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Indian Economy

Where is the cash gone?

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The currency ie. cash in circulation in India has shot up and is said to be at an all time high. It was reportedly about Rs.17.75 lac crores in November, 2016 when demonetisation was announced, 87% of which, at about Rs.15.41 lac crores was in high denomination notes of Rs.500 and Rs.1000, which were cancelled by the government. As per the figures that the Reserve Bank finally published, over 99% of this cash was banked and came back into the system. Once this cash was deposited in the banks, it was no longer cash in circulation and at that point of time, only the lower denomination notes of upto Rs.100, aggregating to Rs.2.34 lac crores remained in circulation. Since then the government has continued to remonetise the economy and further currency has been pumped into the economy as per its needs, such that it is said to be over Rs.21.50 lac crores at present. If the cash in circulation now far exceeds that what it was at the time of demonetisation, then it means that those Rs.15.41 lac crores that were mostly banked/deposited at the time of demonetisation have been withdrawn from banks and much more has been pumped into circulation by the government thereafter.

The interesting point is that despite the government encouraging cashless transactions in the economy, which have shot up and making cash transactions over Rs.2 lakh illegal, and also banning any business expenditure exceeding Rs.10000 in cash, as a measure to combat black money, yet the cash in circulation in the Indian economy has shot up. It proves the failure of the draconian demonetisation, as also the government’s attempt to suppress cash transactions.

The government has a bias against cash transactions which is not understandable. A large part of our economy which is the agri and rural sector and the informal sector transacts in cash, with agricultural income being tax exempt and banking and internet connectivity not being easily available in the rural areas. Cash has traditionally been the preferred mode of household spending in India. Even in a country like the USA, with 31% of transactions being incurred in cash, it remains the most popular mode of transacting. The Indian government equates cash in circulation with black money and corruption, which is a false notion. The cash in circulation in Japan, as a percentage of GDP at 20.40% is almost double that of India, yet Japan is far less corrupt than India is. On the other hand, the cash in circulation in Nigeria as a percentage of GDP at 1.86% is a fraction of that of India, but it is far more corrupt that India is. Even Switzerland’s cash in circulation on this metric exceeds that of India, but it is far less corrupt than India is. There is thus little correlation between corruption, black money and cash in circulation in a country.

But let us comeback to checking that if almost all the high demonetisation currency of Rs.15.41 lac crores was deposited in banks during demonetisation, then why was it all subsequently withdrawn from banks. The reasons could be to do with election expenses, cash needed for payment of bribes, the agricultural/rural and informal economy which is predominantly cash based, household expenses and savings, real estate payments in black, illegal transactions like hawala or interestingly it is said that during demonetisation, a lot of cash was banked by the poor in their bank accounts on behalf of the rich and was thus later withdrawn and handed back to them.

The moot question is that if so much cash in now in circulation, then why is it so scarce and is not available. There is certainly currency in the system, but it is not in circulation. In other words it has been hoarded and those who have it are unwilling to part with it. From an economic perspective it represents idle cash, and has become an unproductive asset, with little benefit to the economy. The reasons why the huge cash said to be in circulation, but is not available are many and include cash savings of the household sector that they are unwilling to bank or spend, the difficulty in spending big amounts since cash transactions exceeding Rs.10000 lakh are illegal and attract heavy penalty, cash parked in illiquid real estate, cash representing proceeds of crime such as corruption that cannot be in circulation and cash hoarded by the netas, babus and the banias.

So the currency is there in the system, but is not in circulation and is a dead asset not available for business or investment. That does not benefit our economy at all.

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