Demonetisation and the less-cash push

Detail

1. 2016: the turning point

Timing

• UPI (Unified Payments Interface) lets you send money straight from one bank account to another, instantly, using a mobile phone. It was launched for the public in 2016.
• Demonetisation came in November 2016, about three months after UPI's public launch.
• So the new digital payment rails already existed when a sudden cash shortage pushed people onto them.

What happened

• Demonetisation means the government withdraws the legal-tender status of a currency note. After that, the note can no longer be used to pay for anything.
• In November 2016, the ₹500 and ₹1,000 notes stopped being legal tender (Class 12, Money and Banking, Box 3.2).
• Legal tender is money that the law says everyone must accept to settle a payment or debt. In India, currency notes and coins are legal tender.
• The withdrawn notes are officially called Specified Bank Notes (SBNs).

Result: cash became scarce, so people went digital

• Very few ₹500 and ₹1,000 notes were left in people's hands. New notes took time to print and send to banks.
• So households and firms turned to other ways to pay:
• mobile wallets (apps that store money you have loaded in advance)
• debit and credit cards
• POS machines (Point of Sale swipe machines at shops)
• UPI QR codes (a printed code at a shop; you scan it and pay from your bank account)

2. How NCERT frames it

Class 10 (Money and Credit, teacher note)

• People were encouraged to use bank deposits instead of cash.
• Digital transactions spread through "bank-to-bank transfer through the internet or mobile phones, cheques, ATM cards, credit cards, Point of Sale (POS) swipe machines, and QR codes through UPI system at shops".
• The stated aims were "to reduce the requirement of cash for transactions and also control corruption."

Class 12 (Money and Banking)

• Demonetisation could help tax administration "by shifting transactions out of the cash economy into the formal payment system."
• The reason: a cash payment leaves no record. A digital payment leaves a trail that tax officers can check.
• NCERT also notes: "Households and firms have begun to shift from cash to electronic payment technologies."

3. Follow-through: policies after November 2016

BHIM app (December 2016)

• BHIM stands for Bharat Interface for Money. It is a government-backed UPI app.
• It gave people a simple, common app for UPI payments at a time when there was little cash.

Watal Committee on digital payments (report December 2016)

• It was set up by the Ministry of Finance.
• It recommended an independent payments regulator, that is, a body separate from the RBI's banking regulation work.
• It also recommended an open-access, competitive system, so that non-banks (fintech firms and wallets) can join payment networks on fair terms.

NITI Aayog incentive schemes (launched December 2016)

• Lucky Grahak Yojana was for consumers. Digi-Dhan Vyapar Yojana was for merchants.
• Both gave cash awards to people who used digital payment instruments for their spending [5].
• The implementing agency was the National Payments Corporation of India (NPCI) [5].
• Consumer prizes under Lucky Grahak Yojana:
• a daily prize of ₹1,000 to 15,000 consumers for 100 days [5]

• weekly prizes of ₹1 lakh, ₹10,000 and ₹5,000 [5]

• Prizes across the schemes ran from ₹1,000 to ₹1 crore. Only transactions of ₹50 to ₹3,000 qualified, to keep the focus on the common man [5].

• Eligible modes: UPI, USSD, AEPS and RuPay cards [5]
• USSD (*99#): pay from a basic feature phone, without internet.

• AEPS (Aadhaar-enabled Payment System): pay using an Aadhaar number and a fingerprint.

• Private credit cards and digital wallets were initially left out [5].

• The schemes especially targeted the poor, the lower middle class and small businesses [5].

Nilekani Committee on deepening digital payments (2019)

• The RBI set up the High-Level Committee on Deepening of Digital Payments on 8 January 2019. It was chaired by Nandan Nilekani, former Chairman of UIDAI [2].
• Its tasks (terms of reference) [2]:
• check how far payments had gone digital and find the gaps
• study how digital payments help financial inclusion (bringing poor and unbanked people into the formal banking system)
• compare India with other countries
• suggest ways to make digital payments safer and to build customer confidence

• prepare a medium-term roadmap

• It submitted its report on 17 May 2019. The RBI said it would fold the relevant action points into its Payment Systems Vision 2021 (published 15 May 2019) [3].

• A follow-up step: in October 2019, the RBI asked each State/UT Level Bankers' Committee to pick one district as a pilot. The aim was to make that district "100% digitally enabled" within one year [4].
• One bank with a strong local presence leads each district [4].
• Where possible, the district should be chosen from the Aspirational Districts programme [4].
• Progress is reviewed every quarter [4].

The broader Digital India programme

• This is the government's umbrella programme for digital infrastructure, digital services and digital literacy.
• The push for less cash sits inside it.

Cross-references

• The demonetisation event itself: money-evolution-functions.
• Its effects on liquidity and money supply: banking-monetary-policy.

4. Cashless or less-cash?

Definitions

• Cashless society: financial transactions happen through "the transfer of digital information (usually an electronic representation of money)" and not through physical notes and coins (Class 12).
• Less-cash economy: cash still exists and is used, but digital payments carry a growing share of transactions.
• India's realistic goal is less-cash, not zero cash.

Currency in circulation

• Currency in circulation (CIC) is all the notes and coins held by the public and banks.
• Figures below are from NCERT Class 12, Money and Banking, Table 3.5, and the RBI Handbook 2024-25.

Year	Currency in circulation (₹ crore)
2015-16	16,63,463
2016-17 (demonetisation)	13,35,266
2020-21	28,53,763
2024-25	37,24,448

Worked example: how far did cash fall, and how far did it rebound?

• Fall in 2016-17:
• 16,63,463 − 13,35,266 = ₹3,28,197 crore less.

• 3,28,197 ÷ 16,63,463 × 100 ≈ 19.7% fall.

• Rebound from 2016-17 to 2024-25:

• 37,24,448 ÷ 13,35,266 ≈ 2.8 times.

• Compared with before demonetisation:

• 37,24,448 ÷ 16,63,463 ≈ 2.24.

• So cash in 2024-25 was about 124% higher than in 2015-16.

• Lesson: demonetisation cut cash only for a short time. It did not reduce cash for good.

Currency-to-GDP ratio

• Formula: Currency-to-GDP ratio = (Currency in circulation ÷ Nominal GDP) × 100.
• Nominal GDP is the value of all goods and services produced in a year, at that year's prices.
• Illustration (assumed GDP figure): suppose nominal GDP in 2016-17 was about ₹153 lakh crore.
• CIC was ₹13.35 lakh crore.

• 13.35 ÷ 153 × 100 ≈ 8.7%.

• The trend over time:

• The ratio fell to about 8.7% in 2016-17.
• It rose above pre-2016 levels by 2020-21, because during COVID people held cash as a precaution.
• It has eased since (verify the current figure in the latest RBI Annual Report).

The "cash paradox"

• Cash and digital payments have grown together.
• Why both grow at once:
• digital payments have taken over transactions (the money we use to pay for things)

• people still keep cash as a store of value (a way to hold wealth) and as a safety buffer in emergencies

• Precautionary demand for money means holding cash for bad times. It rises in a crisis, as it did during COVID.

Limits to going cashless

• Digital divide: rural people, the elderly and women have less access to smartphones and digital skills.
• Weak connectivity: poor internet in remote areas. USSD and offline modes only partly fill this gap.
• Costs for merchants: POS machines, card fees and the time it takes for money to reach the account.
• Privacy and surveillance worries: every digital payment leaves a data trail.
• System outages and weak resilience: when a server or network fails, digital payments stop. Cash works even in a power cut.

Classroom debate (Class 10 teacher note)

• Make a collage of the areas where people legitimately and legally use digital payments, and where they use cash.
• The key point: both have lawful uses. Cash is not the same as black money.

Prelims Hooks

• The ₹500 and ₹1,000 notes stopped being legal tender in November 2016, about three months after UPI's public launch.
• Lucky Grahak Yojana was for consumers and Digi-Dhan Vyapar Yojana was for merchants. Both were NITI Aayog schemes, and NPCI ran them [5].
• Under Lucky Grahak Yojana, only transactions of ₹50 to ₹3,000 qualified. Eligible modes were UPI, USSD, AEPS and RuPay. Private credit cards and wallets were initially excluded [5].
• Watal Committee (report December 2016) recommended an independent payments regulator and an open-access, competitive payments system.
• The Nilekani Committee on Deepening of Digital Payments was set up by the RBI (not NITI Aayog or the Finance Ministry) in January 2019. It reported in May 2019 [2][3].
• BHIM = Bharat Interface for Money, launched December 2016.
• Currency-to-GDP ratio = CIC ÷ nominal GDP × 100. It fell to about 8.7% in 2016-17 but rose above pre-2016 levels by 2020-21.
• Trap: India's goal is "less-cash", not "cashless". CIC in 2024-25 (₹37,24,448 crore) is far above 2015-16 (₹16,63,463 crore).
• RBI 2019 pilot: SLBCs were to pick one district per State/UT to make it 100% digitally enabled within one year [4].

Mains Points

• Demonetisation as a digital catalyst:
• The cash shortage, together with UPI, BHIM and the NITI Aayog incentives, made millions of people try digital payments.
• Digital payments leave a record, which helps tax administration.

• But the cash-to-GDP ratio bounced back. This shows that people's trust and habits, not shocks, keep lasting change going.

• The cash paradox shows two separate uses of money:

• Digital payments replace cash for transactions.
• Cash survives as a store of value and precautionary buffer.

• So policy should aim at less-cash with choice, not force people off cash.

• Inclusion and resilience limits (GS-III, also GS-II equity):

• The digital divide (rural people, elderly people, women), weak connectivity, merchant costs, privacy worries and outages mean cash stays a public good.

• Answers: USSD/AEPS, digital literacy, RBI's 100% digitally enabled district pilots [4], and offline modes.

• Institutional design debate:

• The Watal Committee wanted an independent payments regulator, separate from the RBI.
• Today the RBI both regulates payments and sets the agenda through committees like Nilekani (2019) [2][3].
• The debate is regulator independence vs a single monetary-cum-payments authority.