Why Cash Remains Supreme in Transactions Despite Digital Shift

Despite the increasing shift towards digital transactions over the past five years, cash remains the dominant form of payment in many economies, particularly in regions like rural India. This article explores the reasons behind why cash continues to hold supremacy in transactional activities, including the impact of demonetization and the ongoing challenges faced in the digital payment sphere.

The Growth of Digital Transactions

With the progression of time, digital transactions have seen a significant rise over cash transactions. Many people, even in remote areas of India, have started accepting and making payments through UPI (Unified Payment Interface). I can attest to this by my own experience as an entrepreneur. My highway restaurant now sees nearly 30 transactions per day through online platforms, and when we buy supplies, we use UPI. It is not only convenient but also secure.

Demographic Divide in Payment Preferences

The younger generation prefers digital payments over cash, whereas those above 40 years of age are still inclined towards using cash for most transactions. Interestingly, despite this demographic divide, individuals in the latter category tend to have more money to spend. Therefore, even as digital transactions grow in volume, a significant proportion of transactions still rely on cash.

Inherent Comfort with Tangible Wealth

Indians have a preference for tangible forms of wealth, such as gold and currency notes, over intangible forms like bank balances. This bias is deeply rooted in the culture and mindset of many, especially in the context of the MSME (Micro, Small, and Medium Enterprises) sector, which continues to dominate the economy. This cultural inclination means that cash transactions are still more prevalent, even as digital payment systems are being implemented.

The Impact of Demonetization

Demodemonetization, a policy that involves withdrawing a certain denomination of currency notes and not reissuing them, has had a mixed impact. While it aimed to weed out black money and counterfeit currency, the process of remonetization involved reissuing these notes in a different design and denomination. However, this move did not successfully shift the mindset towards digital transactions. In fact, it has reinforced the preference for cash in many instances.

Real-World Examples and Evidence

To illustrate the persistent reliance on cash, consider the scenario of a daily wage laborer in a village whose district headquarters is a tier 3 city. Even in such remote areas, daily wage workers have started receiving payment via UPI. This shift highlights progress but also demonstrates that a significant portion of the population, even in urban outskirts, still favors cash transactions.

Conclusion and Future Outlook

As long as the MSME sector remains a vital part of the economy and issues of tangible wealth (like gold and currency notes) remain a primary concern, cash will continue to be the primary form of transaction. Moreover, the digital payment infrastructure still faces significant challenges, including user adoption and trust in financial systems. Demonetization, while bringing short-term disruption, failed to permanently alter the dominant preference for cash.

However, it's important to note that the future is dynamic. With continuous efforts and advancements in digital payment technologies, the balance between cash and digital transactions may shift gradually, but it is unlikely to change overnight. As more people adapt to and trust digital payment systems, we can expect a gradual transition, but cash will continue to reign supreme for the foreseeable future.