What is maintaining high cash intensity in the Indian economy?


Although the government and the Reserve Bank of India (RBI) are pushing for a “cashless society”, digitization of transactions and restrictions on the use of cash in various transactions, the amount of cash in the Indian system has increased exponentially. According to reports, liquidity intensity has steadily increased over the past three decades.

What are the growth figures?

The ten-year average ratio of money to the public (CwP) to GDP gradually fell from 8.2% in the 1980s to 10.6% in the 2010s. India’s RBI economy provided data on the currency with the public.)

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Despite a considerable fall in GDP and growth multiplied by digital payments, it peaked at 14.5% in fiscal 2021. Given a monthly increase in electronic payments, the continuation of this high ratio of 13% (29 lakh crore in the last week of February was the currency in circulation) for the financial year 2022 remains a question for many experts.

Observers suggest that neither currency demand patterns nor temporary events such as elections, festivals or precautionary public holdings can explain this trend. During the 2010s, the CwP/demand deposit ratio reached new highs. According to a report by The Hindu Businessline, the CAGR (compound annual growth rate) of CwP and nominal GDP during the period FY2000-20 was 13.4% and 12.2%, respectively.

The surge was mainly driven by the public’s desire for money at a time when the government declared a strict lockdown to combat the spread of the Covid-19 outbreak, according to reports. People started hoarding money to meet their groceries and other basic needs, which were mostly met by local grocery stores.

According to the RBI, currency with the public is calculated after subtracting cash in banks from total currency in circulation. Cash or currency in circulation refers to money that is physically used to conduct transactions between consumers and businesses within a country.

Previously, the sharp withdrawal of liquidity in November 2016 had disrupted the economy, leading to a drop in demand, a crisis for companies and a drop in GDP growth of almost 1.5%. Following the ticket ban, many small businesses were hit hard and had to close. This also led to a liquidity crisis.

What are the other associated reasons attached to the trend?

Indian currency
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Currency, demand deposits and trade credit, according to analysts, constitute the transaction demand for currency. Systemic developments in trade credit, it seems, are not captured by monetary models. The second missing variable is the need for funds to finance the under-invoiced/illegal fraction of Chinese imports, which has been steadily increasing since the early 2000s. velocity and liquidity conditions, all of which are important aspects of RBI’s monetary management.

Economic instability caused by demonetization, GST, and the first and second waves of Covid has accelerated currency growth since fiscal 2018. Liquidity and credit issues affect both buyers and sellers. Cash/bank balances are increased by reducing receivables and preferring cash transactions to credit sales.

Under-invoiced Chinese imports

Reports claim that large sums are needed to finance the continued and massive growth of Chinese under-invoiced/mis-invoiced/illicit imports. This has led to an increase in demand for high-denomination tickets. According to the Hindu Businessline report, the CAGR of these notes was around 20% from FY2001 to FY21, well above nominal GDP growth. Surprisingly, the share of high value banknotes has risen sharply to pre-demonetization levels. These imports seem far too large to offset the decline in demand for currency caused by financial deepening and an increase in digital payments.

Indian currency
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Some research studies estimate that the value of these imports from China to India and other emerging countries is significant. During the FY2000-20 period, the CAGR of official imports from China was 25%. According to the same statistics, despite weaker private consumption, low capacity utilization and strained ties with China, Chinese imports jumped 49% between January and November 2021. This could explain why the high cash intensity is expected to ease. continue in fiscal year 2022.

What about digital payment?

Although digital transactions have gradually increased in recent years, both in terms of value and volume across all economies, according to an RBI study on digital payments, data suggests that the ratio of currency in circulation to GDP will increase alongside overall economic growth in 2020.

“Several quirks, however, are evident in the trend: First, the prevalence and intensity of digital payment use does not appear to have any particular association with a country’s level of development,” said the RBI study. “An increase in the digital payments-to-GDP ratio over time does not appear to suggest a reduction in the country’s currency-to-GDP ratio,” he added.

The amount of Unified Payments Interface (UPI) transactions decreased by 5.9% in March 2020 and by 19.8% in April 2020, totaling just under one billion transactions. However, once the lockdown was gradually lifted, it rebounded.

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