Indian economy - Cash in circulation at 20-year high

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  Indian economy - Cash in circulation at 20-year high

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• The story: The total currency in circulation c-i-c (or the cash in the system) was at Rs.28.6 trillion as of March 2021 end, which was an increase of 16.8% from 2020. So, the total currency in circulation, adjusting for the size of the Indian economy, reached a two-decade high in March 2021.
• Be careful: 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.

1. The ratio of currency in circulation to the GDP was 14.6%, in March 2021 when compared with 12% as of March 2020. 
2. This was a 260 basis points jump, a historic high. Not even in the year after demonetization (2017) was this observed. (100 basis points = 1 per cent)

• Reasons: So what is driving this rise in CIC? 

1. First reason is pure arithmetic. Since the nominal GDP (GDP not adjusted for inflation) for 2020-21 is expected to contract to Rs.195.9 trillion, compared to Rs.203.5 trillion in 2019-20, the denominator is contracting. So, the ratio (CIC / GDP) has gone up.
2. The GDP forecast for 2020-21 was made before the second wave of Covid-19 hit. So the actual GDP number is likely to be lower than the forecast, as the economic activity in March 2021 was hit. That means the actual cash in the system to the GDP ratio will be even higher than 14.6% of the GDP.
3. Second reason is absolute. The currency in circulation in absolute terms rose 16.8% to Rs.28.6 trillion in 2020-21. This is the highest since 2010-11, when the currency in circulation had gone up by 18.8%. (Please ignore the 37% growth in 2017-18 on the back of demonetization in November 2016, when 86% of the currency by value was made useless overnight)
4. There really has been a big growth in currency in circulation in 2020-21 in absolute terms. If 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%. So CIC / GDP ratio is rising. The overall cash in the system has gone up.

• Why is this happening: With the rapid spread of the pandemic, Indians have withdrawn more money from banks and kept it with themselves to meet sudden emergencies. This also means that more transactions are happening in cash, although the UPI numbers are also exploding! The entire parallel system that emerged during the reverse migration of migrant workers in 2020, when people paid cash to truck operators and other transporters to make sure that they got home, must have pushed cash in circulation. Even now, hospitals are demanding cash to admit patients. Cash has also been used to procure medicines and other necessities for treating Covid. Add up, and you get big sums. It also means that people are earning but not depositing much, in banks.
• Summary: The cash in the system has risen substantially in each of the years since March 2017, thereby negating the supposed benefits of the demonetisation exercise 2016. 

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