India’s Cash-to-GDP Ratio

Cash-to-GDP Ratio or Currency in Circulation (CIC) to GDP Ratio or simply currency-to-GDP ratio shows the value of cash in circulation as a ratio of GDP.

Implications of higher Cash-GDP Ratio

There are two dimensions of cash viz. its function and its nature / origin. In terms of function, cash can be used as a medium of exchange but also as a store of value similar to gold. In terms of nature, cash can be either illicit or legal. The cash which is used as a store of value can be white {savings of households for emergency} while it can be black {if it was earned through tax evasion}. At the same time, cash as black money can be converted to white either through money laundering or declaring it to authorities and paying taxes and penalties. Across the globe, a link has been established between Cash and nefarious activities. Higher is the cash in circulation, greater is the amount of corruption.  When cash is used as store of value, it not only blocks inflow of money into the mainstream economy, but also proves to be inefficient and costly. Cash as black money has always posed a challenge to the policy makers and planners, not only in India, but several parts of the world.

India’s Cash-to-GDP Ratio vis-a-vis other countries

For over a century, coins, currency notes and cheques have been the prominent form of payment in India. With the intervention of information technology, the use of paper cheques as well as cash has undergone a dramatic transformation yet the use of cash as a mean to settle transactions and making payments continues to be very high.  Despite of huge increase in usage of plastic cards and digital transactions in recent years, the currency in circulation as a proportion of GDP is highest in India among the emerging economies. In March 2016, the cash-to-GDP ratio of India stood at 10.6%, which was highest in 16 years. This was also highest cash-GDP ratio among BRICS countries.

It’s worth note here that China had seen a steady decrease in its Cash-to-GDP ratio over the last 16 years. China’s currency-to-GDP Ratio stood at 14.6% in 2000 and was at 9.1% at end of 2015. Similarly, for Russia it is high at 9% whole for Brazil it is 3% and South Africa it is 2.5% {lowest among BRICS}.

However, the currency-GDP Ratio for developed countries such as US, UK and Japan has been much higher.