Introduction

India’s journey towards a cash-lite economy has been marked by a staggering rise in UPI transactions, reflecting a decisive shift in household and business payment patterns. From groceries to loans, from investments to utility bills, UPI has emerged as the backbone of everyday economic life. This transformation is not merely technological but a structural change towards the formalisation of the economy, reducing cash-dependency while boosting transparency and traceability in transactions.

Why is UPI making news now?

1. Staggering growth: In April–June 2025, 34.9 billion person-to-merchant transactions occurred through UPI, worth ₹20.4 lakh crore, equal to 40% of private final consumption expenditure, up from 24% two years ago.
2. Shift from ATMs: Cash withdrawals, once dominant, have halved despite the economy doubling in size—falling from ₹2.6 lakh crore (2018) to ₹2.3 lakh crore (2025).
3. Wider impact: UPI is now used not only for routine consumption but also for debt repayments, investments, and financial services, signalling a major step in economic formalisation.

How has household spending been transformed?

1. Digital dominance: Household payments, earlier cash-heavy, are increasingly routed through UPI across income classes.
2. Food & beverages: In April–June 2025, households spent ₹3.4 lakh crore on food and beverages via UPI—17% of all UPI transactions and 21% of household expenditure.
3. Non-food items: Payments include utilities, medicines, petrol, taxi rides, and electronics, accounting for two-thirds of person-to-merchant transfers.

What about precautionary savings and cash usage?

1. Decline in cash holdings: Household currency holdings fell from 12.5% of gross savings (2020–21) to just 3.4% in 2023–24.
2. Changing behaviour: While cash remains important for land, gold, and election financing, its share in household savings has been on a consistent decline.

How is UPI impacting financial formalisation?

1. Formalisation of firms and workers: Increased traceable transactions complement reforms like GST registrations and EPFO contributions, enhancing formalisation.
2. Beyond consumption: UPI in July 2025 facilitated ₹93,857 crore debt repayments and ₹61,080 crore investments into securities—indicating a structural integration of households into formal financial markets.

What are the larger implications for the economy?

1. Scaling up formal economy: Digital payments extend across small, medium, and big-ticket transactions, shrinking the space for the informal sector.
2. Global context: Countries like Germany also have high cash usage despite digitisation—India’s transformation is striking in scale.
3. Policy question: With the public currency-to-GDP ratio falling from 12.9% (2022) to 10.9% (2025), the debate is whether India has reached an inflection point towards becoming a sustained cash-lite economy.

Conclusion

UPI’s ascendancy reflects not just a technological success but a social and economic restructuring of India. By shifting transactions from cash to traceable platforms, it has enhanced formalisation, reduced leakages, and encouraged financial inclusion. The challenge ahead lies in ensuring this transformation is sustainable while safeguarding against risks like digital divides, cybersecurity threats, and over-dependence on electronic infrastructure.

PYQ Relevance:

[UPSC 2023] What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.

Linkage: This PYQ is important as UPSC often tests themes of digitalisation, financial inclusion, and formalisation of the economy under GS3. The article helps answer it by showing UPI’s role in reducing cash reliance and formalising payments, while also pointing to persisting challenges like cash use in land, gold, and elections.

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