Cash is back

Rising currency, slowing digital transactions raise questions

A day after launching the goods and services tax regime, Prime Minister Narendra Modi reasserted his government’s commitment to curbing black income and tax evasion. This time he was addressing a huge gathering of chartered accountants, whom he urged to “safeguard society’s economic health”. The PM alluded to the role CAs played after demonetisation was announced and he warned that the government had zeroed in on over 300,000 companies which were found to have indulged in dubious transactions. He also announced that the government had deregistered 100,000 such firms and was probing more than 37,000 shell companies which were involved in converting black money. It is heartening that the government is rightly focused on the need for mining the data on currency deposits in the wake of demonetisation so that action can be initiated against those who hoarded black money.

However, the latest financial stability report of the Reserve Bank of India, released last week, points to an area of concern that arose out of the government’s decision on November 8 last year to demonetise close to 85 per cent of the currency in circulation. This pertains to the level of remonetisation that is desirable and the extent of the use of digital transactions to reduce the need for cash in the economy. It goes without saying that the two issues are largely interconnected: Higher the use of digital transactions, lower will be the need for having more currency in circulation.

According to the RBI data, the total currency in circulation, as of June 23, was Rs 15.3 lakh crore — over 85 per cent of what it was just before demonetisation was announced. This represents a 70 per cent rise over Rs 8.9 lakh crore, as of January 6, the lowest point since demonetisation. Clearly, the demand for cash in the economy is pushing the central bank to increase the pace at which it has been bringing back currency into circulation. What further buttresses this preference for cash is the trend on digital transactions, which, after the initial bump, has slowed down considerably. The RBI data show that digital transactions fell both in value and volume terms in April. The RBI report attributes this fall to “normalisation of notes in circulation”. This raises two big questions for policymakers. One, what is the level to which they want to remonetise the economy? Two, based on the current trend, if the total currency in circulation is getting close to what it was before demonetisation, does that mean the surprise announcement of November last year failed in driving more people to digital transactions? The government should, only after ascertaining what factors led to the slow growth in digital transactions, devise ways to create incentives for people to move away from an excessive use of cash. And that should also give it an approximate idea of the level of remonetisation that is considered necessary. In short, there is need for deliberations within the government on both the issues.