Letters: Moderation required

With reference to Soumya Kanti Ghosh’s article, “The road to remonetisation” (December 20), according to Reserve Bank of India (RBI) data, as on March 31, 2016, currency notes of Rs 100 and below (small denomination notes or SDNs) contributed just 14 per cent in value terms (Rs 2.235 trillion), while their share in number of pieces was 76 per cent (68.233 billion pieces).
 
The position as on November 8 would not be drastically different. In the three situations described in the article, the share of SDNs in value terms is expected to rise from 14 per cent to a higher range of 21 per cent to 28 per cent.

 
Assuming no change in the denomination mix of small notes, this would necessitate printing of additional notes —over and above the March 2016 level of 68.233 billion pieces — of 45 to 56 billion pieces. Although calculations may vary with change in assumption and/or in denomination mix, there is no denying the fact that this is an arduous, time-consuming and humungous task. Excessive reliance on SDNs can be counterproductive, as dealing in these denominations is unwieldy and cumbersome.
 

According to RBI data, from 2011 to 2016, currency in circulation increased from Rs 2.12 trillion to Rs 16.41 trillion (compound annual growth rate or CAGR of 14.6 per cent), while M3 or broad money surged from Rs 13.116 trillion in 2001 to Rs 116.176 trillion in 2016 (CAGR of 15.65 per cent). Furthermore, the currency-deposit ratio has been almost stable since 2007, hovering around 16 per cent. This indicates that expansion in cash economy was not disproportionate and it grew in tandem with overall growth of broad money/bank deposits.

 
The cash economy has been vilified in the demonetisation process. While the government’s objective of promoting digital economy is laudable, high-denomination notes would be indispensable even in a less-cash situation. Excessive contraction of currency in circulation by coercion and rationing can lead to more chaos.
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