As of March 2024, the Indian economy is experiencing a significant transformation in consumer spending habits, with a remarkable shift from cash to digital payments. A recent study by Pradip Bhuyan, an economist at the Reserve Bank of India (RBI), highlights that cash now accounts for only 60% of consumer expenditure, a steep decline from previous years. This transformation is largely attributed to the rapid adoption of digital payment methods, particularly accelerated by the COVID-19 pandemic.
The study revealed that the share of digital payments surged from 14-19% in March 2021 to an impressive 40-48% by March 2024. This shift signals not only a changing landscape in consumer behavior but also a broader transition towards a cashless economy in India. Bhuyan’s paper, “Cash Usage Indicator for India,” meticulously examined consumer spending trends from 2011-12 to 2023-24, offering valuable insights into the evolving payment preferences of the Indian populace.
Bhuyan introduced a Cash Usage Indicator (CUI) to reflect the share of cash in private final consumption expenditure. According to his findings, cash usage has dropped significantly, from 81-86% in early 2021 to 52-60% by early 2024. This indicator serves as a crucial tool for currency management and provides a clearer picture of the ongoing shift towards digital payments. Importantly, Bhuyan clarified that the views presented in his paper represent his personal perspective and do not necessarily reflect the official stance of the RBI.
One of the key drivers of this shift has been the United Payments Interface (UPI), which was launched during the demonetization phase in 2016. Initially, UPI saw limited growth, but its adoption exploded during the COVID-19 lockdowns. As people sought contactless payment options, UPI became a favored method for transactions. While the average transaction size for UPI was Rs 3,872 in 2016-17, it has now decreased to Rs 1,525 in 2023-24. This change suggests that UPI is increasingly being utilized for smaller-value purchases, reflecting a broader trend toward convenience and efficiency in consumer spending.
Despite the decline in cash usage, cash remains a preferred payment method for low-value transactions. However, the currency with the public (CWP) to Gross Domestic Product (GDP) ratio, which peaked at 13.9% post-demonetization in 2020-21, has fallen to 11.5% in 2023-24. This decline indicates that while cash is still in circulation, its relative importance in the economy is diminishing. Conversely, UPI’s share in person-to-merchant (P2M) transactions has experienced substantial growth, increasing from 33% in value terms in 2020-21 to an astounding 69% by 2023-24. Additionally, in volume terms, UPI’s share soared from 51% to 87% over the same period.
The data indicates a clear substitution of cash with UPI for smaller-value transactions, underscoring a shift in consumer behavior towards digital platforms. This trend is further supported by a broader global move towards cashless transactions, as many countries are embracing digital payment solutions to enhance convenience and security. For instance, nations like Sweden and Norway have made significant strides in reducing cash reliance, with digital payments becoming the norm.
Furthermore, the Indian government has actively promoted digital payment systems to bolster financial inclusion and stimulate economic growth. Initiatives such as the Digital India campaign and various subsidies for digital transactions have played a crucial role in encouraging consumers and businesses alike to adopt electronic payment methods. The COVID-19 pandemic further accelerated this transition, as health concerns pushed consumers towards contactless payment options.
Moreover, the increasing smartphone penetration and internet accessibility in India have laid the foundation for the growth of digital payments. According to recent reports, India is projected to have over 1 billion smartphone users by 2025, creating a vast potential market for digital payment solutions. Additionally, the growing number of fintech startups and innovations in the payment ecosystem are making digital transactions more accessible and user-friendly.
However, despite the positive trends in digital payments, challenges remain. Issues such as digital literacy, cybersecurity threats, and infrastructure disparities pose significant hurdles to achieving a fully cashless society. Ensuring that all segments of the population can access and utilize digital payment methods will be crucial for sustaining this momentum. In conclusion, the shift from cash to digital payments in India represents a significant evolution in consumer behavior and economic dynamics. The findings from Bhuyan’s study underscore the rapid adoption of digital payment methods, primarily driven by the convenience, efficiency, and safety they offer. As cash usage continues to decline, the future of transactions in India appears to be increasingly digital, with UPI leading the charge. The ongoing efforts by the government, along with the rise of fintech innovations, are set to further accelerate this transformation, paving the way for a more inclusive and cashless economy in the years to come.
