour markets are not just ‘cash-heavy,’ but cash-shaped.

The success of UPI should not blind us to a fact corroborated by RBI data. UPI has taken market share away from NEFT, cards and wallets, not just cash. The overall share of the value of ‘paperless’ transactions has not risen as sharply as headline UPI numbers suggest. India is not sprinting to cashlessness. Cash remains entrenched.

This January’s cash spike is much above normal. It means many things. First, digitalization without trust will eventually plateau. Second, UPI faces a potential compliance backlash. Surprise tax notices and ambiguous thresholds push micro-enterprises back into informality. Third, increased cash-transfer welfarism will show up as a higher stock. Fourth, opacity around election use is an unending headache.

Our CiC now is about 2.2 times what it was pre-demonetization in 2016. Nominal GDP is that much larger too. As a share of nominal GDP, CiC has kept pace, although this year’s spike is abnormal. We should forget the fantasy of a ‘cashless’ India. Even developed economies with deep banking systems have large cash stocks. The goal should be more realistic: a less-cash, cleaner-cash India.

India’s payments story is often narrated as a triumphal march from cash to QR code. The truth is subtler. UPI is remaking the flow of transactions, but the stock of cash is shaped by informality, trust, enforcement, welfare design and electoral politics.

The author is senior fellow with Pune International Centre