Context:

• The Indian economy has witnessed significant progress in formalisation over the past decade.
• While formalisation of firms and workers has advanced gradually, the most striking transformation has occurred in household transactions, primarily driven by the adoption of digital payments platforms such as Unified Payments Interface (UPI).

Dimensions of Formalisation:

• Firms: GST registrations reflect increasing entry of businesses into the formal tax net.
• Workers: EPFO enrolments show rising formal sector employment.
• Transactions: The largest transformation has occurred here, with UPI-led digital payments replacing cash in routine and non-routine expenditures.

Rise of Digital Payments:

• UPI transactions (April–June 2025):
  • 34.9 billion transactions (person to merchant) took place through the UPI platform amounting to Rs 20.4 lakh crore.
  • This is equal to almost 40% of private final consumption expenditure (PFCE) during the quarter, up from 24% two years ago.
• Food and beverages sector:
  • Households spent roughly Rs 3.4 lakh crore on food and beverages (including alcohol) through the UPI platform.
  • This works out to around 17% of all UPI transactions (person to merchants) or around 21% of all household expenditure on these items in the quarter (April–June 2025).
• Non-food sector:
  • Digital payments are used for paying for a wide range of goods and services, ranging
    • From payment of utility bills (electricity, water and gas) and petrol,
    • To buying clothes, medicines, electronic goods and cigarettes,
    • To paying for haircuts and taxi.
  • Expenditure on these non-food items accounts for roughly two-thirds of all person to merchant transfers through the platform.
• Beyond routine consumption:
  • In July 2025, households transferred Rs 93,857 crore to debt collection agencies presumably to repay loans, a significant share of which are taken to finance consumption.
  • In the same month, households also transferred Rs 61,080 crore to security brokers and dealers, presumably for the purpose of investing.

Cash vs Digital Paradox:

• Despite the surge in digital payments, India still has high cash usage — similar to countries like Germany.
• Key areas of cash use:
  • Land and gold purchases.
  • Election financing.
  • Precautionary household savings.

Trends in Cash Holdings:

• Demonetisation (2016) and Pandemic (2020–21): Led to surge in household currency holdings.
• Post-pandemic decline: Currency share in household financial savings dropped from 12.5% (2020–21) to 3.4% (2023–24).
• ATM withdrawals: Declined from 81 crore transactions (₹2.8 lakh crore, July 2019) to 44 crore transactions (₹2.3 lakh crore, July 2025), even as the economy doubled.
• Currency with public to GDP ratio: Fell from 12.9% (March 2022) to 10.9% (March 2025).

Key Takeaways from these Trends:

• UPI as a tool of financial inclusion and economic formalisation.
• Shift in consumption behaviour — both routine (food, utilities) and non-routine (loan repayment, investments).
• Declining reliance on cash for transactions and precautionary savings.
• Macroeconomic impact: Lower currency-to-GDP ratio, better monetary transmission, reduced black economy potential.
• Challenges: Cash dominance in land, gold, and political funding.

Way Ahead:

• India appears to be nearing an inflection point in its currency usage trajectory.
• With digital payments steadily replacing cash in both urban and rural consumption, along with formalisation of firms and workers, the role of cash in the economy may decline further.
• Policy priorities:
  • Strengthen digital infrastructure in semi-urban and rural areas.
  • Enhance cybersecurity and digital literacy.
  • Address persistent cash usage in land, gold, and political financing.

Conclusion: The deepening of digital payments marks a structural shift in India’s economic formalisation journey, potentially heralding a transition to a less-cash economy.