India’s use of cash is back to the levels before demonetisation

Cash is king.
Cash is king.
Image: AP/Ajit Solanki
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There is nothing Narendra Modi can do about it—Indians just love cash.

About a year and half ago, in an event dubbed “demonetisation,” the Indian government made all Rs 500 and Rs 1,000 banknotes illegal—about 86% of all currency in circulation. Indians were forced to deposit these notes in banks before they became worthless as legal tender. The apparent goal of the move was twofold: to crack down on illicit activities and to move towards digital transactions.

In this second respect, demonetisation appears to have failed. A look at Reserve Bank of India data suggests that the amount of cash in circulation as a share of GDP will soon return to the share recorded prior to demonetisation. Current trends suggest is may even rise above it.

For the government’s 2018 fiscal year, which ran from April 2017 to March 2018, cash as a share of GDP averaged 10.9%. This was up from 8.8% in the 2017 fiscal year, but still below previous years, when it hovered around 12%.

Why would it continue to rise? According to money supply reports from the RBI, in the first four months of 2018, the amount of cash in circulation rose by more than Rs2 trillion ($293 billion), from about Rs17 trillion to over Rs19 trillion—a nearly 40% annualized growth rate. That is far faster growth than before demonetisation and much faster than growth of nominal GDP, which is expected to rise by 10-12% in the 2018-2019 fiscal year. At this pace, cash in circulation as a share of GDP would equal pre-demonetisation levels in less than six months.

The persistence of cash in India, despite official efforts to discourage its use, isn’t unusual. Despite what you may have heard, cash is not dying. In fact, most countries are using more cash than they did a decade ago. According to a recent report by the Bank for International Settlements, cash in circulation as a share of GDP rose from 7.3% in 2007 to 9% in 2016 for a group of countries that comprise more than 80% of the world’s economy.

No single country is responsible for the trend. The chart below shows the relative growth of cash in circulation for eight representative countries.

Globally, the main drivers of cash’s persistent popularity seem to be low interest rates and wariness of the formal financial system. Take, for example, the run on ATMs in India after claims that deposits weren’t safe spread by word of mouth.

If Modi’s government really wants its citizens to use less cash, making the system more trustworthy and boosting returns on savings will work better than forcing people to part with paper money.