Wrong to use cash as indicator of jump in economic activity, rural economy still depressed: SBI

It is 'erroneous' to come to a conclusion of heightened economic activity using the jump in currency in circulation (CIC), the economic research wing of SBI said on Thursday

Press Trust of India February 14, 2019 17:35:43 IST
Wrong to use cash as indicator of jump in economic activity, rural economy still depressed: SBI
  • In a SBI note, the economists estimated cash in the economy at Rs 20.4 lakh crore

  • Passenger car sales, commercial vehicle sales and two-wheeler sales shows a dip in activity

  • Higher currency in circulation does not suggest a jump in economic activity

Mumbai: It is "erroneous" to come to a conclusion of heightened economic activity using the jump in currency in circulation (CIC), the economic research wing of SBI said on Thursday.

In a note, the economists estimated cash in the economy at Rs 20.4 lakh crore, stressing the rural economy continues to be "depressed".

"Using CIC as a leading indicator of heightened economic activity, specifically the narrative of large cash usage in the informal economy, is erroneous," it said in a report.

It pointed out to data from leading indicators, including passenger car sales, commercial vehicle sales and two-wheeler sales, among others, which shows a dip in activity, to point out that the higher CIC does not suggest a jump in economic activity.

Wrong to use cash as indicator of jump in economic activity rural economy still depressed SBI

SBI. Representational image. Reuters.

"We are in a state of paradox as higher CIC cannot be taken as a proxy of economic activity as is being claimed," it stressed.

It argued that the higher CIC is because of a change in demand for cash more than two years after re-monetization and added that money supply has been restored to full level now.

Elaborating on the same, it said there is a trend towards using currency notes of the lower denomination as the re-monetisation is going through and also pointed out that the RBI has stopped the printing of the Rs 2,000 note.

"This means to sustain a transaction of the same amount now, more currency notes are required/volume of currency notes goes up and thus by default the value of CIC also goes up as more and more small notes are printed to at least ensure we are not reneging on economic activity," it explained.

The note said we are in a state of "paradox" at present, where the CIC has expanded but the income velocity of money has shown a sharp plunge.

Its estimates suggest that in the more advanced and larger States like Maharashtra, Uttar Pradesh and Karnataka, the income velocity is far less than the national average, while in Chhattisgarh, Madhya Pradesh, Andhra Pradesh and Jammu and Kashmir, the velocity is much higher than the national average.

Terming this as an "intriguing" trend, it said a lower income velocity of money in larger and developed states "indicates economic activity is indeed slowing down".

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