Indian economy likely to remain cash-dependent for many years to come

After growing at over 20 per cent for most of 2020, currency in circulation growth fell to 8.5 per cent as of October 29 this year, shows RBI data

Rapid strides in digital payments notwithstanding, the Indian economy will likely remain cash-dependent for many years to come, at least that’s what the automated teller machine makers and cash logistics companies are betting on.  

After growing at over 20 per cent for most of 2020, currency in circulation growth fell to 8.5 per cent as of October 29 this year, shows data from the Reserve Bank of India (RBI). The reason for the steep rise in currency last year was the uncertainties related to the Coronavirus (Covid-19) pandemic, where people preferred to hoard cash to meet exigencies. The outstanding stock of currency now stands at Rs 28.5 trillion, but the pace of increase has slowed down, as the need for additional cash is less.

During demonetisation five years ago, the currency in circulation was just about Rs 18 trillion.  

In this five years, though, digital payments transformed themselves to become mainstream, leaving the need for cash way behind, at least in metro and urban areas.  

In October alone, Unified Payments Interface, or UPI recorded over 4 billion transactions, a new all-time high for the payment’s platform since its inception, driven by the festive season. In value terms, the payments platform saw transactions worth over $100 billion or Rs 7.71 trillion in October, a record high.  

UPI transactions this year may touch 40-42 billion compared with 22 billion transactions last year, NPCI’s CEO Dilip Asbe expect.

So far this calendar, UPI has processed 29.94 billion transactions, worth almost Rs 57.71 trillion. The aim is to reach $1 trillion equivalent annually. Other, retail digital payment platforms such as IMPS and FASTag have also seen their transaction value and volume touch record highs.

Digital payments could be the norm in urban areas, but in tier-II cities and below, cash rules. The semi-urban and rural economy runs on cash, and e-commerce companies are dependent on cash logistic firms.  

India has the third-largest number of ATMs deployed in the world, but also one of the most underpenetrated, population density wise. The cash velocity, which is ATM withdrawals as a percentage of CIC, is also one of the lowest in the world at 1.5 times, compared with 8 in Canada and China.  

Cash logistics firm CMS Infosystems, and ATM service provider AGS Transact – two firms that are planning for initial public offerings, are seeing a massive expansion of ATMs in the coming days.  

In 2020, the total number of ATMs in India was about 2,55,000, compared with around 625,000 in China, around 430,000 in the US, according to data from CMS. However, whereas the global average of ATMs per lakh population is 47 (123 in the case of the US), India’s average is just 22. In states like Rajasthan, Madhya Pradesh, Uttar Pradesh and Bihar, there are only seven to 14 ATMs per lakh population.  

Data from AGS shows that during demonetisation, the number of ATM transactions declined from 802.7 million in October 2016 to 561.8 million in November 2016. While it recovered back to 915.2 million during December 2018, the covid lockdown saw ATM transactions reaching the lowest at 294.9 million, even as CIC rose. The transactions reached a pre-covid level in March this year.

“There is no reason to believe that cash is going to get eliminated from the economy. Banks have a huge catch-up to do in terms of ATM network. States with low ATM penetration are getting ramped up rapidly,” said Anush Raghavan, president, cash management business at CMS.

“In semi-urban and rural areas cash is the main mode of transactions. E-commerce firms can work there only on the basis of cash on delivery mode. We are partners in their cash logistics,” said Raghavan.  

In the ATM space, one particular trend is emerging.  

Private parties are now deploying ATMs on behalf of banks. Banks lease these ATMs and brand them as their own. Playing on the ‘White Label’ ATM for the complete private establishment, these ATMs are informally called “Brown Label” ATMs.  

Firms such as AGS are focusing more on cash recyclers, which dispense cash as well as take deposits, both for banks, as well as brown label ATMs. CMS is one of the major players in this brown label ATM business.  

In 2020, it received a brown label mandate for 3,000 ATMs from the State Bank of India.  In 2021 it got a mandate for managing 900 brown label ATMs with the potential for 15 per cent more bonus sites over seven years.

But digital payments will only increase in the coming days.

The massive adoption of digital payments is reflected in RBI’s digital payments index (DPI), which was launched in January to indicate the extent of digitisation of payments across the country. It shows the index for March 2021 stood at 270.59 as against 207.94 of March 2020, thus signifying the rapid adoption of digital payments in the country since the onset of the pandemic. In March 2019 the index stood at 153.47 and by September 2019, it rose to 173.49, followed by 207.94 in March 2020, and 217.74 in September 2020.

"While the economy is growing and consumption is increasing, the UPI end users count has somewhat plateaued. The Rs 7 trillion worth of transaction is helping create a ripple effect with gradual increase of users now," said Anand Bajaj, MD&CEO, PayNearby. 

He added that during the pandemic the government gave direct benefit transfer to economically weaker citizens. This helped them manage consumption with this additional cash in the economy.

"Of the 900 million bank accounts, only 400 million active debit cards are used. Zero MDR may have a telling effect on re-carding the remaining account holders. Even in the case of UPI, there is zero MDR. That is why we are seeing cash in circulation remain at elevated levels," Bajaj said.