Money & Banking
Is RBI responsible for creation of black money, inflation due to high M0?
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. 
 
Following is stated on RBI website
 
“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])
 

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COMMENTS

Vinay Rao

2 months ago

Great Analysis, the basis of GDP deflator might have some answer to difference in growth rates of M0 and nominal GDP....

Mahesh S Bhatt

2 months ago

Solidly Excellent analysis Bro I am loved it but it misses important super-easy global monetary policy hedging techniques which has bitten off significant Values from all developing economies.Most of sectors are debt ridden ( Power/Telecom/Textile/ Infrastructure/... & NPA ridden.
We have quietly subscribed to larger American Financial Model of making States bankrupt Companies cash rich & few millionaires who run global economy & plunder common man & national resources. Global Legal Eagle Ministers ( Leaders who are Lawyers too Obama/Putin/Chidambaram/Kapil Sibal/Jaitley.. & Economists like Greenspan,Christine Lagarde... work with for them devastating Family/Social Values for so called Economically hollow material gains.


Mahesh Bhatt

Ajit Duge

3 months ago

Rakesh ji, let us concentrate only on high value notes (HVN).. The high value notes last were cancelled some where in 1978.. ( pl correct me if wrong ).. So if we get official figures of HVN printed since then till 8th Noember 2016 minus the soiled notes taken out of circulation together with the in stock with RBI as of 8th November 2016 , we would get the exact number of HVN out in circulation.. And then we can tally that figure with the HVN received back by RBI and the remaining HVN still out with people.. I do not know from where to get this data of HVN printed and soiled notes destroyed by RBI

Madhavan Sekhar

3 months ago

It would boil down to saying that RBI has printed notes much more than warranted by the need; and the result is accumulation of 'black money'. I tend to feel that if notes are printed in excess, they would be lying in currency chests; how can they cause generate 'black money'?
Such excess currency would lead even a person aware of and equipped adequately may be tempted to transact in cash and not 'digitally'. Fortunately, the idea of "cashless": or "lesscash" has come out as an offshoot of demonetisation; it was never pursued by any authority. The card-use charges were recovered from the consumer for his convenience of not carrying cash, and not by the corporate, which is equally facilitated in handling less cash, and attendant hassles of banking it.

REPLY

Dr. Rakesh Goyal

In Reply to Madhavan Sekhar 3 months ago

For supply of new notes, also see my article in ML on 12/12/2016 - Where are the new notes going? http://www.moneylife.in/article/where-are-the-new-notes-going/49119.html

Dr. Rakesh Goyal

In Reply to Madhavan Sekhar 3 months ago

RBI was not only printing and but also circulating extra notes. It was not keeping these extra notes in their treasury as reserve. The above figures are only for notes, which are circulated in public. I also believe that idea of cashless / less-cash came later to compensate for shortage of notes to general public. Though, ideally, there should be no shortage of new notes but it is believed that most of cash black money holders converted their old notes with new notes at the cost of distribution of new notes to aam janata.

KS Sreedharan

3 months ago

An excellent and in-depth analysis. Couple of thoughts .

1. There was a base year push done in 2015 because of which the GDP estimates were upwardly revised and the base year for calculation changed to 2011-12 from the earlier 2004-2005. Do you feel that this upward revision would explain a spurt in note printing?

2. In 2015-2016 there has been a significant increase in the circulation of 20 (13%),50 (11%) and 100 (5%) notes. These % are significantly higher than the previous years. In hindsight was this the build up to Noteban?

S.Gurumurthy in his lecture under the aegis of SASTRA university had identified the increase in % of Hi denomination notes to the M0 as one of the reasons for hoarding and the only way to restore balance was to suck it out and relpace with LDN's over a period of time.

Thanks for your efforts in researching this. As Arnab would say. "Nation wants to Know"

REPLY

Dr. Rakesh Goyal

In Reply to KS Sreedharan 3 months ago

Thanks. Change of base year does not change the reality. It was to facilitate calculation of GDP.

B. KRISHNAN

3 months ago

Excellent analysis. Hope this comes to the notice of the government and required corrective measure s will be taken.

REPLY

Dr. Rakesh Goyal

In Reply to B. KRISHNAN 3 months ago

तथास्तु. Insha allah. Amen.

Dr. Rakesh Goyal

In Reply to B. KRISHNAN 3 months ago

तथास्तु. Insha allah. Amen.

Ajit Duge

3 months ago

Rakeshji I appreciate the your efforts and methodology in estimating MO.. However it still remains a guess work .. Do you feel that the demonetization of high value notes will help as a starting point for future estimates of MO and also have some realistic control over MO..

REPLY

Dr. Rakesh Goyal

In Reply to Ajit Duge 3 months ago

Calculating M0 by this methodology is not 100% guess work. Some research has been done to define assumption to calculate M0. The sample size is not as big as it should be for a country like India. Let RBI or some other agency do extensive market research and refine assumptions. Even than the deviation will not be very big. Demonetization of 500/1000 notes will not help in future estimation of M0 but if may help RBI/GoI to have control over future M0. But if Rs 14-15 lakh crores of old 500/1000 notes comes back that means most of the black money is converted. In that case, I have no hesitation in saying that the objective of demonetization is defeated OR in simple language, it failed.

SuchindranathAiyerS

3 months ago

RBI is a bond maiden of Sarkar. Bharath Sarkar kee Sampathi like any Public Sector "Enterprise". They cannot break step and enforce moderation or self discipline on a profligate and corrupt State.

Govinda Warrier

3 months ago

Interesting thoughts. Let more people ask more questions. Once questions are asked, answers will come from some quarters. Moneylife deserves a special thanks for generating such debates. Let us hope RBI has not remained where it was in 1935, as presumed here.My information is RBI too does continuous learning and research and also place results in public domain. I make this guess after surfing rbi.org.in which is RBI website.

Govinda Warrier

3 months ago

Interesting thoughts. Let more people ask more questions. Once questions are asked, answers will come from some quarters. Moneylife deserves a special thanks for generating such debates. Let us hope RBI has not remained where it was in 1935, as presumed here.My information is RBI too does continuous learning and research and also place results in public domain. I make this guess after surfing rbi.org.in which is RBI website.

Govinda Warrier

3 months ago

Interesting thoughts. Let more people ask more questions. Once questions are asked, answers will come from some quarters. Moneylife deserves a special thanks for generating such debates. Let us hope RBI has not remained where it was in 1935, as presumed here.My information is RBI too does continuous learning and research and also place results in public domain. I make this guess after surfing rbi.org.in which is RBI website.

Gurudutt Mundkur

3 months ago

All those statistics are okay. But to my mind, it is the giver of the bribe who creates the black money. He/she wants to cut corners, wants to park his vehicle in the wrong place, wants to be awarded a contract, wants to rough-shod job to be certified as possible and any such act which is against law.

Gurudutt Mundkur

3 months ago

All those statistics are okay. But to my mind, it is the giver of the bribe who creates the black money. He/she wants to cut corners, wants to park his vehicle in the wrong place, wants to be awarded a contract, wants to rough-shod job to be certified as possible and any such act which is against law.

Candidates to submit certificate from public agencies: EC
The Election Commission of India on Wednesday said that the candidates will have to submit a 'No Demand Certificate' from agencies providing amenities and government accommodation.
 
Chief Election Commissioner Nasim Zaidi said: "The candidates will be required to file a no demand certificate and this certificate will come from agencies dealing with electricity, water, telephone and also the rent certificate of the government accommodation which these candidates may have occupied in past ten years."
 
Zaidi said this at a press conference while speaking on the additional affidavit required to be filled by the candidates in the upcoming state polls, in the light of an order of the Delhi High Court. 
 
Any failure to file these affidavits would be a defect of substantial nature inviting scrutiny by the returning officer, he added.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Prakash Pimparkar

2 months ago

Let us wait and see. Banks would do all not to share the information.

Gurudutt Mundkur

3 months ago

The "creator of black money" will get this certificate in his own way, because there is somebody who does not care for the tenets of Anna Haza and Narendra Modi.

Five states to vote between February 4 and March 8
Assembly elections in Uttar Pradesh, Uttarakhand, Goa, Punjab and Manipur will be held between February 4 and March 8, Chief Election Commissioner Nasim Zaidi announced on Wednesday.
 
The results from all five states will be known on March 11, Zaidi told a press conference here.
 
While polling in Goa and Punjab will take place on February 4, Uttarakhand will vote on February 15 and Manipur in two phases on March 4 and 8.
 
Uttar Pradesh, the country's most populous state, will go to the polls in seven phases: February 11, 15, 19, 23 and 27 and March 4 and 8.
 
This will be the single biggest electoral exercise since the 2014 Lok Sabha polls and will involve a total of 690 constituencies, 403 of them in Uttar Pradesh alone.
 
Goa has 40 seats, Punjab 117, Manipur 60 and Uttarakhand has 70 seats.
 
"We are committed to conduct the elections in a free and fair manner," Zaidi said. The Election Commission would also check the "misuse of black money and liquor".
 
The main players in the five states include the Bharatiya Janata Party, Congress, Aam Aadmi Party, Shiromani Akali Dal, Samajwadi Party, Bahujan Samaj Party and Manipur People's Party.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Prakash Pimparkar

3 months ago

Dr Rakesh has a point but then economists would always stick to books to justify unjustified situations

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