From Demonetization to Digital Dominance

Analyzing UPI's Ascent and the Paradox of Cash Resilience in India

Abstract

India’s digital payments revolution gained unprecedented momentum following the 2016 demonetisation, with the Unified Payments Interface (UPI) emerging as the central pillar of retail digital transactions. Designed as a low-cost, interoperable, and real-time payment system, UPI significantly advanced financial inclusion, reduced transaction frictions, and transformed everyday consumer and merchant payment behaviours. Its rapid diffusion across urban and rural India positioned it as a global benchmark in instant payment systems. However, recent regulatory interventions reveal an emerging paradox in India’s cashless transition. The issuance of Goods and Services Tax (GST) notices to small traders in Karnataka, based on UPI transaction data, has triggered a visible retreat from digital payments toward cash among segments of the informal economy. This development underscores growing tensions between digital transparency and the economic vulnerabilities of small merchants. This paper analyses the evolution of UPI in post-demonetisation India and examines how its adoption has reshaped payment practices across socio-economic groups. It further explores the behavioural responses of merchants and consumers, focusing on fear of compliance burdens, working capital constraints, and perceptions of surveillance. The study evaluates the policy dilemma of balancing revenue enforcement with financial inclusion objectives and argues that the long-term sustainability of UPI depends not only on technological innovation but also on regulatory alignment that safeguards small businesses while enabling gradual formalisation of the economy.