How demonetisation got India’s Cash to GDP ratio at par with advance economies like Germany and France

Even as critics have argued that Prime Minister Narendra Modi's black money jolt last year brought down India's GDP growth by almost 1 per cent, RBI’s recent 2016-17 annual report has some good news. Demonetisation, it says, has brought the country’s currency in circulation to GDP ratio at par with with advanced economies like Germany and France.

High cash to GDP ratio, according to experts, is the biggest impediment in India's bid to transform into a cashless economy. Last year, India’s cash to GDP ratio (12.2%) - an indicator of the amount of cash used in the economy - was much higher than developed economies including the US, UK and Europre but below Japan (around 18%).

It came down to 8.8% by the end of March 2017 as a result of demonetisation which hit the total high value currency in circulation. Modi government's demonetisation move on November 8 last year had scrapped old high-value currency notes of Rs 500 and Rs 1,000.

“At end-March 2017, currency in circulation amounted to 8.8 per cent of GDP, down from 12.2 per cent in the previous year. At this level, India’s currency to GDP ratio compares well with a host of advanced and emerging market economies (such as Germany, France, Italy, Thailand and Malaysia),” reads the RBI report.

Just a week before the announcement of demonetisation decision, India’s cash in circulation was at an all-time high of Rs 18 trillion. In the weeks following demonetisation until December 31, 2016, the RBI pumped in 23.8 billion pieces of bank notes into circulation, which was Rs 5,540 billion in value. By the end of March 2017, currency in circulation had reached 74.3% of the peak.

Other highlights of the RBI report:

Most of the demonetised notes are back
The RBI annual report revealed that only around 1.4% of scrapped Rs 1,000 notes didn’t come back into the banking system post demonetisation. Out of 632.6 crore pieces of Rs 1,000 currency notes in circulation, 8.9 crore haven’t yet returned to banks. According to the report, around 89 million old Rs 1000 notes were in circulation in March 2017, while in March 2016, around 6.3 billion Rs 1000 notes were in circulation. It implies 89 million (or 8.9 crore) of Rs 1000 notes, which were banned by Centre in November, didn’t return to the banks.

More counterfeit notes have been detected
According to the RBI, detection of counterfeit notes was 20.4 per cent higher than the previous year. A total of 762,072 pieces of counterfeit notes were detected in the banking system during financial year 2016-17. Out of these fake notes, 95.7 per cent were detected by commercial banks.

Currency notes will have new designs
The RBI Annual Report stated that new design notes in other denominations are due for phased introduction. The central bank has already issued Rs 500 notes with new designs after demonetisation last year, and new design Rs 50 notes earlier this month.

Purchasing capability of Indians will increase
For the coming year, the RBI report speculates that both rural and urban parts of the country are expected to see high demand values on account of several factors. With normal southwest monsoon likely this year, policy initiatives of the government - for example, hike in maximum support prices, and increasing crop insurance coverage are likely to help in boosting crop production. The resultant increase in rural income is likely to boost rural consumption demand, said the document. In urban areas, implementation of new rates of House Rent Allowance as per recommendations of the Seventh Central Pay Commission for central government employees will contribute to increased consumption. Several state governments have also hiked salaries of their employees, or are about to, in accordance to the new pay panel. According to the report, this will again improve urban consumption demand.

(Image courtesy - Reuters)