Mumbai: India’s heavy demand for cash--nearly 94% of transactions were made out in cash as per a recent survey--is unlikely to have significant implications for the spread of COVID-19 in the country. This is because there is, at best, a weak correlation between the amount of paper currency in circulation per individual and the virus’ transmission rates across countries, showed an analysis of recent global data.

On March 16, 2020, in the week leading to the lockdown, the Reserve Bank of India had suggested increased use of cashless payment methods to curb the spread of the virus. Communication around cash usage became a bigger problem when advisories from the World Health Organization (WHO) and central banks across the world suggested that cash could carry and spread the novel coronavirus, or SARS-CoV-2, as it is now known.

To investigate this alleged link between currency in circulation and the spread of COVID-19, we looked at correlations across countries for currency in circulation as of 2018 and confirmed COVID-19 cases as of July 15. The figure below plots the currency per capita (in terms of hundreds of US dollars) to the total cases per million persons in that country. (This does not permit any comment on causality, and is based heavily on reported infection rates, which may be underestimated for lack of testing.)

When we looked at an alternative measure--the likely links between the currency-gross domestic product (GDP) ratio and total cases per million--we found no correlation. For example, in Sweden, this ratio was 1.3% (as of 2018) and total cases per million are 2,186; in India, the ratio is higher at 11.2% but total cases per million are at 29. In areas worst-affected by the pandemic, such as the US and the Eurozone, a large fraction of cash is held outside these countries and thus may not be associated with domestic infection rates.

Cash Held vs Covid Spread

Although there is no information available on the newest strains of the novel coronavirus, scientific studies compiled by a team of medical researchers in Germany suggested in February 2020 that the time that the virus survives on paper, plastic, and glass surfaces is similar (4-5 days, depending on the type of strain). In a March 2020 article in the MIT Technology Review, associate editor Mike Orcutt responded to the WHO advisory by pointing out that shoppers are more likely to contract the disease from others in the aisles, not at checkout counters.

Given the large share of the informal sector and low adoption of cashless payment methods, restricting cash use may create problems, especially for the large number of migrant workers who face uncertainty around their livelihood because of the pandemic. India’s cash usage has also been linked to the size of its large informal sector, which contributes more than 50% to its national income.

Our finding does not discount the risks from digital methods of payments such as touchscreen phones or point-of-sale (PoS) machines, but it emphasises the need for central banks around the world to adapt to changes in payment methods in a post-COVID world--for example, the use of ‘tap-and-go’ payments or even digital currencies.

Yet, distrust of cash

The pandemic has nevertheless made people wary of cash, requiring central banks around the world to bolster trust in cash, as per an April 2020 bulletin from the Bank for International Settlements (BIS) authored by financial researchers Raphael Auer, Giulio Cornelli and Jon Frost.

“There are two measures economists use to study currency demand: the currency to gross domestic product (GDP) ratio and the currency in circulation per capita,” said Pushpa L Trivedi, a professor of economics at the Department of Humanities and Social Sciences, Indian Institute of Technology, Bombay (IITB). India, alongside countries such as Hong Kong and Japan, is more cash-reliant than other economies by the former measure, but not necessarily the latter owing to differences in exchange rates. For example, in India, there is nearly Rs 13,500 in circulation per capita ($230) but the US has more than $5,000 in circulation per capita as of 2018; by this logic one might think of the US as being more cash reliant than India.

Attitudes and perceptions on cash usage vary widely across countries, said Mehmet Özmen, lecturer in economics at the University of Melbourne’s Faculty of Business and Economics. For example, according to central banker John Bagnall and his colleagues in their 2016 paper published in the International Journal of Central Banking, cash is perceived to be more acceptable relative to debit cards for transactions in Canada, but not so much in the US.

“Countries like the US, Canada, Australia and Britain regularly conduct detailed surveys on how their citizens use cash and other payment methods like debit and credit cards,” said Özmen. “There’s not much evidence on what drives the preferences for payments in India though.” In his ongoing project on payment methods and cash usage in Mumbai, he found that 94% of nearly 15,000 recorded transactions were carried out in cash, typically in transactions of less than Rs 500.

In examining some of the factors that affect the demand for cash in India, recent studies point to the availability of alternative payment instruments as a key determinant of the currency-to-GDP ratio. Thus government advisories suggesting avoidance of cash during the pandemic when digital alternatives are available may have good intentions but may be speculative, as the analysis showed.

Aggregate data on payment systems for May and June 2020 are yet to be released by the Reserve Bank of India, but data up till April 2020 suggested a decline in digital payments and a further reduction in cash withdrawals at automated teller machines (ATMs). Further, recently released data from the National Payments Corporation of India (NPCI) suggested a decline in overall mobile and digital payments in March 2020, compared to earlier months. This could be explained by an overall drop in economic activity since March 24 when the nationwide lockdown was announced. The drop in ATM withdrawals might be due to mobility restrictions put in place during the lockdown, said Trivedi.

Number of cash withdrawals at ATMs (largely using debit cards) fell by more than half from 657 million in January 2020 to 287 million in April 2020.

Way ahead

What happens to cash in a post-COVID world? In the United States, for example, many credit card companies see an opportunity during the pandemic to make a more structural shift away from cash. But this is predicated on the assumption that the novel coronavirus lasts longer on paper currency notes than it does on credit/debit cards, or touchscreen surfaces.

Studies have suggested that ethanol is one of the most effective disinfectants for surfaces potentially affected by COVID-19. As India still uses paper-based currency notes, it may be difficult in practice to disinfect the large volumes of notes in circulation and with the public. Countries such as Canada, the United Kingdom and Switzerland (and other European Union countries, but not the US) have polymer-based banknotes, that are perhaps easier to disinfect without affecting the longevity of the banknote. India has, in the past, explored this option.

(Tagat is a PhD Scholar at the IITB-Monash Research Academy, Mumbai. The views expressed in this article do not represent that of IIT Bombay, Monash University, the Academy, or the sponsors of this research.)

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