Has Demonetization achieved its goal of less-cash Economy?

made a comeback into the economy? What is the currency in circulation & how

does it compare to pre-demonetization levels? During hisfirst tenure as the Prime Minister, Narendra Modi made an announcement regarding demonetization on 08 November 2016. With this announcement, ₹ 500 and ₹ 1000 currency notes ceased to be legal tender effectivefrom midnight of 08 November 2016. In his speech, thePrime Minister has listed out various reasons for taking this step. During theensuing period, the government, through the ministers kept announcing multipleobjectives of demonetization. One of the more prominent objectives highlighted by the government and around which initiatives driven are around building a ‘Cashless Economy’. The then Finance Minister Arun Jaitley had also tweeted that cancellation of the ₹ 500 and ₹ 1000 currency notes will advance India into a cashless economy. Arun Jaitley later went onto clarify that ‘cashless economy is actually a less-cash economy as no economy can be fully cashless’. In this story, we review the current circulation of cash in the economy after nearly 3 years of demonetization and see if we have had progress towards less-cash economy. Reducing the circulation of cash in the economy and encouraging digital transactions During his address to the nation on 08 November 2016, the Prime Minister highlighted the followingpoints as being the broad reasons for taking such a step. The government has on its end took initiatives to incentivize people to opt for digital transactions. The reasons stated in the prime ministerial address and the further actions from the government indicate the intent of the government to move the economy towards a less-cash society. More cash currently in circulation than prior demonetization At the end of October 2016, i.e. prior to demonetization, the total currency in circulation was ₹ 17.77 lakh crores, out of which only ₹ 0.75 lakh crores were with the banks and the rest of ₹ 17.02 lakh crores were with the public. After demonetization,the currency in circulation fell to ₹ 11.88 lakhcrores in Nov’16 and further to 9.43 lakhs in Dec’16. Since then the amount ofcurrency in circulation has shown a gradual growth in the following months. The below graphillustrates the currency in circulation a month prior to demonization and for aperiod of 6 months after demonization. By the end of2016-17, the Currency in circulation was ₹13.35 lakh crores and by the end of next year by March 2018, the total currency in circulation had gone upto ₹ 18.29 lakh crores which is slightly more than the currency incalculation prior to demonetization. By the end of 2018-19, the value of currency in circulation has increased to ₹ 21.36 lakh crores. As per the latest numbers (as on 13 September 2019) the total value of currency in circulationstands at 22.02 lakh crores. Though theincrease in the absolute value of cash in circulation is linked to the increasein the size of the economy, the currency to GDP ratio has also increased in thelast few years as is explained further in this story. Increase in amount of High-value currency The currency of higher value prior to demonetization was the old ₹ 500 and ₹ 1,000 which were rendered to be no more legal through demonetization. The rationale behind this being that higher value notes are an easier means of facilitating corruption and for hoarding of black money. In the same speech, it is specified that in view the necessity for currency notes of higher value, new ₹ 500 and ₹ 2000 notes were introduced. It was also mentioned by the Prime Minister that RBI would be making necessary arrangements to limit the share of these notes of high denomination in the total currency in circulation. The limitation in the share of high-value currency notes is to avert a similar situation that existed prior to demonetization. In RBI’s Annual Handbook of Statistics on Indian Economy, the report on Notes and Coins in Circulation provides details of the coins and notes of different monetary values incirculation. As per the report, the value of ₹ 500 currency notes by the end of 2015-16 was ₹ 7.85 lakh crores. The immediate effect of demonetization was reflectedin 2016-17 where the value of these notes went down to ₹ 2.94 lakh crores. However, the value of ₹ 500 currency notes in circulation has increased in the subsequent years with ₹ 7.73 lakh crores by the end of 2017-18 and ₹ 10.75 lakh cores by the end of FY 2018-19. As for ₹1000 currency note, the value was ₹ 6.32 lakh crores by the end of 2015-16. Post demonetization, ₹ 2000 currency note was released. By the end of 2016-17, the total value of ₹ 2000 currency note in circulation was ₹ 6.57 lakh crores higher than the total value that ₹1000 note in circulation by the end of previous year 2015-16.