Has currency
made a comeback into the economy? What is the currency in circulation & how
does it compare to pre-demonetization levels?

During his
first 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 effective
from midnight of 08 November 2016.

Demonetization achieved_announcement

In his speech, the
Prime Minister has listed out various reasons for taking this step. During the
ensuing period, the government, through the ministers kept announcing multiple
objectives of demonetization.

One of the more prominent objectives highlighted by
the government and around which initiatives driven are around building a ‘Cash
less 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
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 a 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 following
points as being the broad reasons for taking such a step. 

  • The magnitude of cash in circulation is directly linked to the level of
  • High circulation of cash also strengthens the hawala trade which is
    directly connected to black money and illegal trade in weapons. 
  • Cross-border terrorism is being funded by fake currency

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 was 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 lakh
crores in Nov’16 and further to 9.43 lakhs in Dec’16. Since then the amount of
currency in circulation has shown a gradual growth in the following months.  

The below graph
illustrates the currency in circulation a month prior to demonization and for a
period of 6 months after demonization.

By the end of
2016-17, 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 up
to ₹ 18.29 lakh crores which is slightly more than the currency in
calculation prior to demonetization.

By the end of
2018-19 the value of currency in circulation has increased to ₹ 21.36 lakhs.

As per the latest
(as on 13 September 2019) the total value of currency in circulation
stands at 22.02 lakh crores.

Though the
increase in the absolute value of cash in circulation is linked to the increase
in the size of the economy, the currency to GDP ratio has also increased in the
last few years as is explained further in this story.

Increase in
amount of High value currency

The currency of
higher value prior to demonetization were 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 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 in
circulation. 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 reflected
in 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
end of 2017-18 and ₹ 10.75 lakh cores by 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. By the end
of 2018-19, the total value of ₹ 2000 notes in
circulation is ₹ 6.58 lakh crores. This is because the government has
literally stopped printing of the ₹ 2000 note.

The total
amount of high value currency (₹ 500 & ₹ 1000 currency notes) by the end of 2015-16, prior to demonetization was ₹ 14.17 lakh crores or about 86.4% of the total currency in circulation.
Post demonetization the total amount of high value currency fell to ₹ 9.6 lakh crores only to increase in the subsequent years. The total
amount of high value currency (₹ 500 and ₹ 2000 currency notes) in circulation by the end of  2018-19 was ₹ 17.34 lakh crores or 82.2% of the total currency in circulation.

ratio has increased in last two years

In one of the
statements issued post demonetization, the then Finance Minister Arun Jaitley stated that the Currency-GDP
Ratio of India is 12% at the time of demonetization, while in developed
countries it is around 4%. Lower currency-GDP ratio is cited as one of the
objectives to be achieved out of demonetization.

As per RBI data, the currency
to GDP ratio was 12.1% for 2015-16. Post demonetization, this ratio decreased
to 8.7% for 2016-17. However, in the ensuing two years the Currency-GDP ratio
has increased to 10.7% and 11.2% for 2017-18 and 2018-19 respectively. Though
is still less than 12.1% pre-demonetization, the continuous increase of this
ratio is a concern. The RBI’s annual report for 2018-19 also notes that, ‘in
spite of currency in circulation growth of 16.8% for the year as a whole, the
currency-GDP ratio remained lower than 11.6-12.2 per cent observed during
2011-2016, perhaps indicating decline in cash intensity of the’.

Increase in
Fake notes of new currency

To counter the
use of fake notes which sponsor terrorism was one of the reasons provided for
demonetization in Prime Minister’s address to the nation on the eve of

In this
context, ₹ 500 note with a new design and a new ₹ 2000 note was released by RBI.

The data as per RBI
annual report
, shows an increase in the fake currency of these two currency notes.

In 2016-17, 199
new design ₹ 500 notes were identified as fake as per RBI data. This
number has increased to 9,892 and 21,865 in 2017-18 and 2018-19 respectively in
the case of ₹ 500 notes.

Similarly, in
the first year (2016-17) of introduction of ₹ 2000 note, 638 pieces were identified as fake. The number has further
increased to 17,929 and 21,847 fake notes in the subsequent two years.

While the total
value is still less & negligible, it needs to be noted that these are the
notes which have been identified by banks as fake. It does indicate the quantum
of fake notes of new currency in the economy.  

Objectives of
demonetization from cash perspective not yet achieved

Reduction in
the utilization of cash and driving the country towards a cash-less or less
cash economy was one of the key stated objectives of demonetization. However,
the increased amount of the currency in circulation as well as the higher
Cash-GDP ratio indicate the reality being different from the objective.

high value currency was cited to be an encouraging factor for corruption and
hence the withdrawal of ₹ 500 and ₹ 1000 notes which formed nearly 86% of the currency in circulation at the
time of demonetization. However, the amount of new high value notes has also
increased over the three years and now form nearly 82% of total currency in

the past two years has also seen an increase in the number of fake currency
notes detected of the two new currency notes of ₹500 and ₹ 2000.

Though all
these numbers are still less than the pre-demonetization levels, if this level
of growth continues, we might reach the pre-demonetization levels in the next
few years.

Hence, the
objectives of demonetization at least to the extent of the less cash economy is
yet to be achieved.

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