Cash Drives India’s Economy Even as Banknotes Withdrawn

As India embraces digital payments, and prepares to withdraw its highest-denomination banknote, cash continues to drive the nation’s economy, with ATM usage rising more than ten percent in a year and circulating currency at an all-time high.

Business and finance newspaper Mint cites data from CMS Info Systems—India’s largest cash management company—showing the average ATM was stocked with 1.35 crore of banknotes (around $125,000 or €116,000) each month in the latest financial year, representing a rise of 10.1 percent over the previous year. It also shows states including Karnataka, Chhattisgarh and Andhra Pradesh require the most frequent ATM restocks, with machines nationwide seeing stronger use during festival months.

Macroeconomic data site CEIC cites Reserve Bank of India (RBI) figures showing currency in circulation reached a new all-time high in May 2023. This same month, RBI announced it would be withdrawing its highest-denomination notes, which have a value of 2,000 rupees ($24 or €22). It has instructed the public to deposit or exchange the notes by the end of September 2023, though it has not yet announced how long they will remain legal tender.

A Financial Times report observes parallels are being drawn with the government’s demonetisation policy, which saw 500 and 1,000 rupee notes invalidated overnight in 2016 and ‘caused enormous pain to cash-reliant small businesses that weighed on growth for years afterwards, according to some experts.’

In the short term, there could be benefits to small businesses as people seek to spend the soon-to-be-withdrawn notes. Speaking to FT, Sunil Ahuja, the owner of a home appliances shop in Delhi, said transactions using 2,000 rupee notes started soaring the weekend after the bank’s announcement, adding: ‘I am expecting a sales boom over the next two to three months.’

The longer-term impact remains to be seen. Shumita Deveshwar, Senior Director of research consultancy TS Lombard, says: ‘Any step like this is disruptive. The difference this time if that they’re giving more time for people to switch their notes over.’