India and Sweden | A tale of two cash economies

The status of cash in India and Sweden is progressing in the opposite directions. While Sweden is worried about cash disappearing from its payment system, India is worried about cash still being a dominant part of its payment system. Why is the humble cash on different trajectories in these two countries?

For a while now Sweden’s economy has been undergoing a transition to a cashless economy. As per the Payments Report 2022, the number of Swedes using cash for their purchases declined from 80 per cent in 2016 to 35 per cent in 2022. At the same time, the number of people who paid by the payment app Swish increased from 50 per cent to 80 per cent. The map of Sweden shows that in a few counties cash usage is in the range of 0-3 percent.

The payment trends in Sweden were unlike other developed economies, where there is a trend of ‘cash paradox’. ‘Cash paradox’ means that though the share of cash in payments is declining, demand for cash is rising. The reason is that people still prefer to keep cash for emergencies, a lesson learnt during the Covid-19 pandemic. However, in Sweden this is not the case. Both payments in cash and demand for cash are declining.

Interestingly, Sweden was the first European country to introduce cash; and is now facing its extinction. There are reports that people and retail stores are refusing to accept cash payments. The decline in physical cash has been a cause of concern for Riksbank, the Swedish central bank. Riksbank recently released a consultation document regarding the state of payments.  The document notes that there is still a segment of the population, particularly the elderly and disabled, who use cash and find it difficult to use digital payments.

Given the developments, the Riksbank has suggested that the government should legislate to ensure people and businesses cannot refuse cash payments. The Riksbank has drawn examples from Denmark and Norway which have legislation which obliges people and businesses to accept cash payments.

The Riksbank is also worried that the rise of digital private payments would mean that central bank-issued currency, the Swedish Krona, will not be in circulation. The central bank would lose its control over the monetary policy. As a result, the central bank is also pushing for the introduction of a central bank digital currency (CBDC). It has asked the government to issue legislation for the issuance of e-krona to accelerate the introduction of the CBDC.

While Sweden is busy trying to figure how to make cash going in the economy, in India we are seeing the opposite.

In May, the RBI withdrew the Rs 2000 currency notes from circulation. The Reserve Bank of India (RBI) cited two reasons for its withdrawal: one, the currency note was not being used for transactions and the RBI had stopped printing new notes in 2018-2019. Two, under the clean note policy, the RBI is supposed to withdraw old notes and release new ones. As the currency is not being used, the bank decided not to replace soiled notes with clean notes; and instead withdraw it.

This withdrawal is a follow-up to series of steps taken by the government and the RBI to make India a less cash economy. The biggest decision towards this was taken in November 8, 2016, when Rs 500 and Rs 1000 currency notes were demonetised. Demonetisation was done to address multiple objectives: curtail black money, reduce counterfeit of currency, and terrorism financing. However, overtime the objective of demonetisation became the reduction of cash in the economy, and promote digital payments. Post-demonetisation, the government has taken more measures to promote digital payments and reduce cash transactions in the economy. Amidst all these measures, the demand for cash remains strong in the economy.

Even if Sweden and India are not comparable in terms of economic development, it is interesting to note the differences in status of cash in the region. In Sweden, people prefer digital payments whereas the policymakers are striving to keep cash. In India, people continue to keep cash whereas policymakers are striving for digital payments. How the journey of cash and digital payments pans out in the two economies, will have implications for other economies as well.

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.