Cashless Society – Digital Payments, Demonetization, etc.

Demonetization and the digital payment ecosystem


From UPSC perspective, the following things are important :

Prelims level: E-rupee

Mains level: UPI and future of E-rupee



  • Paperless payments have been a big national goal ever since 8 November 2016, when India rendered ₹500 and ₹1,000 currency notes useless in a stunning decision that was upheld as valid by the Supreme Court on recently. Today, our cash intensity remains roughly on the same incline as it was earlier. But online payments have soared. This means a fine policy judgement call will need to be made soon.

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Demonetization: A brief Analysis

  • The supreme court rejected petitions arguing that demonetization was done illegally and by 4:1 bench majority Supreme court held the process as satisfactory.
  • The overnight note-ban was also found to satisfy a general test of proportionality. For all the hardship caused by weeks of cash starvation, that exercise of authority was not judged too drastic for its aims.
  • The extent to which unaccounted-for money was flushed out, terror funding frozen and commerce formalized cannot reliably be estimated, but small businesses were clearly hit hard and India’s economy slowed down soon after.


The changing trend: How we are transacting?

  • Rise of digitals payments: The past half decade’s big trend in our use of money has been the exponential rise of a platform that’s part of our digital stack of public goods.
  • Spectacular success of UPI: Designed for instant transfers between bank accounts done via mobile phones, the Unified Payments Interface (UPI) has been a spectacular success since its 2016 launch.
  • UPI transactions for instance: According to National Payments Corporation of India (NPCI), its operator, UPI processed more than 74 billion transactions in 2022, up 90% over 2021, worth almost ₹126 trillion, a 76% leap.

Examining feasibility of levying user fee on UPI and the E-rupee

  • Financial support to UPI: The case for UPI as India’s payment bedrock is weakened by the fact that while it levies no user fee, it isn’t a costless service. Last year, the finance ministry justified financial support for UPI on the ground that it’s a digital public good with immense convenience for the public and productivity gains for the economy.
  • Coast benefit review must be done: If public funds are increasingly needed to back UPI as it expands, we must put it to a cost-benefit review as we go along; UPI is already logging huge sums and the total for 2023 may be much more.
  • Promoting E-rupee: It’s not just a cost consideration that should make us promote RBI’s retail e-rupee instead for routine payments.
  • E-rupee is a direct liability of RBI: The E-rupee’s mass usage would involve circulation of money that’s a direct liability of the central bank (an IOU issued by it, i.e., like cash), which would better serve the cause of economic stability. This is because what RBI owes its currency bearers is entirely free of risk, while the same cannot be said of banks.


Why India needs a digital rupee?

  • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
  • High currency in circulation: India has a fairly high currency-to-GDP ratio.
  • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.


  • For superior systemic safety, the e-rupee should get a significant share of online payment swipes. Even if its holdings earn no interest, it could catch on if the security of its value, ease of liquidity and erasure of data trails (below a limit) are duly advertised. For an e-rupee to aid macro level prudence, it will have to eat into UPI.

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