HYDERABAD: India’s Currency is Circulation (CIC) is showing disparate trends of late. While a recent note by HSBC narrated the large cash usage in informal economy, SBI Research on Thursday argued otherwise. It further suggested that money isn’t effectively being circulated in the economy.
According to SBI, going by the trend growth, currency is short by at least Rs 1.5 lakh crore, negating arguments of cash aggressively financing informal activities.
Even though CIC expanded, income velocity of money, or the rate at which we spend money, plunged, indicating that it isn’t getting adequately circulated.
For instance, in FY18, circulation of Rs 200 and other smaller denominations increased manifold, altering their demand to possibly substitute larger notes, particularly with Rs 2,000 note printed put on hold for now. In other words, to sustain a transaction of same amount, volume of currency notes goes up and by default, the value of CIC.
More smaller denomination currencies are printed to ensure we don’t renege on economic activity.
“This paradox is often missed out by many, leading to erroneous conclusions of using CIC as a leading indicator of heightened economic activity, specifically the narrative of large cash usage in informal economy,” Dr Soumya Kanti Ghosh, Chief Economic Advisor, SBI Research, noted.
Sans demonetisation, CIC by March 2019 would have been Rs 22.45 lakh crore or 11.9 per cent of GDP, against Rs 20.4 lakh crore as on January 2019. It is likely touch Rs 20.9 lakh crore or 11.1 per cent of GDP by March 2019. Consequently, there will be at least Rs 1.5 lakh crore lower CIC compared to the trend.
After a spike during demonetisation, income velocity of money fell to 9.5x (x=nominal GDP/average CIC) in FY18 from 12.1x in FY17 and may reduce further to 9x in FY19.
The decline indicates that increasing currency with public failed to spur nominal GDP, clearly suggesting that economic uptick remains elusive.
Interestingly, though the state-wise income velocity is hard to determine, our internal estimates suggest that in the advanced and larger states such as Maharashtra, Uttar Pradesh and Karnataka, income velocity is far less than the national average. In other states like Chhattisgarh, Madhya Pradesh, Andhra Pradesh and Jammu and Kashmir, the velocity is much higher than the national average.
This is intriguing. But a lower income velocity of money in larger and developed states indicates economic activity is indeed slowing down.