Blow to Digital India! Cash to GDP ratio peaks at 14.7%

Higher currency growth at 17.2 per cent in 2020-21, which was 14.0 per cent a year ago, has also contributed to higher cash to GDP ratio

Anand Adhikari

• May 28, 2021,
• Updated May 28, 2021, 1:16 PM IST

Despite government's efforts to digitise the economy, the cash in the economy has shot up to 14.7 per cent of GDP in 2020-21, according to data in the Reserve Bank of India's annual report.

The currency to GDP ratio was always less than 12 per cent. In fact, one of the objectives of demonetisation of high-value currency notes in 2016 was to reduce cash levels (including black money)  and increase digitisation by way of online transactions, card payments etc.

The currency to GDP had fallen to 8.67 per cent in 2016-17. But the drop was short-lived cash to GDP ratio increased to 12.03 per cent in 2019-20. The figure 14.7 per cent is very high as compared to lower levels in the last decade.

Also read: Stock market levels pose risk of a bubble: RBI

Higher currency growth at 17.2 per cent in 2020-21, which was 14.0 per cent a year ago, has also contributed to higher cash to GDP ratio. The currency in circulation has increased from Rs 16.63 lakh crore pre-demonetisation to Rs 28.60 lakh crore in 2020-21.

There could be a denominator effect as GDP has gone down due to Covid-19 impact on economy.

Given the RBI's accommodative instance and the resolve to keep G-Sec yields low, the money supply is expected to increase in the future. Expert suggests the cash to GDP ratio will remain elevated for sometime.

Currency in Circulation (CiC) includes banknotes and coins. According to the RBI's  annual report, the value and volume of banknotes in circulation increased by 16.8 per cent and 7.2 per cent, respectively, during 2020-21 as against an increase of 14.7 per cent and 6.6 per cent, respectively, in 2019-20.

In value terms, the share of Rs 500 and  Rs 2,000 banknotes together accounted for 85.7 per cent of the total value of banknotes in circulation as on March 31, 2021, as against 83.4 per cent as of March 31, 2020.

Clearly, the Rs 500 notes are replacing the Rs 2,000 notes as the volume and value of Rs 2,000 notes are declining. In volume terms, Rs 500 has the highest share at 31.1 per cent followed by Rs 10 denomination banknotes which constituted 23.6 per cent of the total banknotes in circulation as of March 31, 2021.