Last Updated on May 12, 2025 by Rakshitha

Study on impact of plastic money on broad money in India

Impact of plastic money on broad money in India, which includes credit cards, debit cards, and prepaid cards, has significantly transformed the landscape of financial transactions in India. With the rise of digital infrastructure, government initiatives like Digital India, and the increasing penetration of banking services, the usage of plastic money has grown rapidly. It has provided convenience, security, and speed, making cashless transactions more appealing to both urban and semi-urban consumers. This shift has led to a notable reduction in the dependence on physical currency for day-to-day expenses.

The growing use of plastic money impacts the composition and velocity of broad money (M3), which includes currency in circulation, demand deposits, time deposits, and other liquid assets. As consumers prefer card-based payments, the reliance on currency in circulation decreases, while demand deposits tend to increase due to more electronic transfers and fewer cash withdrawals. This behavioral change supports a more efficient banking system, encouraging higher savings within financial institutions and enhancing liquidity management.

However, while the use of plastic money contributes to digitization and transparency, its direct impact on the total volume of broad money remains complex. Although it influences the components of M3, it does not necessarily expand or contract the overall money supply unless accompanied by changes in banking policies, interest rates, or economic activity. Plastic money improves money circulation, reduces the informal sector, and promotes financial inclusion, which indirectly affects broad money structure and use in India.

Impact of plastic money on traditional payment systems

The advent of plastic money has brought a significant shift in the way financial transactions are conducted, impacting traditional payment systems like cash, cheques, and demand drafts. With the widespread availability of debit and credit cards, consumers increasingly prefer quicker, hassle-free transactions over conventional methods that are often time-consuming and less secure. The ease of swiping or tapping a card has reduced the need to carry cash, leading to a decline in cash-based transactions, especially in urban and semi-urban areas.

Traditional instruments such as cheques and demand drafts have seen a sharp decline in usage due to the convenience offered by plastic money. These older methods often involve physical visits to banks, longer processing times, and higher risk of errors or fraud. In contrast, card-based transactions offer instant processing, better tracking, and enhanced security features. This has prompted both consumers and businesses to adopt electronic payment modes, leading to a gradual phasing out of paper-based transactions in many sectors.

However, the transition to plastic money also poses challenges to traditional payment systems. While banks are upgrading their infrastructure to support digital transactions, rural areas still face issues like limited card acceptance, low internet penetration, and lack of financial literacy. Despite these challenges, the overall impact of plastic money has been transformative. It has pushed traditional systems to evolve and integrate with digital platforms, making the payment ecosystem more efficient, secure, and inclusive over time.

An analysis of the use of plastic money in india

The use of plastic money in India has seen a substantial rise over the past two decades, especially following the growth of digital infrastructure and financial inclusion initiatives. Plastic money—primarily in the form of debit cards, credit cards, and prepaid cards—has become a preferred mode of payment for millions of Indians due to its convenience, portability, and safety. The government’s push towards a cashless economy, especially after demonetization in 2016, accelerated this shift by encouraging digital transactions and reducing dependence on physical cash.

Debit cards have been the most widely used form of plastic money, largely due to the widespread issuance of RuPay cards under schemes like Jan Dhan Yojana. Credit card usage, although more limited in comparison, has been growing steadily in urban areas where consumers engage more in e-commerce and lifestyle spending. The rise of Point-of-Sale (PoS) terminals, online payment gateways, and contactless technology has made card-based payments faster and more secure, enhancing user experience and encouraging adoption across retail, hospitality, and services sectors.

However, despite its growth, the use of plastic money still faces certain limitations. In rural and semi-urban regions, low digital literacy, limited access to banking infrastructure, and preference for cash continue to restrict widespread adoption. Additionally, concerns around cybersecurity and data breaches occasionally hamper trust in card transactions. Nevertheless, as financial awareness improves and infrastructure expands, plastic money is expected to play an increasingly vital role in India’s transition to a digital economy.

Dissertation on factors behind use of plastic money

The increasing use of plastic money in India can be attributed to several key factors, primarily convenience, speed, and safety. Debit and credit cards allow users to make transactions without the need to carry physical cash, reducing the risk of theft or loss. Additionally, with the expansion of online shopping and digital services, plastic money offers a seamless payment experience that aligns with the evolving lifestyle of consumers. Contactless payment options and rewards programs further incentivize card usage, making plastic money an attractive alternative to traditional cash-based transactions.

Government initiatives have also played a vital role in promoting the use of plastic money. Schemes such as Jan Dhan Yojana have helped open millions of bank accounts, leading to a surge in the issuance of debit cards. Post-demonetization, policies promoting a cashless economy, such as waiving transaction charges and increasing the number of Point-of-Sale (PoS) terminals, further accelerated the adoption of plastic money. The growth of financial technology companies has also simplified digital payments, integrating plastic money into everyday consumer behavior across sectors like retail, transport, and dining.

Socio-economic factors also contribute to plastic money adoption. Rising literacy rates, urbanization, and the growth of the middle class have increased financial awareness and demand for secure and efficient payment options. Moreover, the expansion of mobile banking and internet access in semi-urban areas has enhanced accessibility. Despite cybersecurity worries and infrastructural shortages in rural areas, plastic money use in India shows a strong and rising demand for digital financial instruments.

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