The post-pandemic increase in currency in circulation has been a global phenomenon, described as a ‘dash to cash’ under extreme uncertainty. This has been experienced by the US, Spain, Italy, Germany, France, Brazil, Russia and Turkey. Meanwhile, digital payments are nearly three times what they were in FY18. The RBI’s digital payments index, which has 2018 as the base year at 100, has risen to 270.
The index also captures the spread of digital, taking into account growth in the payments infrastructure.
Of the four key objectives of demonetisation, India appears to have done well on three. There has been a rise in digital transactions. Besides this, there has also been a drop in fake currencies. Counterfeit notes detected continued to fall from 3.1 lakh in FY19 to 2.9 lakh in FY20 and 2 lakh in FY21. There are also indications that the economy is getting more formalised.
According to SBI group chief economist Soumya Kanti Ghosh, there are indicators that the informal economy has shrunk to 20% of GDP from 50% a few years ago. This is comparable to Europe and much better than Latin American countries where the size of the informal economy is estimated at 34%.
“The rise in GST collections despite the GDP shrinking clearly shows that formalisation has ensured fiscal policy can be used as a counter-cyclical fiscal policy tool when revenue collapsed due to the pandemic. This is a clear break from the past as fiscal policy has always been used as a pro-cyclical fiscal policy tool in India,” said Ghosh.
Recent data shows although there has been a resurgence in economic activity, there has not been a proportionate increase in currency in circulation. The high level of digitisation has given the economy capacity to grow without a corresponding increase in cash. “An increase in formalisation and the rise in currency under circulation are not mutually exclusive. The stakeholders in the formal economy are also consumers. While they may be having more cash in hand, more transactions are now being captured through digital footprints,” said Ghosh.