An HSBC global research report finds a spike in India’s cash in circulation, after demonetisation had knocked off the bulk of it. The ratio of currency in circulation to GDP touched a low 8.8% in March 2017, jumped to 10.9% in March 2018, and is likely to touch 11.4% by March 2019. It is no cause for alarm. The use of cash has continued even in advanced countries since the start of the global financial crisis. The cash-to-GDP ratio is about 7.9% in the US, and even higher at about 10.6% in the EU area. Countries such as Japan, Hong Kong and Switzerland have cash-to-GDP ratios that are higher or comparable to that of India. So, the level of currency in circulation is not what is alarming, but the attempt to stamp out the use of cash.
Earlier, an RBI study showed that households still prefer to hold cash for their transactional needs, suggesting a premium on liquidity, induced by the demonetisation shock. Dependency on cash will come down if people are given ample opportunities to save in non-cash instruments that are both safe and inflation-proof.
The need is also to reduce the cost of electronic payments for merchants, whose thin margins force them to pass them on to households. The HSBC report cautions that the increase in currency usage is not due to a rise in rural incomes, but due to recovery of informality in the economy as the government goes easy on goods and services tax (GST) compliance and businesses continue to use cash. Once GST stabilises, large swathes of the economy will become formal and dispense with the need to use cash.
True financial inclusion to enable medium and small enterprises (MSMEs) to raise more money from formal channels (read: banks) will help curb the cash economy.
Today, there is a parallel economy that finances MSMEs, given that they borrow largely from informal lenders and varied non-banking finance companies. India’s political class also deals a lot in cash. The remedy is to reform poll funding and reform governance, which would break the cosy nexus between industrialists, politicians and civil servants, and kill the unwanted cash economy.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Do not fret about India’s cash economy