As of 29th March 2019, the amount of currency in circulation in India tallied at around ₹21.40 trillion. This significant figure was a marked increase from the ₹13.35 trillion reported back in March 2017, representing an impressive growth of 60.2% over this two-year period. This increase was observed during the fiscal year when demonetisation came into effect.
Growth in The Currency-to-GDP Ratio
When analysing India’s economic state, it’s crucial to take the Currency-to-GDP ratio into account. As of March 2019, this ratio reached 11.23%; the highest recorded number in three years. Comparatively, the Currency-to-GDP ratios in March 2017 and March 2018 were 8.69% and 10.70%, respectively. By these figures, we can see that there was consistent growth in the currency-to-GDP ratio between March 2017 and March 2019.
Despite efforts by authorities to promote a less cash-reliant economy, the size of cash transactions is growing. For every one-percent increase in GDP, the currency in circulation expanded by 1.5 percentage points.
Public Affinity for Cash Transactions
Despite the emergence of many alternatives to cash transactions, the public still shows strong preference for using physical currency. This preference is evident from the consistently high currency-to-GDP ratio.
High denomination bank notes make up a significant portion of the currency in circulation. Specifically, 37.3% of the circulating bank notes are of the ₹2,000 denomination, while 42.9% are of ₹500 denomination. This prevalence of higher denomination notes could potentially encourage hoarding.
Contributing Factors to Currency Demand Growth
There are several fundamental drivers that influence the growth of currency demand. These include the rate of growth in GDP, inflation rate, interest rate, and increased usage of non-cash payment instruments. An important aspect to consider in this context is the role of Direct Benefit Transfers (DBT).
Table: Substantial Cash Transfers
| Scheme | Amount (₹ crore) |
|——————|——————|
| PMAY-G | 43,375 |
| MGNREGS | 43,287 |
| PAHAL (LPG subsidies) | 34,128 |
| Total | 1,89,266 |
In the recent past, significant cash transfers have been made through schemes like PMAY-G, MGNREGS, and PAHAL (LPG subsidies), totalling ₹1,89,266 crore. These cash transfers partially explain the sharp increase in currency transactions.
The Importance of The Currency-to-GDP Ratio
As an economy grows, the total amount of currency used within it also grows in absolute terms. Therefore, it’s valuable to take into account the size of the economy. The higher currency-to-GDP ratio indicates that economic transactions in the informal sector are increasing, although they have not returned to pre-demonetization levels. This trend could be seen as positive news for the Indian economy.
Currency and Corruption
While there may be a perception that cash is linked with corruption, being paid bribes in the form of cash does not mean this money is held as wealth. Instead, these funds are typically used to purchase items such as real estate and gold. For instance, Japan’s currency-to-GDP ratio in 2017 was 20.44%, yet it is perceived as less corrupt than India. Meanwhile, Nigeria’s ratio was only 1.85% in 2016, but it is viewed as more corrupt than India.