Demonetisation report card: Five years on, cash rules and digital payments surge

It has been five years since the Modi government demonetised currency notes worth over Rs 15 lakh crore. Since 2016, currency in circulation (CIC) has been steadily rising despite the move. However, digital payments are also on the rise.

Five years after the Modi government demonetised Rs 500 and Rs 1,000 banknotes -- effectively taking 86 percent of the currency out of circulation on November 8, 2016 -- cash continues to be king in India.

According to the latest data from the Reserve Bank of India (RBI), the CIC in value terms soared from Rs 17.74 lakh crore as of November 4, 2016, to almost Rs 29 lakh crore plus on on October 29, 2021, a near 65 percent jump in just five years.

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Within a year of demonetisation, cash in circulation had crossed the pre-demonetisation levels to over Rs 18 lakh crore. It is currently at an all-time high again and has been steadily rising over the years.

However, the growth in currency hardly comes as a surprise because as any economy grows, the total amount of currency being used also grows in absolute terms. Therefore, it's not fair to only look at CIC in isolation; the size of the Indian economy also needs to be factored in. The currency to nominal GDP ratio has been about 11-12 percent in the past decade. However, it hit at least a decadal high of 14.7 percent in FY21.

Part of the reason is the fact that the base of the economy shrank in FY21 because of the hit to activity. But a lot of it also has to do with the relentless rise of cash.

The growing popularity of digital payments balances to a certain extent the sky-high cash in circulation. The number of UPI transactions is up from just six million-plus in March 2017 to over 4.2 billion as of October 2021. The value of UPI transactions also touched a record high of over $100 billion or Rs 7.71 lakh crore for the month of October.

Overall digital payments have almost tripled in volumes in the past four years. So, while demonetisation may not have done much when it purging black money -- since almost all of it came back to the system -- it certainly boosted the use of digital payments.