Currency still in demand

The latest RBI Annual Report describes the counter-intuitive phenomena of record parallel growth in both currency and digital payments as “currency demand paradox”. Notably, the CAGR of currency with public [CwP] was 13.3 per cent during FY2018-23 against 11.9 per cent in FY2011-16 while the value of digital payments jumped from an equivalent of 12 per cent of GDP in 2018 to 76 per cent of GDP in FY 2023 (Morgan Stanley).

Secondly, the share of high denomination notes [₹500 and above notes] in circulation increased from 80 per cent in FY18 to 88 per cent in FY23 while absolute value of non-HDNs in FY23 was less than that in FY18. The RBI attributes this paradox to low interest rates; precautionary holding amid uncertainty, elections; large informal economy and direct benefit transfer-based cash withdrawals. However, these transient phenomena defy logic as high cash intensity and steady increase in HDNs have persisted since 2000s. High growth in HDNs across periods of low and high interest regimes, low economic uncertainty and greater formalisation of the economy are counterfactuals to the RBI’s explanation.

It is observed that CAGR of CwP and HDNs remained high and greater than GDP growth during FY01-23. And it is more so during FY18-23 despite the meteoric rise in digital payments (see Table).

The missing variables

The ground reality suggests that a substantial part of black money is generated by y-o-y rise in under-invoiced and illicit imports from China since early 2000s. These monies mostly in the form of HDNs remain in circulation to fund such imports. CAGR of officially recorded value of Chinese imports is 23.8 per cent over FY01-23 period [Table1].

Generation of black money, under-invoicing, illicit imports, sale of counterfeits, loss of tax revenue, etc., arising mostly from Chinese imports, are evidently elaborated by the reports/papers of Directorate of Revenue Intelligence (2015) to the Supreme Court-appointed SIT on black money and the 145th Parliamentary Standing Committee on Commerce Report.

The other variable is the uncertainty created in trade credit ecosystem by sequential events of demonetisation, GST and Covid. These events amplified uncertainty about cash flows and trust-deficit in B2B dealings. Fear of payment delays/default and large backlog of receivables all drive firms to hold more cash balances. These developments not only affected ability to repay but more critically the willingness or intent of borrowers to repay.

The latter needs an urgent fix for maintaining discipline in B2B payment system. A GSTN-based digitally self-driven mechanism, outlined in my previous article [https://tinyurl.com/Solution-to-late -payment], envisages graded auto-action by impacting a firm’s credit rating and market reputation.

The demonetisation strategy was based on demobilising HDN hoardings. However, CBDT Statistics 2018 shows that only 462 entities deposited more than ₹25 crore. It constituted just 1.9 per cent of HDNs. In reality, granularised holding of HDNs is spread across numerous household, trade, commerce and manufacturing networks as Chinese imports pervade our consumption and production structure. Hence, we witnessed near 100 per cent return of HDNs to banks. Demonetisation’s intent was right but its assumption of concentrated cash hoardings was misplaced.

The most effective, efficient and administratively feasible way to check this source of black money and demobilisation of its circulation lie in effective control at the ports and airports — the entry points of such imports.

The writer is former DGM, SIDBI

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