Home/ Economy / Cash in circulation is now at a two-decade high

The total currency in circulation, adjusting for the size of the Indian economy, reached a two-decade high in March 2021.

The total currency in circulation or the cash in the system was at 28.6 trillion as of March end, an increase of 16.8% from the year earlier.

Looking at currency in circulation in absolute terms, however, doesn’t give us the correct picture. One needs to adjust for the size of the Indian economy as well. This is done by dividing the currency in circulation by the gross domestic product, or the GDP.

the ratio of currency in circulation to the GDP stood at 14.6% as of March 2021
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the ratio of currency in circulation to the GDP stood at 14.6% as of March 2021

Once we do that, the ratio of currency in circulation to the GDP stood at 14.6% as of March 2021 when compared with 12% as of March 2020. This is a 260 basis points jump, something which has never happened before. Not even in the year after demonetization. One basis point is one-hundredth of a percentage point.

Let’s try and understand why the cash in the system is at its highest level in two decades.

1) The nominal GDP (not adjusted for inflation) for 2020-21 is expected to contract to 195.9 trillion. It was at 203.5 trillion in 2019-20. With the denominator contracting, it is not surprising that the ratio has gone up.

It is worth remembering here that the GDP forecast for 2020-21 was made before the second wave of covid broke out in India. Hence, the actual GDP number is likely to be lower than the forecast, as the second wave is likely to have hurt economic activity in March. And that means that the actual cash in the system to the GDP ratio will be even higher than 14.6% of the GDP.

2) It’s not just about the GDP contracting. The currency in circulation in absolute terms rose 16.8% to 28.6 trillion in 2020-21. This is the highest since 2010-11, when the currency in circulation had gone up by 18.8%. In saying this, we are ignoring the 37% growth in 2017-18 simply because that had come on the back of demonetization in November 2016, when 86% of the currency by value was made useless overnight, and the government replaced a large chunk of that in 2017-18, the next financial year.

The point is that there has been significant growth in currency in circulation in 2020-21 in absolute terms. Let’s say the GDP in 2020-21 hadn’t contracted and had stayed where it was at in 2019-20; even then, the currency in circulation to GDP ratio would have been at 14% of the GDP. If the GDP in 2020-21 had grown by 8%, then the currency in circulation to the GDP ratio would have been at 13%. These figures would also have been the highest in two decades.

Hence, the overall cash in the system has gone up, and it’s not just because of the GDP contracting.

3) Why has the overall cash in the system gone up? A simple explanation for this lies in the fact that with the spread of the pandemic, people have withdrawn more money from banks and kept it with themselves to meet emergencies.

This could possibly also mean that more transactions are happening in cash. Take the case of the entire parallel system that emerged during the reverse migration last year, when people paid cash to truck operators and other transporters to make sure that they got home. In the recent past, there has been enough anecdotal evidence of hospitals demanding cash to admit patients. Cash has also been used to procure medicines and other necessities for treating covid.

It could also mean that the people are unable to deposit the money that they earn in banks.

To conclude, the cash in the system has risen in each of the years since March 2017, telling us clearly that the major aim of demonetization to take the Indian system away from cash has failed.

Cash was king. Cash is king. And cash will remain the king.

Vivek Kaul is the author of Bad Money.

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Updated: 27 Apr 2021, 08:19 AM IST
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