The most beneficial impact of demonetization in November 2016 is that it ushered in a permanent era of electronic payment systems (wholesale and retail). This was supported by technological innovations such as the Unified Payments Interface (UPI), COVID-19 shutdowns, and increased financial inclusion.
Today, Indian payment system has emerged as reliable, secure, low-cost, convenient and efficient payment system characteristics.
It may be recalled that the ₹2000 notes introduced post-democracy were removed from circulation by the RBI from May 19, 2023, even though they continue to be legal tender. 98% of the ₹2,000 notes in circulation on May 19, 2023 have been returned by September 30, 2024.
It may also be mentioned that with demonetisation, the then ₹500 banknotes were replaced by newly designed ₹500 banknotes, while ₹1000 banknotes were not introduced subsequently.
Against this backdrop, this article examines the impact of rapid and comprehensive adaptation of technology in the retail payments space on the circulation of high denomination banknotes (HDN) of ₹100, ₹200 and ₹500 denominations.
The electronic retail transaction (ERT) modes considered are UPI, National Electronic Funds Transfer, credit and debit card payments, mobile payments, net banking, and cash withdrawals at ATMs/POS/Micro ATMs.
This article summarizes the specific impacts of technology adaptation and covers a four-year period from 2020-21 to 2023-24.
ERT progress
From 2020-21 to 2023-24, the volume of ERT increased continuously from 68 billion to 282 billion, registering a compound annual growth rate (CAGR) of 60.9 percent. In value terms too, it grew continuously from Rs 1,100 trillion to Rs 1,979 trillion at a CAGR of 21.6%, also exceeding the CAGR of 14.2% of GDP at current prices during the same period.
As a result, the average transaction size (ATS) gradually decreased from 16,255 ₹ in 2020-21 to 7,024 ₹ in 2023-24, indicating the increasing popularity of these modes among small spenders as well. Masu.
The CAGR recorded by ERT from 2020-21 to 2023-24 was 21.6%, while the CAGR of “Public Currency” (CwP) and “Transactions in Paper-Based Instruments” (TPI) was only 7.4% each. and remained at 8.6%.
As a result, the CwP/ERT ratio and TPI/ERT ratio decreased continuously from 2.5 percent to 1.7 percent and from 5.1 percent to 3.6 percent, respectively.
The ERT/GDP ratio further increased from 554.2 percent to 670.1 percent, while the CwP/GDP ratio and TPI/GDP ratio decreased from 13.9 percent to 11.5 percent and from 28.3 percent to 24.4 percent, respectively.
In summary, ERT rapidly and significantly replaced currency and paper-based instruments.
ERT and HDN
The table shows the configuration of HDNs in circulation. In total, HDN volume and value grew at a CAGR of 11.6 percent and 14.6 percent, respectively, from 2021-24. By denomination, the highest CAGR in terms of value/volume was ₹500 (15.9 percent), followed by ₹200 (9.8 percent) and ₹100 (2.6 percent).
In terms of quantity and value, 500 ₹500 notes account for the highest share of the total HDN, and the proportion is increasing year on year. Although the ₹100 share was still higher than the ₹200 share, the former’s share declined at a faster pace than the latter’s share.
The graph showing the relationship between ERT and HDN (in value terms) clearly shows that ₹500 notes have increased faster than ₹100 and ₹200 notes. According to the RBI, the 2000 ₹2000 note was introduced to meet the currency requirement immediately after demonetisation and printing was discontinued in 2018-19 once the requirement was met after other denomination notes became available. .
Nevertheless, if we look at the demonetization of ₹1000 notes at the same time as the introduction of ₹2000 notes, many of the notes also looked like this. Abu InitioI doubted its future continuity. Hence, a high growth of ₹500 was observed during 2018-19.
The sharp increase in 500 rupee notes in 2023-2024 (dashed line in chart 1) could be due to mass withdrawals from accounts after 2000 rupee notes were withdrawn from circulation in May 2023.
For example, looking at the fortnightly change in demand deposits for all fixed term banks from 7 April 2023 to 22 March 2024, we find that the fortnightly change in demand deposits for all fixed-term banks is between 14 July 2023 (£2.67 trillion) and 2024. A sharp drop was observed on January 12th. (1.72 trillion rupees).
On a ‘per capita’ basis, HDN circulation jumped from 13-14 pieces for ₹100 and 4-5 pieces for ₹200, to 27 to 42 pieces for ₹500.
In total, the circulation of ₹500 notes moved forward despite the rise in ERT and sharp fall in ATS. This phenomenon, known as the “banknote paradox”, has attracted attention in many countries in recent years. This means that the demand for cash (especially HDN) will increase as an increase in ERT will lead to a decrease in cash transactions.
As research by prominent economists such as J.P. Gordon, Charles A.E. Goodhart, and Kenneth Rogoff reveals; ceteris paribus, HDN is used for illegal activities and supports cash hoarding, money laundering, counterfeiting of banknotes, etc., and recommends small denominations. Therefore, you need to be careful about “paradoxes”.
However, this does not mean that all ₹500 notes can and should not be used for illegal purposes. Paradoxically, it is entirely possible that they are also used for genuine high-value transactions. Additionally, ATMs primarily dispense ₹500 notes when withdrawing large amounts of cash.
Looking at the relative growth rates and the movement of the ₹100 and ₹200 shares, it is tempting to speculate that the latter will eventually overwhelm the former. Moving to smaller denominations may increase the cost of printing banknotes, but it’s worth it.
Mr. Das is a former senior economist at SBI. views are personal
Research by a prominent economist reveals that high-value banknotes are being used for illegal activities Assists with cash hoarding, money laundering, and banknote counterfeiting
https://www.thehindubusinessline.com/opinion/cash-keeps-pace-with-e-payments/article68815696.ece