FROM CASH TO CASHLESS: ASSESSING THE IMPACT OF DIGITAL PAYMENT USAGE ON HOUSEHOLD CONSUMPTION BEHAVIOUR AND FINANCIAL DECISION-MAKING IN INDIA

The transition of cash to cashless is one of the most influential changes in payment behaviour ever witnessed by India. In this paper, we conceive of it as a way of removing two frictions in one shot: both the physical friction of releasing coins, and the psychological friction of making a payment. It's a no-brainer that removing the first is good. But removing the second is not; that friction was doing useful and quiet work as a self-control device. The Indian data are in line with that reading. This has resulted in payments increasing significantly in volume and dropping substantially in value, with the average value of UPI transacting dropping around 29 per cent from its peak in 2020-21 to around ₹1,300 in 2025-26. There has been an increase in consumption   and a shift toward non-food, discretionary items. The ratio of household debt to GDP now stands at 45.5 per cent, with numbers of household-dwelling units holding consumption loans making up the bulk and the net financial saving by this sector falling short of the pre-pandemic level. Causal evidence for India reveals the spending effect of cash dependence, which increases by 2.38 per cent per 10 percentage points of cash dependence, due to the erosion of endowment effect and not as a result of income or credit shocks. That digital payments are bad is the wrong conclusion. They have increased access, reduced costs, formalized transactions and connected hundreds of millions of people who were not served previously, in fact, for the poorest families, the international evidence indicates savings on their part, rather than spending. The takeaway: a payments system this seamless creep can alter the way that households make financial choices, and thus public policy should adjust accordingly. The challenge of the coming decade will not be to delay transition, but rather to establish the financial education, behavioural controls and consumer safeguards to help households reap the benefits of transition, while maintaining control of their finances.

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