Digital payments up, but so is cash. Why?

The objectives of the November 2016 demonetisation of high-value currency notes of Rs 500 and Rs 1,000 were curbing black money and corruption by preventing hoarding of cash, preventing counterfeiting of currencies and fighting terrorism by preventing cash-funding.

Post-demonetisation, it was expected that transactions in cash would come down, people would shift to digitised payments and, consequently, the demand for currency notes in circulation would fall. Demand for currency notes is inversely proportion to increase in digital payments. However, it is paradoxical to observe that substantial increase in digital payments has not helped to achieve a less-cash economy. The currency in circulation now far exceeds pre-demonetisation levels.

Post-demonetisation, to discourage high-value cash transactions, certain measures were taken in Finance Bill 2017. From April 2017, payments of Rs 2 lakh and above could be in cash and the receiver (of Rs 2 lakh or more) in respect of a single transaction in a day is liable to pay an equal penalty (Section 269T of Income Tax Act). This restriction is not applicable to receipts by government, banks, post-office savings bank or co-operative banks.

To be eligible for tax deductions, under Section 80G, the limit for donations in cash was reduced from Rs 20,000 to Rs 2,000. Expenses above Rs 10,000 in cash are disallowed, the earlier limit was Rs 20,000.

The restrictions in cash transaction above thresholds were aimed at promoting digital payments. Further, banks, especially new generation private sector banks, discourage cash transactions by imposing charges on cash deposits beyond the limits fixed for the specific category of accounts.

While demonetisation was intended to destroy the stock of black money in cash, the ban on high-value transactions in cash was to prevent the future flow of black money. Politicians, real estate dealers, fake currency dealers, people involved in betting, private educational institutions accepting capitation fees, the film industry and corrupt bureaucrats receiving bribes, etc., were all expected to be badly hit.

Notes in circulation

As per the RBI Bulletin of May 2018, the currency notes in circulation had reached Rs 18.78 lakh crore in April, as against Rs 14.07 lakh crore in April 2017. The low level of cash in circulation a year back was on account of post-demonetisation effects as the RBI was in the process of replenishing currency notes. However, the present level has exceeded the pre-demonetisation level of Rs 17 lakh crore. By and large, the currency notes in circulation is now increasing at the pace of the pre-demonetisation era.

Even with the increase in notes in circulation, shortage of notes was reported in a few centres and RBI was blamed for not printing/distributing the required quantity of notes to meet the genuine demand of the public. An unusual spurt in demand for cash was observed during mid-April 2018 in some parts of Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar.

Several theories like hoarding of Rs 2,000 notes, more withdrawals from banks, especially from ATMs, and reduction in cash deposits with the banks, piling up of cash to meet election expenditures, etc., were all blamed for this currency shortage.

Digital payments

During the demonetisation period, many shifted payments to digital modes out of compulsion, and the trend held post-demonetisation, too.

As of March 2018, the number of point-of-sale machines have gone up to over 31 lakhs from 25 lakhs a year before; debit cards and credit cards in use, too, went up. The monthly usage of debit/credit cards at POS machines was around 45 crore transactions as against 37.9 crore transactions in March 2017.

The monthly mobile banking transactions has more than doubled to 24 crores from 11.4 crores in March 2017. However, PPI (Prepaid Instruments — m-Wallet, PPI cards and paper vouchers) transactions have come down to 29 crores from 34.2 crores. Thus, the alternative channels for cash payments have shown considerable increase.

Increase in digitised modes of payment, coupled with the curbs on high-value cash transactions, should necessarily reduce demand for currency notes in circulation. Despite an increase in notes in circulation, a shortage is felt in some corners. Why? The question largely remains unanswered. One can only speculate the reasons for the shortage in currency notes.

Is it on account of black money piling up by hoarding of cash as it happened in the pre-demonetisation period? Is it on account of improper distribution of notes by RBI? Is it on account of ineffective government machinery to prevent hoarding of cash? Is it on account of accumulation of cash by politicians to meet election expenses in some assembly and Lok Sabha elections? Somebody must research and find out!

(The writer teaches banking at ICICI Manipal Academy, Bengaluru)