Prior to demonetization, 95% of transactions were in cash with some 90% of merchants unable to accept any other form of payment. According to a recent report (Global Cash Index), the cash share of the economy (which includes ATM + OTC) – a little over 45% and predicted to remain for the next few years. The cash share of the economy pre- and post-demonetization remains about the same. The same report says that total use of cash in India is estimated to grow at 11.9 percent CAGR through 2020.
Figure 1: ATM Cash Withdrawals in India (INR bn)
The chart shows that ATM withdrawals have more or less maintained steady-state equilibrium over a 2-year timeframe with the obvious dip during the demonetization months. However, the data also shows that things were more or less back to normal by March 2017.
A simple analysis shows how much cash dominates the economy. In the first 6 months of 2018, ATM withdrawals were INR 15,681 billion. If one includes the Over the Counter cash withdrawals, it would be safe to assume that the number could be closer to INR 30,000 billion. This compares to INR 9,461 billion for card transactions at POS, PPI cards and m-wallet transactions, UPI and e-commerce transactions all combined (e-commerce transactions for 2018 is forecast to be $50 billion).
This behooves us to understand why cash is so dominant. It is simplistic to assume that cash transactions are to evade taxes or that cash is being hoarded for a variety of reasons including elections among others. Neither is thedominance of cash suggestive that the rise in digital financial transactions has been less than optimal.
There are reasons for why cash is dominant in India.
1. The International Labour Organization estimates that the informal economy in India accounts for more than 80 per cent of non-agricultural employment. This economy is almost completely driven by cash.
2. Low education levels and a lack of understanding of the banking system keep people away not to mention the limited reach of bank branches
3. There is also the chicken and egg story, which is the relatively low POS penetration in India.
a. India – With a population of 1.2 billion, there are 3.31 million POS terminals currently.
o Brazil – In 2016, with a population of 206 million, there were 5.08 million POS terminals. The number is considerably higher now.
o China – In 2016, with a population of 1.38 billion, there were 24.53 million POS terminals in the country.
-Mr. Deepak Chandnani, Managing Director, Worldline South Asia and Middle East and Managing Director, MRL Posnet