My article, “How Much of Black Money is Held in Cash?”
, published in Moneylife on 28 December 2016, has been a good learning experience for me. It attracted many comments from many learned members and subscribers, on the webpage and by direct email to me. I tried to respond to most of these.
I started the article to estimate how much cash was needed in the Indian economy and thus “how much black money is held in cash”, if we go partly cashless digital transactions (CDT), wherever easily possible. Full CDT is not possible till challenges are met, as discussed in another article “5 Hurdles for Cashless Digital Transactions
” published in Moneylife Magazine dated 23 December 2016 with web-edition of the same date ( https://rakesh1blog.wordpress.com/2016/12/22/first-blog-post/
). The idea of the above article came as there is no data or information available on this estimate, so I started building it from basics.
During comments and discussions, I learnt that the Reserve Bank of India (RBI) is using a framework or methodology and an algorithm which is quite old (quite possibly 60-80 years old) to calculate estimates of M0 (currency in circulation) requirements.
“How does the Reserve Bank estimate the demand for bank notes?
The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models.”
These are three elements in calculating demand or print order of notes – (a) replacement (of mutilated notes); (b) reserve requirements and (c) add to currency circulation based on “growth rate of economy”.
This “growth rate of economy” rang a bell in my mind. I thought of testing and analysing it in more detail. During the process, many questions came up which I try to put at the end of this paper.
I decided to explore further, especially various relationships between GDP, GDP growth, M0, M0 growth, etc. Interestingly, all data is taken from RBI publication only, as referred below.
Following are some observations and analysis –
Table -1: NOTES AND COINS IN CIRCULATION (Rs billion or hundred crores)
(The M0 value of Rs16,634,32 crore is as on 31 March 2016 and not as on 8 November 2016. The estimated figure published by RBI (https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!2
) in Time-Series-Publication (COMPONENTS OF MONEY STOCK (Monthly)) for October 2016 was Rs17.77 lakh crore)
The above table shows the growth of money supply in economy. The above data is used to calculate the yearly growth of M0 as per the table below -
Table – 2: Yearly Growth of M0 (growth over previous year)
The growth of M0 is 10.21% to 14.85% on Y-to-Y basis.
Table – 3: India’s GDP and its growth
(Source – “HANDBOOK OF STATISTICS ON THE INDIAN ECONOMY 2015-16, September 15, 2016 published by Department of Statistics and Information Management, Reserve Bank of India. Table -2, Page – 8)
India’s GDP taken at market price with base year 2011-12. The growth of GDP is 5.62% to 7.56%.
Let us calculate M0 as percentage of GDP.
Table – 4: M0 as percentage of GDP
It is clear from the above table that M0 has increased gradually from 12.21% of GDP in 2011-12 to 14.66% in 2015-16 in four years. In four years, the total increase in GDP is 29.92% whereas total increase in M0 is 56%. This is about double increase.
Based on the above data let us compare the growth of M0 over the growth of GDP.
Table – 5: Growth of M0 compared to growth of GDP
The table shows that the M0 grew at a rate of 154% to 196% compared to GDP growth.
Let us also see the growth of bigger notes (Rs1,000 and Rs500) over the growth of M0 –
Table – 6 : Growth of Rs1,000/ Rs500 notes over growth of M0
The above table shows that value-wise, RBI printed more bigger notes of Rs1,000 and Rs500 at the cost of notes of Rs100 and below.
The following facts comes out from the above data and analysis –
1. RBI circulated more and more money (bank notes) every year, where M0 grow at a rate of 12.42% to 14.85% compared to GDP from 5.62%-7.56%.
2. The ratio of cash in economy to GDP has increased from 12.21% to 14.66% in just four years. In value terms, it is about Rs6,000 billion or Rs6 lakh crores.
3. The growth of M0 over growth of GDP has been 154% to 196% higher during this four years period.
4. If GDP grew by 30% in four years, M0 grew at 56%.
5. Bigger notes were printed more by 10% to 20% at the cost of smaller notes.
In my article, “How Much of Black Money is Held in Cash?”
, using my framework and methodology, based on demand and usage, I have calculated the M0 requirements as below, provided citizens use existing cashless instruments such as cheques, NEFT/ RTGS and credit/ debit cards (not considering eWallets, BHIM, etc.) -
Table – 7: Ideal M0 requirements at national level -
Following is the cash (M0) requirements at national level –
Thus, if in an ideal scenario where there is no total CDT, then the total cash (M0) requirement at national level is calculated as Rs5.18 lakh crore or say Rs5.20 lakh crore.
As the situation existed on 8 November 2016, if we consider that all above categories, except companies, used cash, the M0 requirements will be (percentage of income spend in cash = 100%):
Table – 8: M0 requirements at national level, if all transactions are in cash
The total cash economy will need Rs1,21,840 lakh thousands or Rs12,184,00 crore).
Table – 9: proportion of M0 requirements (with all cash transactions) to GDP, and actual M0 (Rs. Billion or hundred crores) -
The ideal M0 of Rs12,184 hundred crores, with all cash transactions, is 10.73% of GDP of Rs1,13,502 hundred crores compared to 14.66% as per RBI data. In all cash economy, except companies, the maximum M0 requirement is just 70% of existing M0. M0 is excess by Rs5.37 lakh crore.
This means, RBI has pumped excess cash in economy. As per Macroeconomic theories, this can result in –
1. Inflation – More money chasing fewer goods and services, with prices going up. This has happened.
2. Hoarding, black/ parallel/ cash economy – This has happened. Extra cash has been used to hoard commodities, real estate.
3. Lowering interest rates – due to more liquidity in the system, interest rates go down. This has happened.
4. Devaluation of rupee – This has happened
Based on these data, RBI needs to respond to the following queries from a concerned and affected citizen:
1. What is the basis of calculation of “currency in circulation”? Is there a scientific method for this? Had the framework or methodology been reviewed for relevance to changing environment, anytime? Had it been audited to suit constantly changing Indian economic conditions and/or whether this gives desired results?
2. Why has the ratio of currency circulation to GDP been increasing, from 12.21% in 2011-12 to 14.66% in 2015-16, in just four years? What can be the economic rationale?
3. Why has the ratio of growth of currency circulation to the ratio of growth of GDP been 154% to 196% in these four years?
4. Does RBI have the required expertise and capabilities to calculate currency circulation requirements?
5. Has RBI directly or indirectly not helped in creating and maintaining black money in the economy by pumping extra cash at high level?
6. Had RBI directly or indirectly not contributed towards high inflation by pumping this extra cash, which may be used by commodity hoarders, real estate sharks, etc.?
7. Has RBI directly or indirectly not contributed to NPA and bad loads by extending this extra cash to people like Vijay Mallya?
8. Has RBI directly or indirectly not helped bribe-takers, illegal operators, speculators, bookies, hawala operators, etc. by providing them sufficient cash in the economic system.
9. Is RBI indirectly or directly not responsible for devaluation of rupee over the last four years due to printing of extra money?
10. Have the world class economists, sitting in RBI as governors, deputy governors and advisors, monitored and asked how this distortion crept into the system over the years? If no, why? If yes, then what was the conclusion or decision?
11. Does RBI propose to change its framework or methodology?
12. Will RBI own responsibility for this economic mismanagement?
(Dr Rakesh Goyal is perpetual student of cyber security since 1991. He is PhD is Cyber Security, Gold Medalist Engineer, Gold Medalist PGDM from IIMB. He is MD of Sysman Computers Private Limited, Mumbai, one of the 23 IT security audit organisations empanelled with CERT-In, Min of IT, GoI to audit cyber security of critical national infrastructure/assets. He can be contacted at email [email protected]