The formalisation of the Indian economy can be viewed at multiple levels – formalisation of firms, workers and transactions. Over the past decade or so, progress has been made across each of segments. Data on firm registrations under the GST and the number of contributing members under the EPFO do provide an indication of the extent of formalisation. But, by far, the greatest headway appears to have been made in the formalisation of transactions, triggered by the rapid adoption of digital modes of payment by households. And this holds true across the income distribution.
The scale of formalisation of household transactions, which were earlier dominated by cash, is staggering. In the first quarter of this year (April-June), 34.9 billion transactions (person to merchant) took place through the UPI platform amounting to Rs 20.4 lakh crore. To put this in perspective – this is equal to almost 40 per cent of private final consumption expenditure during the quarter, up from 24 per cent two years ago. While the extent of formalisation of payments would vary across various goods and services segments, this is a dramatic scaling up of payments through the UPI platform.
Now, these are person to merchant payments and would thus exclude some of the person to person payments made for goods purchased or services rendered which would possibly be part of household spending. There may also be the likelihood of some merchant to merchant transactions being included in this data – for instance, retailers buying items from wholesalers. As such, it is difficult to know the extent of the underestimation/overestimation. Moreover, some payments may also not be considered part of household “consumption” but are transfers made for building assets and repaying liabilities. Nonetheless, the UPI dataset does indicate that the increasing substitution of cash in favour of digital payments and their growing share (spending through credit and debit cards would also have to be added) in household transactions in all parts of the economy, across formal and segments that may have been part of the informal economy.
Take the case of food and beverages, segments that involve millions of small transactions each day, which have typically been conducted through cash. Even in this category, digital payments have made a significant dent. In the April-June quarter of this year, households spent roughly Rs 3.4 lakh crore on food and beverages (including alcohol) through the UPI platform. This works out to around 17 per cent of all UPI transactions (person to merchants) or around 21 per cent of all household expenditure on these items in the quarter (assuming the ratio of spending on these items is in line with that in 2023-24).
Within the non-food category, 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.
But, it’s not just spending on items of routine consumption that are routed through UPI. 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.
This growing substitution of cash by digital payments for routine and non-routine, small and big ticket transactions by households, along with the growing formalisation of firms and workers, which would also impact the usage of cash in business to business, business to consumer/worker transactions, has till now sat rather uncomfortably with the continuing high levels of cash in the economy. While cash is also widely used in the purchase of land, gold and election financing, India, however, is not an outlier. Some other countries such as Germany also had high levels of cash usage, despite high levels of digital adoption.
Some have argued that high levels of cash in the economy is perhaps more for the purpose of maintaining precautionary household savings amid growing uncertainty and its store in value functions. That may well have been the case. Household currency holdings did surge in 2017-18 after demonetisation and in 2020-21 during the pandemic. But, data also shows that in the years after the pandemic, the share of currency in household financial savings has been on a consistent decline. In fact, currency holdings, which accounted for 12.5 per cent of gross household financial savings in 2020-21, have declined to just 3.4 per cent in 2023-24.
Further, cash withdrawals from ATMs whether for precautionary holdings or transaction purposes have also seen steep decline. In July 2018, there were 78 crore withdrawal transactions amounting to Rs 2.6 lakh crore. In July 2019, there were 81 crore transactions amounting to Rs 2.8 lakh crore. But by July 2025, while the size of the economy almost doubled, the number of transactions had declined by almost half to 44 crore, while amounting to Rs 2.3 lakh crore.
This raises the question: If each year, incrementally, household currency demand for transaction purposes and precautionary holdings is falling, and the formalisation of firms and workers continues, though perhaps at a relatively slower pace, then, are we nearing an inflection point where incrementally currency in circulation will trend lower? There are some signs. In the last three years, currency with the public has grown at an average of just 6 per cent — half the pace of nominal GDP growth. As a consequence, the currency with the public to GDP ratio has fallen from 12.9 per cent at the end of March 2022 to 10.9 per cent by March 2025. But, will this be sustained?
Till next time
Ishan Bakshi
