The Indian economy’s heavy dependence on cash is likely to worsen its pain following the government’s decision to scrap Rs500 and Rs1,000 notes.
The importance of cash in India can be seen from the fact that the country has a much higher cash-to-gross domestic product (GDP) ratio than most major economies. Even in terms of cash-deposit ratio, India is much ahead of the US and euro zone. While some of this could be due to hoarding of undisclosed income, India’s huge informal economy is also a major factor in the dominance of cash in day-to-day transactions.
Low average balance in Jan Dhan Yojana accounts suggests that those dependent on the informal economy might not have been using bank facilities regularly and are most vulnerable to the transition costs.