On Currency in Circulation – Cash questions

Source: The post on Currency in Circulation has been created on the article “Cash questions” published in “Business Standard” on 30th November 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy.

News: The article discusses the issue of currency in circulation increasing in India despite a significant growth in digital payments at the same time.

What is the status of digital payments in India?

One of the most significant developments of recent years is the widespread adoption of digital payments.

Facilitated by the Unified Payments Interface, between 2016-17 and 2022-23, digital payments expanded at a CAGR of 51% in volume terms, and CAGR of 27% in value.

What are the benefits of using digital payments?

Instant and convenient mode of payment: Unlike cash, money can be instantaneously transferred to the beneficiary’s account using digital modes like using mobile number or easy-to-remember virtual payment address (email-like address).

Enhanced financial inclusion: People who may have been deterred by the time, and travelling cost involved in physically accessing a bank outlet can now conveniently access the bank account digitally and get various benefits of being part of the formal banking system.

Increased transparency in government system: Earlier government cash transfers were subject to “leakage” and “ghost” (fake) recipients. Now, benefits are directly transferred to target beneficiary’s account through digital modes of payments.

Safe and secure: Recipients of cash payments are vulnerable to theft. Digital payments are secure as multiple levels of authentication are required for making transactions.

Formalisation of Economy: Unlike cash payments, digital payments automatically establish a user’s financial footprint. This leads to formalisation of the economy because of increased access to Financial Services, Reduction in informal Cash Transactions, ensuring Tax Compliance, etc.

However, despite the adoption of digital payments, demand for cash, as reflected by Currency in Circulation, has also been growing.

What is meant by Currency in Circulation (CiC)?

Currency in circulation is the value of all the banknotes and coins that a country’s monetary authority has issued, minus the amount that has been removed from circulation. It is a key part of a country’s money supply.

What is the status of currency circulation in India?

The demand for cash increased significantly during the time of Covid-19 pandemic. In 2020-21, CiC increased by 16.6 per cent of GDP, against an annual average of 12.7 per cent during the past decade.

In 202122, this has come down to 13.2 per cent of GDP.

Notably, CiC is higher than the 11.5-12% of GDP in the pre-demonetisation period.

Source: Times of India.

What are the factors influencing the increasing demand for cash in the economy?

1. Disruption caused by the Pandemic: This may have led to a behavioural changes with people now keeping more cash to deal with uncertain situations.
2. Growing Informalisation of the Workforce: The informal sector depends on cash for settlements, which may be driving the demand. Higher CiC may be an indication of the growing informalisation of the workforce.
3. Higher Inflation: The rise can also be attributed to higher inflation in recent years. CiC tends to grow during episodes of high inflation (since it necessitates more spending).
4. Direct benefits received digitally but used as cash: The benefits are transferred through digital modes, but their actual usage is in cash because of a variety of factors (such as village shopkeepers not having the option of digital payment).
5. Tax Evasion and Black Money: It is possible that cash is still being used in large transactions to avoid taxes in sectors such as real estate. Recent reports of cash seizure, especially at the time of elections, suggest that illicit cash is still being generated in the system.

Question for practice:

Despite rising digital payments in India, currency in circulation as a % of GDP has been increasing. Discuss the reasons for this phenomenon.