Cash-to-GDP ratio: Why less cash in itself may not necessarily mean less black money

A lower ratio could be due to a combination of factors — lower currency supply, shrinkage in cash-dependent enterprises due to the note ban, and shortage of cash in pockets of the economy.

Written by Sunny Verma | New Delhi | Updated: November 8, 2017 8:33 am
Demonetisation India, Demonetisation, India note ban, India GDP, India black money, Narendra Modi, Arun Jaitley, India news, Indian Express Economists say reading the ratio in isolation could be misleading.

The government has presented a lower cash-to-GDP ratio as a key achievement of demonetisation, and a measure of black money being checked. Economists, however, caution against reading this metric in isolation.

Prime Minister Narendra Modi said last month that the cash-to-GDP ratio is down to 9% after demonetisation, from over 12% earlier. “Was it possible if a new era of honesty had not been ushered in the country, in the economy of the country?” he said at The Institute of Company Secretaries.

Finance Minister Arun Jaitley said Tuesday the reduction in currency in circulation is of the order of Rs 3.89 lakh crore. “One of the important objectives of demonetisation was to make India a less-cash economy and thereby reduce the flow of black money in the system. The reduction in currency in circulation from the base scenario reflects that this intended objective has been met.”

Economists, however, say reading the ratio in isolation could be misleading. Apart from a shift towards digital transactions, a lower ratio could be due to a combination of factors — lower currency supply, shrinkage in cash-dependent enterprises due to the note ban, and shortage of cash in pockets of the economy.

“To say that a 12% cash-to-GDP ratio for India is too high, when compared with other countries, is incorrect. This comparison is not valid,” said Pronab Sen, former chairman of National Statistical Commission. “Since India has a large informal sector, its cash needs are also higher. There may be legitimate need for cash. A lower cash-to-GDP ratio could mean that the informal sector has shrunk due to demonetisation thereby needing lower cash, indicating rise in unemployment. It could also be on account of people shifting from cash-based transactions to informal credit-based transactions,” Sen said.

Elsewhere

Among the developed and acknowledged-as-honest economies, Japan —whose formal economy makes up a higher share than India’s — has the highest cash-to-GDP ratio at 18.61%. Hong Kong has 14.65%, Thailand 11.37%, Switzerland 11.14% and the Eurozone 10.09%. The fact that these ratios are higher than India’s indicates that a lower ratio in itself does not address the problem of black money.

Demonetisation India, Demonetisation, India note ban, India GDP, India black money, Narendra Modi, Arun Jaitley, India news, Indian Express

“The entire informal sector mainly deals in cash and this does not mean that all cash is black. Cash-to-GDP ratio would depend upon the status of the economy, the proportion of the informal economy, whether it is an unbanked society or fully banked,” said D K Pant, chief economist at India Ratings & Research. As more cash has become available, people are moving back to cash transactions, Pant said.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, said, “The international norm on cash-to-GDP ratio is around 10%. So a ratio lower than that is always welcome because it leads to higher digital transactions in the economy, resulting in expansion of the tax base… That does not mean that cash has no value, cash is required but not in excess. So even if India settles around 9-9.5% of currency-to-GDP ratio, it will be a very good rate for our economy.”

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  1. Jagdish Chander
    Nov 8, 2017 at 4:00 pm
    What is rationale behind GDP to Cash ratio for measuring black money? Why cash equal to 100 of GDP taken as bigger black money and why it cannot be taken as 100 white money. So long the people are paying tax honestly how does the cash to GDP ratio matters. If people feel more convenience by cash in hand and do more turnover in business and pay more tax why it is not good? Currency in circulation on November 8th, was about 17 lac crore and GDP was about six times more than currency in circulation and central and states tax revenues was about four times of the currency in circulation where about 25 of GDP is legally out of tax system. It suggests that black money was not that large as being thought. Country did not require such a big punishment as given by the Govt. Govt could have punished such persons by intelligence.Black cash caught was by intelligence only. It is non application of mind by govt.
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      Ajay
      Nov 8, 2017 at 11:24 pm
      The 3 s have no mind at all - so no question of application!
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        Ajay
        Nov 8, 2017 at 11:25 pm
        I meant to say 3 s
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          Ajay
          Nov 8, 2017 at 11:26 pm
          3 IDIYOTS
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        Manzoor
        Nov 8, 2017 at 2:06 pm
        What do you expect from Ketley he is not a economist but a lawyer who knows how to do the jugglery.
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          Asatya Morgue
          Nov 8, 2017 at 2:47 pm
          maybe he is a juggler who knows the law.
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          Ashutosh
          Nov 8, 2017 at 2:00 pm
          Let’s share our own practical experiences about demonetisation- how many people lost how much of their hard earned money ?? My experience- I had about 12 lac cash in hand in both of my business firms in demo notes which I successfully deposited all in my bank account till the 31 Dec time line allowed, I took care about all my staff members and helped them exchange their notes. I personally don’t know a single person who has LOST his money.
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            Asatya Morgue
            Nov 8, 2017 at 2:48 pm
            i watched prem ratan dhan payo and felt like i lost my life savings.
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            1. Jagdish Chander
              Nov 8, 2017 at 4:13 pm
              Have you seen long ques in front of the banks. How much productive hours they lost did, not get their wages for the period they stood in the lines and the persons who lost their lives for want of medical treatment, and could not get treated even though they had money in bank but could not get it. over a 100 persons died for want of money is this not a loss and can any one evaluate this loss in terms of money?
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              rangarajan
              Nov 8, 2017 at 1:30 pm
              So now its clear that all corporates and politicians have already stashed their money in secret foreign accounts.so what was demonitization for ? Money laundering ?
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                Indian
                Nov 8, 2017 at 1:16 pm
                Ratio is over 10 in Europe and 11 in Switzerland, 14.6 in Hongkong, 9.4 in China/Taiwan, 9 in India, 1.5 in Nigeria, 2 in Argentina, 3.6 in Chile, 3.4 in Brazil, 6.8 in Columbia, etc. So the numbers don't indicate much and it would be stupid to infer anything.
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                  Ajay
                  Nov 8, 2017 at 11:27 pm
                  The numbers are another Jhumla strategy....lol...not kidding ...am serious.
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