JANUARY 2, 2023
Nearly six years and two months after the government announced demonetisation on November 8, 2016, currency with the public is at a new high. With cash remaining the preferred mode of payment, currency with public for the fortnight ended December 16, 2022 stood at a record high of Rs 31.27 lakh crore — up 74 per cent from Rs 17.97 lakh crore on November 4, 2016, days before the demonetisation was announced.
In fact, the currency with public is up 243 per cent from Rs 9.11 lakh crore that was recorded on November 25, 2016, two weeks after Rs 500 and Rs 1,000 notes were withdrawn from the system. The year-on-year rise in cash with the public has been Rs 232,986 crore as on December 16, 2022.
After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, currency with the public, which stood at Rs 17.97 lakh crore on November 4, 2016, declined to Rs 7.8 lakh crore in January 2017. Many say that the sudden withdrawal of notes roiled the economy — with demand falling, businesses facing a crisis and gross domestic product (GDP) growth declining nearly 1.5 per cent. Many small units were hit hard and downed shutters after the note ban as it created liquidity shortage.
Currency with the public is arrived at after deducting cash with banks from total currency in circulation (CIC). Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.
Cash in the system has been steadily rising, even though the government and the Reserve Bank of India (RBI) pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions. The jump was primarily driven by a rush for cash by the public in 2020 as the government announced a stringent lockdown to tackle the spread of the Covid pandemic. As nations around the world announced lockdowns in February, people began accumulating cash to meet their grocery and other essential needs.
Economists, however, say that currency with public should not be seen in absolute terms. “It should be seen as a percent of GDP and that has remains constant at around 12-13 per cent. Had the UPI, wallet and other digital transactions not grown over the last five years, that ratio to GDP would have been much higher,” said DK Pank, chief economist at India Ratings. A look at data shows that while currency with public to GDP ratio pre-demonetisation was around 11.8 per cent, at the end of the December 2022, it is marginally higher at 12.1 per cent. The rise in currency in circulation in absolute numbers is not the reflection of reality. “What needs to be taken into account is the currency to GDP ratio, which had come down after demonetisation,” said a banker.
The cash in circulation to GDP ratio has been 10-12 per cent till about FY20. CIC in India increased to a high of 14.4 per cent of GDP in 2020-21 from 10.7 per cent of GDP in 2017-18. However, post the covid-19 pandemic and due to the growth of cash in the ecosystem, CIC to GDP is expected to inch up further.
