currency in circulation

Cash is Back: Ill-Effects of Demonetisation are Finally Going Away

We had written about this issue, earlier this month.

At that point of time, the currency in circulation was approaching its pre-demonetisation level.

As of March 9, 2018, the currency in circulation crossed its pre-demonetisation level, for the first time. This is a significant event, which has largely gone unreported in the mainstream media. We wonder why? Dear Reader, guess you know the answer to this one.

Take a look at Figure 1.

Figure 1:The currency in circulation as on November 4, 2016, four days before demonetisation was announced, had stood at Rs 17.98 lakh crore. After that the currency in circulation fell, as people deposited Rs 500 and Rs 1,000 notes in their bank accounts. It fell to low of Rs 8.98 lakh crore as on January 6, 2017, and has had largely had an upward trend since then.

Of course, it is not fair to look at currency in circulation, just in isolation. Then there would be no difference between what passes of as analysis on the social media and us.

The currency in circulation is also a function of the size of the economy. Between November 2016, when demonetisation happened and now, the economy has also increased in size. Hence, we need to adjust for this, and the right metric to look at is the currency in circulation to the Gross Domestic Product (GDP) ratio.

In order to come up with this ratio for the end of this financial year, we will have to project the currency in circulation. A projection for the GDP is available.

We basically look at the weekly growth rate of currency in circulation over the last one year (i.e. from March 10, 2017 to March 9, 2018). We ignore the rate of increase in currency in circulation from January 6, 2017 and March 2, 2017, because it was growing at a very fast rate at that point of time.

Using the weekly rate of increase of currency in circulation from January 6, 2017, onwards, is likely to lead to a higher currency in circulation at the end of this financial year and we like to be slightly conservative in our calculations.

Using the rate of weekly increase in currency in circulation between March 10, 2017 and March 9, 2018, the currency in circulation at the end of March 2018, is likely to be around 18.53 lakh crore. As of March 9, 2018, it was at 18.14 lakh crore.

The GDP at the end of the year is projected to be at Rs 167.51 lakh crore. This means a currency to GDP ratio of 11.1%. Take a look at Figure 2, which basically plots, the currency to GDP ratio of the Indian economy, over the years.

Figure 2:The currency in circulation as of March 31, 2017, had stood at 8.8% of the GDP. By March 31, 2018, it is expected to be at 11.1% of GDP, a jump of 230 basis points. One basis point is one hundredth of a percentage. While, this has still not crossed the pre-demonetisation level, it is a tremendous recovery from the March 2017 low.

There are multiple interpretations that can be made from this. Firstly, it tells us very clearly that Indians have gone back to cash as a medium of exchange. It also tells us very clearly that fundamental habits cannot be changed overnight, a point we have been hammering away at for a while now. An economy which used cash for close to 98% of its transactions (in volume terms), cannot be suddenly expected to use substantially less cash.

The increasing currency in circulation as a proportion of the GDP, is a sign of people carrying out more economic transactions with each other than they were in the past. Only when economic transactions happen do people need cash or currency to pay for stuff. If economic transactions are not happening, the currency can continue to stay in the bank account. Only, when transactions start to happen, money is withdrawn from banks and currency in circulation goes up.

Of course, many transactions are carried out in cash. Informal economy forms a huge part of India’s total economy. It also employs a major part of the workforce.

Depending on which estimate you want to believe the informal economy forms around 40-45% of India’s economy and employs anywhere between two-thirds to 92% of its workforce. The currency in circulation going up is clearly good news for the informal sector.

It shows that life seems to be gradually getting back to normal, for this sector, which was badly hit in the aftermath of demonetisation. This should gradually translate into good news for the formal sector as well. If the informal sector does well and people working in it earn money and spend it, the firms operating in the formal sector are bound to benefit, as well.

Of course, the propaganda these days is that everybody who operates in the informal sector is bad, because they don’t pay tax. But that is incorrect. As we have written in the past, a bulk of the individuals working in the sector do not come under the tax bracket and hence, they don’t pay tax. Hence, painting everyone with the same brush is neither fair nor required.

Having said that, there are people and firms operating in the informal sector not paying their fair share of taxes. This means the income tax department needs more efficient targeting, instead of painting everyone with the same brush, as the government has been doing since November 2016. But that is easier said than done.

Propaganda is way easier than doing the right things.

The column originally appeared on Equitymaster on March 22,2018.

Digital Payments Go Up in March, But a Large Part is Seasonal

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I have been closely tracking the increase in currency in circulation and the volume of digital payments being made by Indians, for some time now.

The idea is to check if people are “increasingly” moving towards digital modes of payment in the aftermath of demonetisation. Having more and more people go digital has emerged as one of the motives for demonetisation.

I use the word increasingly because even without demonetisation, people have been moving towards digital modes of payment over the years at a pretty good rate.

Look at Table 1. It shows the volume of digital transactions happening in India over the last few months. This table has been reproduced from a report titled Macroeconomic Impact of Demonetisation: A Preliminary Assessment, authored by the Reserve Bank of India and published on March 10, 2017. The table had data until February 2017, I have updated it for March 2017 as well.

Table 1: Number of digital transactions.

Volume (in Crore)Nov-16Dec-16Jan-17Feb-17Mar-17
National Electronic Funds Transfer12.316.616.414.818.7
Cheque Truncation System8.71311.81011.9
Immediate Payment Service3.65.36.266.7
Unified Payment Interface0.030.20.420.420.62
Unstructured Supplementary Service Data00.010.030.020.02
Debit and Credit Card Usage at Point of Sales20.631.126.621.223
Prepaid Payment Instrument5.98.88.77.89
Total51.175.070.260.269.9

Source: Reserve Bank of IndiaBetween February 2017 and March 2017, the total number of digital transactions has jumped by around 16 per cent to 69.9 crore. There are two reasons for it. One is the fact that the rate of increase in currency circulation has gone down dramatically during the month of March 2017.

This is something I had discussed last week. Take a look at Figure 1. It plots the rate at which currency circulation has been increasing week on week since January 6, 2017.

Figure 1: 

Due to reasons which only the government or the RBI can explain, the rate of increase in currency circulation has been slowing during the course of March. What does this mean? The currency in circulation as on March 3, 2017, was at Rs 11,98,412 crore. This increased to Rs 12,45,819 crore as on March 10, 2017. This meant a jump of Rs 47,407 crore or around 4 per cent (Rs 47,407 crore crore divided by Rs 11,98,412 crore). This jump of 4 per cent is referred to as the rate of increase in currency circulation.

For the week ending March 30, 2017, the currency in circulation increased by just 1.7 per cent. Hence, even though the currency in circulation is going up, the rate at which it is going up has slowed down dramatically. For the week ending January 13, 2017, it had grown by 5.9 per cent.

This slow growth of currency in circulation wasn’t enough to satiate the demand of the public and to a large extent explains why ATMs have generally been running dry. And this to some extent explains the increase in digital transactions.

Take a look at debit and credit card usage at point of sale terminals in Table 1. After falling dramatically in between January and February 2017, they have jumped up again by 8.5 per cent during the course of March. This is a good indicator of the fact that the shortage of currency forced people to use digital money.

Over and above this, there is a seasonality factor as well. March is the last month of the financial year and digital payments seem to go up during the course of the month, as people pay their taxes (advance income tax and service tax) as well as settle business payments between them.

Take a look at Table 2. It shows the digital payments made between November 2015 and April 2016. It shows that the digital payments showed a jump between February 2016 and March 2016.

Table 2:

Volume (in Crore)Nov-15Dec-15Jan-16Feb-16Mar-16Apr-16
National Electronic Funds Transfer101211.91112.911.2
Cheque Truncation System7.18.27.88.48.87.9
Immediate Payment Service1.92.12.32.42.62.7
Debit and Credit Card Usage at Point of Sales16.617.81817.218.519.1
Prepaid Payment Instrument6.36.96.56.57.26.9
Total41.94746.545.55047.8

Source: Reserve Bank of IndiaIn Table 2, I have ignored Unified Payment Interface as well as Unstructured Supplementary Service Data, given that the numbers are very small and do not have any overall impact. As can be seen from Table 2, the total number of digital transactions in March 2016, went up by around 9.9 per cent to 50 crore, in comparison to February 2016.

Between February 2017 and March 2017, the jump was at 15 per cent (ignoring Unified Payment Interface as well as Unstructured Supplementary Service Data). As explained earlier, a part of this jump is because of shortage of cash, something that the government wants and a part of this jump is simple seasonality as people make their tax payments and settle their year-end business payments.

As can be seen from Table 2, in April 2016, the total number of digital transactions fell by around 4.4 per cent. Given this, once April 2017, data comes out, we will get a much clearer trend on the impact of demonetisation and shortage of cash on digital payments.

Dear Reader, keep watching this space.

The column originally appeared on Equitymaster on April 19, 2017

Why Suddenly There is No Cash in ATMs

Over the last few days there have been a spate of media reports about cash not coming out of ATMs. “Bengalureans were greeted with ‘No Cash’ boards at most ATMs on Monday [April 10,2017],” reports the Deccan Chronicle.

“The arid days of demonetisation are back to haunt Mumbaikars. Ten days after the banking sector’s yearly closing on March 31, ATMs continue to run dry across the city,” reports The Times of India.

The New Indian Express reports that the cash crunch has made a comeback to the city of Visakhapatnam, with majority of the ATMs running out of cash.

“Although the new financial year is in its second week, a majority of ATM kiosks in Pune continue to run dry while citizens run from one kiosk to another to withdraw cash,” reports The Indian Express.

The Hindu reports that “cashless ATMs and serpentine queues outside banks have once again become the norm,” in Hyderabad.

I guess I will stop here. This is enough to establish that there really is a problem and currency at ATMs is in short-supply.

So, what is happening here? The explanation that has been offered is that this cash shortage has been because of the March 31st, year-end for banks. While that clearly might be a reason, there are other reasons at work here as well. Allow me to explain.

Since January 2017, the currency in circulation has been increasing every week. This has been happening with the printing presses of the Reserve Bank of India and the government, printing and pumping money into the financial system through banks. Take a look at Figure 1.

Figure 1 

As can be seen form Figure 1, the currency under circulation has been going up from January 6, 2017, as the RBI and the government have printed and pumped money into the financial system.

But is that enough? What we also need to take a look at is the rate at which the currency in circulation has risen week on week since January 6, 2017. How is this obtained? The currency in circulation as on January 6, 2017, was at Rs 8,98,017 crore. This increased to Rs 9,50,803 crore as on January 13, 2017. This meant a jump of Rs 52,786 crore or around 5.9 per cent (Rs 52,786 crore divided by Rs 8,98,017 crore). A similar calculation is carried out for the remaining weeks as well.

Take a look at Figure 2. It plots the rate at which currency circulation has been increasing week on week since January 6, 2017.

Figure 2: 

Figure 2 makes for a very interesting reading. The highest increase in the rate of increase in currency circulation came in the period of one week ending January 13, 2017, at 5.9 per cent. Since then the overall trend has been down, with jumps in between. Having said that, the rate of increase in currency circulation has seen a downward trend between March 10 and March 31, 2017.

The rate of increase in currency in circulation for the week ending March 31, 2017, was at the lowest level since January 2017, at 1.7 per cent. What does this mean? It means that the RBI is not releasing currency to the banks at the same pace as it was in the past. The rate of currency release at RBI’s level has come down. And that basically means banks don’t have enough currency/cash to load into ATMs as they had in the past.

This explains why there has been shortage of currency at ATMs. It could also mean that the RBI and the government printing presses are not printing as much currency as they were doing in the past. Why is this happening is something only the central bank and the government can explain.

If this is being done knowingly to bring down the total amount of currency in the system, then it’s a rather stupid move. Any economy needs a certain amount of currency to function. The Indian economy as of now does not have an adequate amount of it. The total currency in circulation as on March 31, 2017, was at 74.3 per cent of the level of the pre-demonetisation level. Unless we get back to a similar level, some currency shortage is likely to continue.

If the government decides not to print and pump in as much currency as there was in the pre-demonetisation era, it will have an impact on the total number of economic transactions carried out in the economy. And that possibly is not a good thing.

Further, the fact that ATMs are running out of cash tells us that the demand for currency continues to be high. This basically means that the digital medium of payments hasn’t really caught on despite the best efforts of the government.

To conclude, as the old jungle saying goes, when you don’t know where you are going, the journey is the reward.

The column originally appeared on Equitymaster on April 11, 2017

Is the RBI Telling Us Something That the Govt Isn’t?

One of the things that we have learnt in the business of economic forecasting is to highlight the forecasts that we get right and tom-tom about it. The new Reserve Bank of India deputy governor Viral Acharya said something two weeks back that we seemed to have missed (you know with the media expanding at the rate it has, it is difficult to keep track of everything).

Nevertheless, here we go. Acharya said on March 6, 2017, a few days after his birthday: “I think everyone should keep in mind that the remonetisation is taking place at a very fast pace. We have some way to go, but I think we expect that within two to three months we will reach full currency in circulation. It will be slightly lower, but it is in that ballpark (number).”

What Acharya was basically saying was that by May 2017, the currency in circulation will come to a level around what prevailed before demonetisation rendered Rs 500 and Rs 1,000 notes useless. This is something we have maintained from the very beginning, even though we have been ridiculed about it more than once, as we have gone along. (You can read the pieces here and here).

In fact, if the Modi government is to be believed there was never any problem because of demonetisation. In fact, the finance minister Arun Jaitley, said in early February: “At no point of time, not for a single day, was the currency inadequate.” Around the same time the economic affairs secretary Shaktikanta Das, who reports to Jaitley, said something along similar lines when he said that the remonetisation process was complete. Remonetisation essentially refers to the process of printing money and pumping it into the financial system.

We live in Mumbai and not in Delhi. And we don’t know Das. But if we did, we would have definitely asked him, if the remonetisation was almost complete in February, why is the RBI deputy governor, who knows a thing or two about such things, saying that remonetisation will be completed only in May 2017.

Now let’s get back to look at what Acharya is saying. Take a look at Figure 1. It shows the currency in circulation every week, through late January 2016 to March 10, 2017, the latest data point that is available.

Figure 1Figure 1

What does Figure 1 show us? It shows us that the currency in circulation fell dramatically in the aftermath of demonetisation. This is not surprising given that more than 86 per cent of the currency in circulation was rendered useless overnight. And it has been rising since early January 2017, as the RBI prints and pumps more new currency into the financial system. The average increase in currency in circulation per week since January 6, 2017, has been Rs 38,645 crore.

At this pace of increase, over a period of 10 weeks, i.e. two and a half months (the average of two to three months that Acharya said), the total currency in circulation by May 19, 2017 (10 weeks after March 10, 2017), will stand at Rs 16.32 lakh crore (Rs 12.46 lakh crore as on March 10, 2017 + Rs 3.86 lakh crore added over the 10 week period). If we go for the full three months, then the total currency in circulation as on June 2, 2017(12 weeks after March 10, 2017) will stand at Rs 17.10 lakh crore.

The currency in circulation before demonetisation was announced stood at Rs 17.98 lakh crore (as on November 4, 2016). If we end up with a currency in circulation of Rs 17.10 lakh crore after remonetisation is complete, the total currency in circulation would have fallen by around 4.9 per cent. If we end up at Rs 16.32 lakh crore, then the currency in circulation would have fallen by around 9.2 per cent.

If the currency in circulation is expected to come down by around 5-9 per cent, then what was the point in disrupting the economy in such a big way, is a question worth asking. Of course, the way things are these days, we won’t get answers. All we will be told is that in the long term, demonetisation will be beneficial.

Further, in this age of relentless media, people have forgotten by now that going digital wasn’t on the original list of aims of demonetisation. It was subtly introduced only once the original aims of tackling black money and fake notes, went out of the window.

What does Acharya’s comment and our analysis accompanying it, tell us? It tells us, something we have been saying recently, that Indians are going back to cash. The brief spurt in digital transactions has been reverted and this shall become more and more obvious as we go along. It also means that the RBI will have to print and remonetise a greater portion of the demonetised currency. If it does not do that then there is the risk of not enough currency going around in the economy and that will have an impact on the total number of economic transactions.

The RBI of course recognises this. It recognises the fact that an adequate amount of currency is needed in the economy. It also recognises that digital transactions despite all the hype around them haven’t really taken off. In this scenario, more and more new currency will have to be introduced into the economy.

Having said that the RBI, under the new dispensation of Urjit Patel, can’t say this in a very direct way. Nevertheless, sometimes we do have to read between the lines to understand the real message behind what is being said.

The column originally appeared in Equitymaster on March 21, 2017.

And the Notebandi Lies Continue…

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One week back, the finance minister Arun Jaitley said in the Rajya Sabha: “At no point of time, not for a single day, was the currency inadequate.”

Every government needs to defend decisions it has taken. In that context Jaitley’s statement is hardly surprising. Nevertheless, it not only mocks the common man of this country but also tells us how disconnected our ruling politicians are with the realities of the day.

Jaitley was essentially talking about the situation that prevailed in the aftermath of demonetisation or notebandi, as it is more commonly referred to as.

If there was no currency shortage for even a single day, why did ATMs have such long lines for close to a month? Is Mr Jaitley saying that people just gathered there because they had nothing else to do?

If there was no currency shortage even for a day, why did the government place limits on ATM withdrawals? It was churlish of Jaitley to have said what he did, given that 86 per cent of the currency in circulation was demonetised, the midnight of November 8, 2016, onwards.

The advantage with making speeches is that nobody asks questions at the end of it. Nevertheless, the lack of empathy among the politicians does get registered.

That apart, let’s look at the currency in circulation data published by the Reserve Bank of India every week. Take a look at Figure 1.

 

Figure 1:

Figure 1 essentially shows the currency in circulation in the Indian economy in 2017. December 30, 2016, was the last date for depositing the Rs 500 and Rs 1,000 notes which had been demonetised. Hence, I have taken the currency in circulation numbers from January 6, 2017, onwards, which is a week later.

The currency under circulation has been going up since 2017. On November 4, 2016, four days before prime minister Narendra Modi, made the announcement to demonetise Rs 500 and Rs 1,000 notes, the total currency in circulation had stood at Rs 17.97 lakh crore. In comparison, on February 3, 2017, the total currency in circulation, the latest data available, stood at Rs 10.49 lakh crore.

Hence, the total currency in circulation as on February 3, 2017, was at 58.4 per cent of the level before monetisation was announced. Given this, it is not surprising that the currency shortage, even though it has eased, continues to persist. This goes against what the Economic Affairs Secretary Shaktikanta Das recently said about the remonetisation process being complete.

Take a look at Figure 2. It basically plots the total increase in currency in circulation every week since January 6, 2017.

Figure 2:For the week ending January 13, 2017, the total currency in circulation grew by Rs 52,780 crore. Thereafter, the increase in circulation has fallen quite dramatically. One explanation for this may lie in the fact that initially more Rs 2,000 notes were being printed and that has now been replaced with more Rs 500 notes being printed, which is what the financial system needs, given the shortage of change. But at the same time, it takes four Rs 500 notes to replace money worth Rs 2,000.

The larger point being that the financial system is still away from having an adequate amount of currency. This, as I have explained in the past, is primarily because of the limited currency printing capacity of the government of India and the Reserve Bank of India.

The average increase in currency between January 6 and February 3, 2017, comes to around Rs 37,778 crore. At this speed, it will take many more weeks, before the financial system gets to a level, where it has adequate currency.

The total currency in circulation had stood at Rs 17.97 lakh crore before demonetisation. As of February 3, 2017, the total currency in circulation stood at Rs 10.49 lakh crore. The difference between this and the total amount of currency in circulation before demonetisation stands at Rs 7.48 lakh crore (Rs 17.97 lakh crore minus Rs 10.49 lakh crore).

At the speed of introducing currency worth Rs 37,778 crore per week, it will take close to 20 weeks for the currency under circulation to reach the pre-demonetisation level. One logic that has been offered is that the government may choose not to replace the entire currency.

Even if the government chooses not to replace the entire currency, at Rs 37,778 crore per week, it will take many more weeks before the currency in circulation stabilises at an adequate level.

While, the economics of it, can get tricky, even if the government chooses to go up to Rs 16 lakh crore and not Rs 17.97 lakh crore, it will still take close to 15 weeks to get to the pre-demonetisation level. Of course, the time taken can come down if the speed of money printing can be increased.

Long story short—both Jaitley and Das are essentially lying to the country in saying what they are. And that is something worth remembering and talking about, dear reader.

The column was originally published on February 14, 2017, on Equitymaster