Currency with public doubles from demonetisation days: Why did Narendra Modi’s big gamble fail to dethrone the cash king?

Currency in Circulation (CIC), which is all the currency printed by government mints, totaled Rs 19.3 lakh crore as on 1 June. Remember, this figure had fallen to Rs 8.9 lakh crore in the aftermath of demonetisation, meaning the quantum has more than doubled since then.

Of the total CIC, the currency with the public (the chunk of money with the general public excluding the currency with banks), is also at a record high now, at Rs 18.5 lakh crore. As RBI data points out, this too had touched a low of Rs 7.8 lakh crore immediately after the note ban.

Now, what do these numbers tell us? Quite clearly, demonetisation has failed to take away the penchant for cash from India’s general public. Had the idea of a cashless economy found its way to the public psyche and plastic money indeed replaced cash, these figures would have told us a different story.

Representational image. PTI

Representational image. PTI

Now, look at the progress of digital payment data since demonetisation. Indeed the volume is going up but not enough, in terms of quantum, to displace cash from the common man’s kitty; not yet. The pace of growth picked up sharply post demonetisation but lost steam subsequently. That growth has been mainly on large value transactions not so much on retail transactions.

For instance, the value of mobile banking transactions had risen from Rs 1.36 lakh crore (87.47 million transactions) in November 2016 to Rs 2.13 lakh crore in May, 2017 (114.26 million transactions). However, in August 2017,  it slipped to Rs 80,506 crore (98.25 million transactions). In April, 2018 (the latest available data), the value is Rs 1.31 lakh crore (247.36 million transactions).

The story is largely the same with other digital payments except in the case of UPI, where there is a clear spike both in the value and the number of transactions. But, even in the case of UPI, the quantum of transactions is small to call it a major pointer. In February, 2018, the total value of UPI transactions stood at Rs 19,100 crore from 171.2 million transactions.

"The competition is cash," Sri Shivananda, senior vice president and chief technology officer at PayPal told CNBC in an interview in May this year. "It's not even, like, you're fighting for each other's volumes. It's actually cash," Shivananda said, adding people still prefer cash because it's easier than either obtaining a credit card or using a digital payments platform in many places. In short, Indians still love cash, even after a shock therapy in the form of demonetisation and persistent nudging by the Narendra Modi-led government and the RBI to switch to a 'less-cash' economy.

That raises another curious question. If there is enough cash to go around, then why did some parts of India face a severe cash crunch recently? There could be two possible reasons. One, large scale hoarding of cash. Second, the possibility that the CIC hasn’t recovered enough post the demonetisation period in correlation with the growth in the national income. A good indicator to look at here is the cash-to-GDP ratio.

A Firstpost analysis of the average growth in CIC for the last 10 years shows a rate of around 14 percent. Just before demonetisation, as on 4 November, 2016, CIC was Rs 17.98 lakh crore. Suppose demonetisation never happened, and had the CIC grown at an average rate of 14 percent, the CIC in November 2017 would have been Rs 20.5 lakh crore. However, the figure is below that level even now.

Cash to GDP ratio table - 11 June 2018

Now, the abovementioned numbers need to be seen in conjunction with the cash-to-GDP ratio. India is a cash-intensive economy that comprises of a huge informal sector (which employs 70-80 percent of its population). The sudden withdrawal of 86 percent of all cash, during demonetisation, dealt a bloody blow to the informal segment. Since then, the point to note here is that the cash-to-GDP ratio has shrunk substantially despite the CIC growing to Rs 18.3 lakh crore in FY18, or around 10.9 percent of GDP as compared with 12-13 percent of GDP prior to demonetisation. In FY17, it was 8.8 percent, while in FY16 it was 12.1 percent.

Now, if one compares the growth in CIC and the growth in nominal GDP for the last six years, it is quite evident that post demonetisation, the CIC failed to catch-up with the pace in GDP growth by a significant margin. Between FY12 and FY16 (prior to demonetisation) the growth in CIC was 55.6 percent while the growth in the nominal GDP rate was 57.5 percent. But, in the two-years post demonetisation, the growth in CIC was a meagre 10 percent while nominal GDP grew at 21.7 percent.

To sum up, data available so far shows that cash remains king in the economy, even post demonetisation, and that the government's digital drive cannot easily dethrone cash from Asia’s third-largest economy.

(Data support from Kishor Kadam. Part of this piece was published earlier)


Updated Date: Jun 11, 2018 15:38 PM

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