BREW YOUR TEA #11 Sunday Reflections with CA Hemant Gupta

Dear Esteemed Professional Colleague,

Thank you, Colleagues for sharing your thoughts on my reflections. You have been generous in your readings and feedbacks. 

 ECONOMY OF CREDIT.

Once a person came to a hotel for booking room, he gave Rs.1000/- as advance and told the owner, in case if room is not comfortable advance has to be returned. When he went to check the room, the hotel owner went to next provision shop and paid 1k, so his credit amount is repaid. The provision store person gave the 1k to whole sale dealer to clear his credit balance. Whole sale dealer paid the amount farmer, farmer gave the amount to goldsmith, goldsmith gave amount to milkman, milkman gave the amount to hotel, at that time the hotel customer came and told he doesn’t like the room and got back his Rs.1000/-. But by this time everyone were relived from their payables and started their credit account afresh.

 Credit economy plays a major role in the Indian Economy. From small tea stop to biggest MNC all are involved in credit transaction. The credit given for the customers is known as receivables and financial institutions fund the business for these receivables. I will try to give more details about this working capital gap in future write-ups. Now let’s brush up about the Indian Economy and Cash circulations.

 Indian economy is known as middle income developing economy. It’s the fifth largest economy in the world and third largest economy by purchasing power parity. By considering 2019 data, (Because of pandemic situation and lock downs 2020 cannot be taken as measurement of the market) of Indian economy, Gross Domestic Product is Rs.189.71 Lakh Crores and for 2021 government is estimating the growth between -3.5% to 0.9%. For the 2022 the growth is predicted at 4.2%.

 Just to refresh the memory the Gross Domestic Product is defined as the final value of the Goods and Services produced within the geographical boundary of a country within a year. GDP can be measured by three methods namely

 Output Method - This is the monetary value of goods and services produced in a year by a country adding the subsidies given by the government and reduced by the taxes.

 Expenditure Method – This is the total expenditure incurred by all the entities in a year. Expenditure method is well defined by a formula GDP (Exp method) = Revenue Expenditure or Consumption expenditure + Capital Expenditure + Government Spending + Net export ( Export – Import). Expenditure method is the most popular method of calculating GDP.

 Income Method – In income method GDP is calculated by total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country

 Total Value of Currency in circulation as at the end of March 2019 is Rs.21.11 Lakh Crores only compared to the total market value of transaction of Rs.189.71 Lakh Crores. Precisely the value of money circulated in India is only 11.13% of the total value of the Indian Economy. The remaining transactions are non-cash.

 Non cash transaction includes banking transaction. As per the recent study more than 60% of the transactions are happening through banking channel and the same will be expected to grow because of the Government initiation in promoting digital money from past few years. Especially after demonetarization even the tea shop and pan shops were accepting the digital money.

 Because of digitalization the cash transactions were expected to reduce substantially. As per the RBI report the total UPI digital transaction for the year 19-20 is Rs.21.31 lakh crores, which is almost equal to the currency circulation of the previous year.

 Further the government spent Rs.4377.84 Cr in 19-20 towards the printing of the currency and also has kept gold reserve of Rs.200 crores as a RBI policy to keep gold reserve for printing of currency.

 “Money is what money does” (Hicks (1969)). Cash, like other forms of money, is used both as a means of payment and as a store of value. A common way to try and disentangle the two types of cash demand is to assume that high value denomination notes are mostly held as a store of value and low denomination for payments (Amromin and Chakravorti (2007)). Over the past 5 years, the demand for high value denominated currency has outpaced low value denominated currency which may indicate that cash is increasingly used as a store of value and less for making payments. (Source, RBI annual report 2020)

 It is evident from the above that in India, high value denominations are used as store value than for transaction. The store value doesn’t mean black money. It consists of storage of cash from middle class family to high net worth individuals. Further it is well known fact that most of the immovable transactions in India always involve the cash element in it. Further it is evident from the statistics of the Income tax search that most of the agricultural product related business, consumer product business and charitable trust like hospitals and colleges are keeping high amount of cash stored.

 The cash withdrawals from ATMs increased over the past 5 years. India is next only to China in terms of the cash withdrawals from ATMs. However, the percentage of cash withdrawals to GDP has been constant in India at around 17%. In addition, with a CAGR of 9% in terms of volume and 10% in terms of value, the growth has been slow when compared to digital payment transactions (which grew at a CAGR of 61% and 19% in terms of volume and value, respectively), indicating a shift towards digitization. Further, the infrastructure for cash withdrawal, i.e., ATMs has grown at a low pace (CAGR of 4% during the past 5 years).

 Some surveys / reports have attempted to measure the level of cash payments in the economy. Although many of the reports are only estimates, they do provide some indication of cash usage and digitization in the country as also across the world. According to these estimates, cash still reigns supreme not only in India but in many other jurisdictions as well. Payments are, however, quickly expanding to include online payment channels. A report by World pay revealed that digital payment usage is increasing in the Asia Pacific region and estimated that the e-commerce market in the region will grow by a CAGR of 12 percent between 2016 and 2021, with India being one of the key drivers of this growth.

 The Payments Global Cash Index for Asia Pacific published in June 2018, computed the “cash share of the wallet”, as the amount of cash withdrawn in a country as a share of its annual GDP, to determine the popularity of physical cash exchange in comparison to that of alternative payment methods. India was observed to be highly dependent on cash.

 To conclude the value of cash is more than the cash at bank because of the cost spent by Government towards its printing and cost of transaction, which is substantially less in digital transaction. Hence as rightly said more usage of digital payment is a contribution towards nation building.

 Thank you for Reading!!