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Can't fool all the People all the Time

The latest claim made by the Government, in a series of alleged benefits from the demonetisation of November 2016, is the drastic reduction of cash-to-GDP ratio from 12% to 9%. Our Prime Minister had made this claim while addressing the company secretaries at a programme to mark the golden jubilee year of Institute of Company Secretaries of India (ICSI) in Delhi on 4 October 2017. It is a moot question whether a lower Currency in Circulation-GDP (CIC-GDP) ratio is a sign of a more developed economy or not. Before venturing to find its answer, let us examine certain facts.

Let us compare our CIC-GDP ratio from FY 2009-10. CIC-GDP ratio of 12.3% in 2009-10 seen a gradual reduction to 11.6% in 2013-14, when Dr. Manmohan Singh relinquished his office. Under the leadership of Shri. Narendra Modi, by 2015-16, it had shot up to 12.2%, and then witnessed a drastic, if disruptive, reduction to 8.8% in 2016-17. 

Our Prime Minister conveniently overlooked or glossed over the fact that this apparently lower ratio was arrived at based on ₹13.353 lakh crores currency in circulation (CIC) as on 31 March 2017, when the remonetisation was still on-going, and not yet completed by a long chalk. As per the latest RBI release, the CIC has increased to ₹16.004 lakh crores as on 6 October 2017. This means that the CIC has already recorded a jump of 19.8% within the last 6 months. When computing the CIC-GDP ratio, always nominal GDP is considered. If we account for the fact that GDP at current prices (Nominal GDP) is growing at 9.3%, the present currency-GDP ratio has already crossed 10% mark. An interesting fact one should not lose sight of is, despite all the pious announcements, the total CIC is reached approx 90% of the pre-demonetisation stage currently. When GDP is slipping, this will reflect in a higher CIC-GDP ratio, further down the line.

Increase in Currency in Circulation
Another fact not to be missed is how the currency in circulation spiked under Shri. Narendra Modi before declaring a war on the cash. When he assumed office on 26 May 2014, the currency in circulation was ₹13.715 lakh crores (as on 23 May 2014) and it reached ₹17.977 lakh crores on 4 Nov 2016, a few days before demonetisation was announced. This is a growth of more than 31%. Look at the steep increase recorded between October 2015 to May 2016 in the CIC. It is quite baffling that if the demonetisation was a considered decision taken after months of brainstorming, why did RBI keep pushing more currency into circulation in the interim?

Our Finance Minister, while giving an interview to the CNN-News18 on 10 Nov 2016, immediately after the demonetisation, made some sweeping statements about CIC-GDP ratio.
“No economy in the world, nowhere, except in India is the cash in circulation 12 percent of your GDP. You have almost around Rs 17 lakh crore of cash circulating in the market, a lot of it maybe static, lying just stacked. Most countries in the world don't have more than 4 percent of your GDP in cash.
A look at the graph below from “The Curse of Cash” by Mr. Kenneth Rogoff, a Harvard Economist (the data used in the graph is from July 2016), who is on the forefront of the war of eliminating cash, shows how much our Finance Minister has been economical with the truth:
  • Japan and Hong Kong are having a higher CIC-GDP ratio than India
  • Switzerland and Thailand are having comparable ratios with us.
  • Majority of the countries are having more than 4% CIC-GDP ratio.

The question remains whether lower CIC-GDP ratio is an indicator of more structurally-evolved economies or not. If it is, then how does the Finance Minister account for countries such as Japan, Hong Kong, and Switzerland having ratios, which are either higher or comparable to that of India? The World Bank also ranks these countries higher on ease of doing business, as well as tax and regulatory compliance. If the CIC-GDP ratio is indeed relevant to efficiencies, it is ludicrous to reach a conclusion that South Africa, Brazil, and Turkey are more “efficient” than Singapore, Switzerland, and Japan. The undeniable truth is that economic, technological, cultural, and sociological factors that influence currency demand differ across countries.

Per Capita Currency in Circulation

Next, let us examine if ₹17.977 lakh crores is unwarranted in relation to the population of India. If we translate this amount to per capita, then it becomes just ₹14382 with each citizen. Does this make India an outlier? Look at another graph from the “Curse of Cash” again. We can see from this graph that we hold one of the lowest cash per capita. While the countries with lowest currency-GDP ratio viz. Norway, Sweden, Canada, etc, are having much per capita currency with its people.
Factors influencing Currency circulation
RBI’s working paper titled “Modelling Currency Demand in India: An Empirical Study” states that the factors  that majorly influence the quantity of currency in circulation are:

  • The cross-country variations in growth inflation and interest rates
  • The rate of direct and indirect taxes
  • The share of informal and underground economy in the overall economic activity
  • The organization of economic activity (viz., dominance of retail vis-à-vis large-scale business)
  • Regulation of various modes of payment Proportion of migrant workers
  • The nature of currency (‘soft’ or ‘hard’), etc. are among the important explanatory economic factors.
Attempts to reduce the CIC-GDP ratio by merely reducing currency in circulation without the necessary and preceding structural reforms will only lead to unintended and deleterious consequences which we are experiencing currently. When the Government removed 86% of the currency in circulation, they called on the people to go ‘digital’. But little did they consider the options available to the large majority (approx 70%) of our countrymen resident in rural areas. The misadventure of abruptly removing cash without ensuring alternate choices to majority of the population finally resulted in shrinking of the GDP growth.

Rural and Urban India
Let us examine some hard facts about the rural India from the socio-economic census data, 2011.  

  • Out of the 17.98 crores rural households, only 9.58% have a salaried income
  • 74.52% households have an income of less than ₹5000/month
  • Only 8.52% of the rural households have income greater than ₹10000/month
  • Only 68.27% of the rural households have a mobile phone connection
  • If mobile phone ownership is taken state-wise, it is as low as 28.58% for Chhattisgarh, 33.58% for Odisha and 44.18% for Arunachal Pradesh.
If we look at the urban population, data from the same source reveals that 13.28% live in slums and 20.3% don’t possess a mobile phone.

What options did Government leave for these people for transactions when they removed cash and bragged about structural reforms? How bizarre it is to exhort these people to embrace digital payments when every day is a struggle to make both ends meet? We have paid a huge price for the misadventure both in personal misery and GDP growth. But instead of putting up their hands and honestly admitting making a snafu through an ill-planned misadventure called demonetisation, the Government is adding insult to injury by spouting outlandish and far-fetched claims to justify the totally avoidable pain inflicted on the public, especially to the lower strata of the society, as if they think they can fool all the people all the time.


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