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In a dramatic and unforeseen move in November 2016, India annihilated two of its highest-denomination banknotes, effectively obliterating 86% of the nation’s currency in circulation overnight. This bold maneuver, dubbed Demonetisation, aimed to dismantle rampant corruption and siphon out hidden wealth. The immediate aftermath was a pandemonium of serpentine queues outside banks and ATMs, with critics decrying the policy for disproportionately afflicting the impoverished and crippling India's vast informal economy. Nonetheless, Prime Minister Narendra Modi staunchly defended the decision, heralding it as a catalyst for diminishing black money, enhancing tax compliance, and fostering economic transparency.
Seven years on, the resilience of cash endures, casting a shadow on the efficacy of the contentious policy. Despite an explosion in digital transactions, with the revolutionary Unified Payments Interface (UPI) driving India to capture 46% of global digital payments, cash usage has paradoxically escalated. Cash in circulation surged by over 16.6% in 2020-21, with the currency-to-GDP ratio peaking at over 14%.
The Indian economy now navigates the "currency demand" paradox, where both cash and digital payments thrive concurrently. Cash remains a steadfast financial safeguard for most Indians, serving as a precautionary stash and a store of value, particularly in a country where falling interest rates, a vast informal economy, and substantial direct benefit transfers during the pandemic bolster its appeal. Even the real estate sector, intertwined with political machinations, remains a bastion of unaccounted cash transactions.
Internationally, this phenomenon isn’t unique to India. The European Central Bank and Sweden’s experiences echo similar trends, with rising demand for physical cash amid the digitization wave. In India, cash persists as an indispensable part of daily life, a sentiment encapsulated by Delhi auto-rickshaw driver Atul Sharma’s declaration: “Cash will never go away.”
Thus, the grand Demonetisation experiment stands as a testament to the complex interplay of policy and public adaptation, illustrating that in the face of sweeping financial reforms, the tangible currency clutched in the hands of the common man retains its enduring significance.
Source: https://www.bbc.com/news/world-asia-india-67674453
