As currency in circulation is about 20 per cent lower than the levels at the beginning of November 2016, the sharp decline in the pace of remonetisation over the past few weeks and indications from government officials suggest that the government and the Reserve Bank of India (RBI) may not go for full replacement of the currency that was in circulation during the pre-demonetisation period.
According to data from the RBI, while the net addition of currency into the system in the week ended January 13 stood at Rs 52,787 crore that in the week ended April 28 slipped to Rs 14,561 crore.
The government announced the withdrawal of old Rs 1,000 and Rs 500 notes (aggregating to Rs 15.5 lakh crore) from circulation on November 8, 2016.
While the currency in circulation was Rs 17,74,200 crore as on November 4, 2016, it dropped to Rs 8,73,416 crore as on January 6, as individuals across the country rushed the banks to deposit the demonetised currency in their possession. As the RBI has been in the process of printing Rs 2,000 notes and new Rs 500 notes to replace the demonetised notes, the total currency in circulation rose to Rs 14,06,968 crore as on April 28.
A look into the weekly currency data from the RBI shows that the net addition of currency in circulation turned positive for the first time (since demonetisation) in the week ended January 13, and the value of notes in circulation rose 6.04 per cent over the previous week (Rs 52,787 crore). However, there has been a declining trend in the pace of net addition since then. While the weekly growth of net addition of new currency between January 6 and March 10 hovered between 3 and 6 per cent, the weekly growth over the next six weeks till April 21 stood between 2 and 3 per cent. It came down sharply to 1.05 per cent in the week ended April 28 and during the week, the net addition of currency was only Rs 14,561 crore.
An extrapolation of the value of currency at 1.05 per cent weekly growth rate shows that it would take another 22 weeks to reach the value in circulation pre-demonetisation. But, given the slow pace of printing of currency and indications from government sources, it is unlikely that there will be full replacement of demonetised currency denominations.
A senior government official had earlier told The Indian Express that the economy needs only around 10 lakh crore of currency and the remaining lies in the informal economy. “While the total money in circulation pre-demonetisation was around Rs 17.5 lakh crore, government estimates that the formal economy was working with active circulation of about Rs 9-10 lakh crore. The remaining sum never got captured and while all of it may not be black money, it was part of the informal economy,” said the official who did not wish to be identified.
Experts say that while the initial decline in the value of remonetisation in February could have been on account of printing of low-denomination currency notes (Rs 500 and Rs 100) as against printing of Rs 2,000 notes, the sharp decline in the pace of value of net addition of currency in April shows that the RBI and the government may now be contemplating when to stop net addition of currency.
Economists also feel that the government may not need to bring the same amount of currency in circulation going forward. “This was one of the ideas of demonetisation. If you are able to bring idle money back into the system and also get citizens to use electronic mode of transactions, you don’t need that kind of currency in circulation and, thus, it is not required to print the same value of currency,” said D K Pant, chief economist, India Ratings.
Illustratively, suppose there is Rs 100 in the system of which Rs 80 is getting circulated and Rs 20 is lying idle. Then, if the government manages to bring idle money out through demonetisation and replaces only Rs 80 with new notes, it will have the same impact on the economy as previous Rs 100 was having, Pant added.
While it is only realistic to assume that after demonetisation also some amount of money has moved out of the system and is lying idle, experts say that the push towards digitisation and people adopting electronic mode of transaction will only reduce the need for higher volume and value of currency in circulation.