Image Credit: Sanjay Rawat
Context
Cash in people’s hands has grown way beyond double since the govt scrapped old notes back in 2016.
Demonetisation
- The PM revealed the currency move on November 8, 2016.
- It announced that old Rs 500 and Rs 1,000 bills – making up roughly 86% of cash in use – would no longer be accepted as money.
- Demonetisation back in 2016 seemed meant to wipe out undeclared cash, while also cracking down on fake notes; it pushed digital transactions at the same time – aiming to bring more activity into official channels.
Currency with Public
- Cash held by people gets figured out once you take away what banks have from all the money floating around.
- Cash in circulation means paper bills or metal money put out by a nation’s main bank, actually swapped when people buy stuff from shops.
- Nearly a decade since cash was pulled overnight, people still use notes a lot – even while officials from Delhi to Mumbai push digital payments instead.
- Still, the economy got bigger too – growing over 6% each year – so the amount of cash compared to GDP dropped under what it was before demonetisation kicked in.
Does Rise in Currency Show the Real Picture?
- The increase in cash moving around isn’t what it seems – after all, the economy kept growing fast, hitting up to 7.8% early in FY2026.
- After the cash ban in 2016, notes in use have gone up each year – by 2020–21, money supply jumped to 14.5% of GDP compared to just 8.7% five years earlier.
- The proportion dropped to 11.11% by 2025, whereas back in March 2016 it stood at 12.1%.
- A high CIC-to-GDP level means individuals or firms use physical money quite often when buying things; in contrast, a smaller value suggests movement into electronic transfers, bank services, alongside structured finance setups.
- A smaller CIC relative to GDP – fueled by more digital tools while depending less on physical money – often helps central bank actions flow faster into the economy, making it easier to keep prices stable.
CIC-GDP Ratio of India compared to Other Countries?
- Post-demonetisation plus the pandemic phase, while India’s cash-to-GDP level rebounded, it still exceeded that of most large nations.
- Japan’s share sits around 9 to 11 percent, while the Eurozone runs between 8 and 10, whereas China hits about 9.5.
- Russia’s share stands at 8.3%, while the U.S. comes in slightly below at 7.96%.
- India’s high money supply relative to its economy – around 11.11% – comes from a large informal sector that runs on cash, deep-rooted habits favoring physical money, fewer people using cards, along with slower uptake of digital payments.
- Meanwhile India’s quickly adopting digital payment methods, unlike the heavily structured, tech-driven markets of the US, Europe, China or Russia.
India’s Money Supply Dynamics: Demonetisation to Digitisation
- Demonetisation in 2016 caused an immediate drop in spending – small firms struggled, people lost jobs, while cash dried up. Growth slowed, slipping under 6% for a bit.
- Folks shifted fast to digital pay after 2016 – by 2025, monthly UPI volume hit ₹20 lakh crore, reaching smaller cities hard; this shows people now pick apps over cash when buying stuff locally.
- Cash use compared to the total economy dropped from 12% in 2016 down to about 10.5% by 2024 – shows people are relying less on physical money, but it’s still higher than richer countries because lots of transactions happen off the books.
Digital Economy in India
- After demonetization, India’s digital economy picked up speed – making up 11.74% of national income in 2022–23, with forecasts showing a rise to 13.42% by 2024–25.
- India’s digital economy has jumped to third place globally, says a new 2024 report from ICRIER on the country’s tech-driven growth.
- By 2030, India’s online economy could make up close to 20% of its total economic output – growing faster than older industries. Instead of just adding on, it’s pulling ahead. Not only is tech expanding rapidly, but old-school sectors are lagging behind. This shift isn’t minor – it’s reshaping how money flows across the nation.
Source: The Hindu
Prelims PYQ
(Q) Supply of money remaining the same when there is an increase in demand for money, there will be (2013)
(a) a fall in the level of prices
(b) an increase in the rate of interest
(c) a decrease in the rate of interest
(d) an increase in the level of income and employment
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