What does cash to GDP ratio mean?

 The total currency in circulation as of 27 March 2020 was ₹24.39 trillion. GDP for 2019-20 is projected to be ₹203.85 trillion. Hence, the cash in the system works out to 12% of GDP.Apr 13, 2020

What does cash to GDP ratio mean?

1. GDP: Gross Domestic Product or GDP is the money value of all the goods and services produced in a country within its geographic boundaries in a particular period of time or say a given period of time. In other words it is the value of all that is produced in a country in monetary term.
2. Public Debt: This refers to the money that is owed by the government which is done in the form of borrowings and repayments in each fiscal year. These are generally of 2 types Internal, which means the money borrowed from the residents of the country and External, which is money borrowed from sources outside the country.

Now coming back to your question , the cash to GDP Ratio or to be more accurate the Debt to GDP Ratio refers to the ratio between the public debt incurred by the government to its GDP. The debt is a cumulative amount i.e the sum of all the amounts added together whereas the GDP is measured in years.

One can see the trend in the ratio and determine the position of the country in the debt market. Say if the ratio is too high then the country is borrowing more than its capacity and hence at some point of time may be unable to repay back the debt.This is because the amount of goods and services produced within the country is not enough to generate the money and pay back.

A lower trend in the ratio signifies that the amount of goods and services sold in the economy is sufficient to pay back the debts incurred by the country.

The reason for such upheavals depends on many factors such as the general borrowing practices of the nation as to whether it has a borrowing tendency or not and hence incur further debt. Other reasons happen to be war, recession, natural calamities, the market, etc.

Hope, I have been able to clarify your doubt. Good Luck! :)

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Asthana Dev, lived in Mostly in My Head.

Answered October 4, 2017

GDP is basically how much money the country as a whole makes. It is a sumtotal of exports-imports + govt spending + investment + consumption ( This is one method of calculating it, there are others, but lets not confuse matters. It is sufficient to understand the concept). So basically if your family was India, GDP would loosely mean how much all members of your family make, the money you get on festivals, lottery wins, gift coupons you got, interest earned etc.

Now, to make the money, some business in the country is done in cash, some may be done as debt and credit, while some maybe done in the form of online transaction. So to calculate Cash to GDP ratio, you basically take the hard cash that is in circulation in the country and divide it by GDP. Basically, it means how much of GDP of a country was earned in cash. So in your family, how much money do you have in hard cash? You may have a home, money in the bank, gift coupons, gold etc, but how much cash is there is the house to go around? Divide that by total income as mentioned above and that should give you the Cash/GDP ratio for your family.

Now, generally the CtoGDP ratio for developed countries is around 4–5, India had the ratio hovering arounf 13%.

After DeMo, it is said that it is about 10.3%, some say less than that. However, that was just after. It is expected to climb back up again because even today, not everyone is connected to the banking system and people still prefer cash. Plus a lot of black business is also done in cash.

On top of that, just a low cash to GDP ratio can be deceptive. Because in informal sector people maybe using debts and barter system to conduct business which would not count as cash but is actually not a good thing. So you may be asking your friends for sugar, flour etc in return for giving them salt and you may be getting paid in potatoes instead of money being transferred to your account by netbanking. While that is cashless, its not progressive. So look at the data with a grain of salt, especially because DeMo hit the informal sector very hard and there is not good data available for that sector.