Context and Overview

Over the past decade, the Indian economy has made notable strides in formalisation. While the integration of firms and workers into the formal sector has progressed incrementally, the most profound shift has occurred at the household level, primarily driven by the widespread adoption of digital payment platforms such as the Unified Payments Interface (UPI). This transformation in household financial behaviour marks a significant structural change in how the Indian economy operates, particularly in terms of transactions and consumption patterns.

Dimensions of Economic Formalisation

Formalisation in India can be observed across three key domains—firms, workers, and household transactions. Firms entering the Goods and Services Tax (GST) regime have increased, signaling a greater incorporation into the formal tax system. Similarly, worker formalisation is evident through the rise in Employees’ Provident Fund Organisation (EPFO) enrolments, suggesting growth in formal sector employment. However, the most rapid and impactful formalisation has taken place in household transactions, where cash-based spending is increasingly being replaced by digital payments, especially through UPI.

Rise and Scale of Digital Payments

·       The scale of UPI-led transactions underscores this transformation. Between April and June 2025, nearly 9 billion person-to-merchant transactions were conducted via UPI, amounting to ₹20.4 lakh crore. This figure represents nearly 40% of India’s Private Final Consumption Expenditure (PFCE) for the quarter, a sharp increase from 24% just two years prior.

·       In the food and beverages sector, households spent approximately ₹3.4 lakh crore using UPI, which constituted around 17% of all person-to-merchant UPI transactions and roughly 21% of total household expenditure on these items during the April–June 2025 quarter. Beyond food, digital payments have expanded across a wide array of sectors, including utility bill payments, petrol purchases, clothing, pharmaceuticals, consumer electronics, personal grooming, and transport services. In fact, non-food related spending now accounts for around two-thirds of all UPI person-to-merchant transfers, reflecting a broad-based digitalisation of consumption.

Beyond Day-to-Day Spending

Digital payments are not limited to everyday consumption. In July 2025, households transferred ₹93,857 crore to debt collection agencies, indicating significant use of digital platforms for loan repayments, many of which are likely tied to consumer credit. In the same month, ₹61,080 crore was transferred to security brokers and dealers, reflecting growing household participation in financial investments via digital means. These trends point to a broader shift in financial behaviour, where households increasingly use digital payments for both consumption and asset allocation.

The Cash vs Digital Paradox

·       Despite the explosive growth in digital transactions, cash usage in India remains relatively high, comparable to economies like Germany. Certain sectors continue to rely heavily on cash, particularly land and gold purchases, election financing, and precautionary household savings. These areas represent significant barriers to complete formalisation.

·       However, recent trends suggest a declining reliance on cash. Events such as demonetisation in 2016 and the COVID-19 pandemic in 2020–21 initially triggered a spike in household cash holdings. Yet, the post-pandemic period has seen a notable drop in cash’s role. The share of currency in household financial savings fell from 12.5% in 2020–21 to 3.4% in 2023–24. ATM withdrawals also declined, from 81 crore transactions worth ₹2.8 lakh crore in July 2019 to 44 crore transactions worth ₹2.3 lakh crore in July 2025, even as the broader economy nearly doubled in size. Furthermore, the currency-to-GDP ratio decreased from 12.9% in March 2022 to 10.9% in March 2025, suggesting improved monetary efficiency and lower dependence on physical cash.

Key Takeaways and Economic Implications

·       The rise of UPI and other digital platforms signifies more than just a change in how people pay—it represents a major step forward in financial inclusion and economic formalisation. There is a visible shift in consumption behaviour, with households increasingly using digital methods for both routine expenses like food and utilities and non-routine financial activities such as loan servicing and investing.

·       This transition is contributing to a decline in the use of cash, with implications for macroeconomic policy. A lower currency-to-GDP ratio improves monetary policy transmission, reduces leakages associated with the black economy, and enhances the transparency and traceability of transactions. Nevertheless, challenges remain. Cash continues to dominate in specific sectors like real estate, gold transactions, and political funding, which are often opaque and resistant to formalisation.

The Road Ahead

·       India appears to be approaching a critical inflection point in its journey towards a less-cash economy. The penetration of digital payments into both urban and rural markets, combined with ongoing efforts to formalise firms and workers, indicates that cash''s role in the economy may decline even further.

·       To support this transition, policy efforts must focus on strengthening digital infrastructure, particularly in semi-urban and rural areas, where connectivity and digital literacy may still be lacking. Additionally, robust cybersecurity measures are essential to build public trust in digital systems. Persistent challenges related to cash usage in land purchases, gold trade, and political funding also need targeted reforms, including better enforcement and policy transparency.

Conclusion

The expansion of digital payments, especially via platforms like UPI, is catalysing a deeper and more rapid formalisation of the Indian economy, particularly at the household level. As this transformation continues, it has the potential to reshape the economic landscape by reducing cash dependency, increasing financial inclusion, improving fiscal transparency, and enhancing the efficiency of India’s monetary system. This shift marks a pivotal moment in India’s evolution towards a digitally driven, formalised economic future.