Indians' Love for Cash Continues Unabated
The article discusses whether Indians' love for cash has waned after the note ban of November 2016. Data of more than 10 years are used to find out the truth relating to use of cash in India.
Table 1: Data showing Currency in Circulation and Currency-GDP ratio >
Data from 2011-12 to 2021-22 >
(please click on the image to view better)
Currency and Economic Growth
As Table 1 above shows currency in circulation (CIC) has been growing at a much faster pace than nominal GDP growth. Even though cashless payment systems have shown phenomenal growth in the past decade, cash is still dominant with Indians.
Currency in circulation is a sum of Bank notes, Rupee coins and Small coins. There are various measures to observe the dominance of cash in India. I present here two important measures, namely, year-on-year growth in currency in circulation and currency as a percentage of GDP.
Currency in circulation tends to grow along with the growth of a country's economy. CIC growth is also connected with rising prices (inflation).
As it’s not a good idea to look at absolute numbers in isolation, it’s better to normalise the absolute CIC numbers by adjusting them with nominal GDP—hence, the second measure of currency-GDP ratio. For comparison purposes, I’ve included data relating to consumer price inflation (CPI) and growth rates in nominal GDP (gross domestic product at current market prices) also.
Here, I’ve provided data for the past eleven years, from 2011-12 to 2021-22. There are two years in which we experienced key developments. One is year 2016, when the Government of India banned high-value bank notes of Rs 500 and Rs 1,000 (demonetisation); and another is 2020, when India (like others across the globe) suffered from draconian lockdowns after the outbreak of COVID-19 Pandemic.
During the financial year 2016-17, currency in circulation declined by 19.7 per cent due to note ban of November 2016. And in 2020-21, India’s nominal GDP declined by 1.4 per cent
To smoothen out the effect of these two turbulent years, let us look at the annualised growth of these measures between 2015-16 (one year before the note ban) and now, that is, 2021-22.
Table 2: Annualised growth rate or compounded annual growth rates (CAGR) between 2015-16 and 2021-22 are:
Despite the tall claims of the Indian government, Indians’ love for cash continues, with the currency in circulation outpacing the growth in nominal GDP and consumer price inflation (CPI).
As shown in Table 2, in the past six years (between 2015-16 and 2021-22), annualised growth in currency is 11.14 percent; whereas the CAGR of nominal GDP and CPI inflation are much lower at 9.44 percent and 4.88 percent respectively.
Currency-GDP Ratio
Another important measure also points to the fact that cash is still dominant form of usage, both for payments and as a store of value. Currency as a percentage of GDP used to be at 12.1 percent in 2015-16 (pre-note ban period) and during the note ban year of 2016-17, it plunged to 8.7 percent. But subsequently, the currency-GDP started rising with the currency-GDP ratio increasing to 13.3 percent in 2021-22 (Table 1).
The data bear the fact that despite the shock of note ban in 2016 and continued acceleration of digital payments, Indians are still fond of cash as a primary means of payments and as a store of value.
Surging Digital Payments
However, India has leapfrogged as far as non-cash (digital) payments are concerned. Payment and Settlement systems, like, RTGS (real time gross settlement) and NEFT (national electronic fund transfer)-- introduced in 2005--have facilitated the acceleration of digital payments.
Of course, the acceleration of digital payments is the most welcome feature of India’s efforts to deepen and widen the penetration of the payment systems. And in recent years, UPI (unified payments interface) has revolutionised the digital payments in India.
Due to uncertainties after the COVID-19 Pandemic, people have hoarded more cash than usual as a form of security. This primarily accounts for the higher growth of currency in circulation in 2019-20 and 2020-21 (Table 1).
Why Hold Currency?
Why do people hold currency? The main reason are:
- for doing financial transactions
- as a store of value for contingencies (hoarding)
- some use it in underground economy
High cash usage bias is not a phenomenon peculiar to India. Cash reigns supreme not only in India, but in other countries as well. Even advanced economies, like, Germany and Japan, depend predominantly on currency for conducting financial transactions, though COVID-19 has changed the payment habits of people--away from cash and toward electronic means.
Cash usage is ubiquitous, it's easy to use and provides great convenience for people. Maybe, instead of trying for a cashless utopia, it's better to focus more on a less-cash world.
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References:
RBI Annual Report May2022
RBI Report on Progress of Digitisation from cash to electronic Feb2020
RBI Monthly Bulletin for several years
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
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