One of the economic positives of Covid-19 pandemic is material rise in digital payments and e-commerce. The steep rise in adoption of digital payments by household consumers and merchants in past one year should have arguably led to lower currency in circulation. However, the recent data released by RBI indicates that the cash in circulation is highest in 6 decades relative to GDP. In absolute terms also, the cash is materially higher than the pre demonetization levels.
It may be argued that holding more cash during
the times of distress (e.g., Pandemic) is natural instinct; and this trend has
been seen globally. Nonetheless, in the Indian context, the issue needs deeper
examination by the policy makers.
Digital payments rising exponentially
The initial public offer (IPO) by One 97 Communication Limited, the owner of India’s largest payment brand PayTM, celebrates the exponential growth in digital payment in past few years. As per NASSCOM, digital payments in India have grown ~10x in five years, from Rs352cr in FY15 to Rs3435 in FY20. The apex body of IT Services Industry in India, expects, the digital payment volumes to grow another ~16x to Rs54,800 crores by FY25. The fastest growth during FY20-FY25 is expected to be in UPI payments, which are expected to grow 26x, from rs1251cr in FY20 to Rs32,500cr in FY25. Payments using Aadhar enabled payment system (AePS) are also expected to grow 23x to Rs3800cr over this period.
…triggered by Covid-19 pandemic
The lockdown forced by the Covid-19 pandemic
has definitely given a strong push to the digital payments in India. As per the
available data, the digital payments have increased to 25% of the private
consumption expenditure in 1QFY22 from mere 4% in FY15.
As per a recent report by brokerage firm Sanford C. Bernstein, “The pandemic has changed user behavior – more people are buying things online. This has given a boost to online payments. Further, buyers are shifting towards digital payments for in-store purchases as well. Mobile payments, driven by UPI, has been a big factor in the rising adoption of digital payments in India during the pandemic.
Digital merchant payments stood at ~25% of PCE for Q1FY22 in India. The number stood at ~22% for Q4FY21, and at ~18% for FY20. The first boost to penetration came from demonetization when higher denomination currency notes were discontinued for three months. The rise of UPI has supported the increased adoption over FY18-20. The pandemic has provided another step-jump in the adoption of digital payments by merchants and consumers. The rapid adoption growth comes from the rising share of mobile payments, mainly from UPI. UPI has grown from 3% of PCE in FY20, to 9% of PCE in Q1FY22.”
Informal economy is shrinking
As per a recent note released by SBI Research,
share of informal economy in India may have shrunk to 20% from 52% in 2018. The
note “estimates that currently informal economy is possibly is at max 15%-20%
of formal GDP. There is wide variation across sectors, though, with formal
sectors like finance and insurance expanding post pandemic.”
Though many experts have challenged the data
and method used by SBI Research to assess the formalization level in the
economy, it cannot be denied that the level of formalization of economy has
increased in past one decade or so.
“For India, post 2016 plethora of measures
which accelerated digitisation of the economy, emergence of gig economy have
facilitated higher formalisation of the Indian economy - at rates possibly much
faster than most other nations”, the note reads.
The note highlights that “E-Shram is a big step
towards the formalisation of employment as our calculation indicates that till
date the rate of formalisation of unorganised labour due to E-Shram is around
17% / Rs 6.8 lakh crore / 3% of GDP in just 2 months. Even in Agriculture, the
usage of KCC cards has increased significantly and we estimate Rs 4.6 lakh
crore formalisation only through KCC route, with more marginalized farmers
coming under the banking sector ambit through such usage. The total number of
insurance and pension accounts that have been opened across several schemes for
the unorganised as well as organised is as much as 68.9 crore.”
Paradoxically currency in circulation is
highest in six decades
The currency in circulation (cash in pocket)
grew to six decade high of 14.7% of GDP by the end of FY21. The currency in
circulation grew at staggering 17.2% in FY21 to Rs28.6trillion. The amount was
Rs16.63trillion five years, before the demonetization of higher denomination
notes in 2016.
Moreover, the proportion of high denomination currency (Rs2000 and Rs500) has also increased to 85.7% in March 2021, against 83% share of Rs1000 and Rs500 currency notes in November 2016.
I guess there could be a variety of reasons for the people preferring to hold more cash in pockets. Moderating pace of financial inclusion efforts; lower denominator (nominal GDP); increased cash payout to poor for Covid-19 relief; rise in corruption; rise in election spending; etc.
Financial inclusion progressing at modest
speed
Financial inclusion has been one of the primary
thrust areas for successive governments in past two decades. Indubitably, the
access to basic banking services has improved materially in past one decade.
Nonetheless, in absolute terms, the access to basic banking services is much
below optimal levels and growing at very modest speed. The rate of improvement
in accessibility to banking services has actually declined in past five years
as compared to the previous block of five years.
Denominator (Nominal GDP) growing at much slower rate
Rise in election spending
Corruption might be rising again
After declining sharply post 2014 general election, India’s positioning on the Corruption Perception Index, published by Transparency International, has begun to worsen again. Though the methodology used for this Index is questionable, it does give some sense of the situation on the ground.
The sharp rise in corruption perception in past couple of years, could be one of the explanations for rise in the cash in circulation.
