The demonetisation drive has started to hit hard the Indian economy in many ways as it is heavily dependent on liquid cash. The decision to scrap old high denomination currencies is likely to worsen its pain further.
India has a much higher cash to gross domestic product (GDP) than most of the other major economies, which underlines the importance of cashflow in the country. India (10.86%) has fourth position among the nations in terms of banknotes and coins in circulation as percentage of GDP, following Japan (20.66), Hong Kong (15.51%) and Switzerland (11.76%). And a sudden halt in the flow is likely to bring down the economy to new lows.
In terms of currency-to-bank deposit ratio, India is much ahead of the United States (12.86%) and the entire euro zone (10.49), with 16.23 percentage. However, reports suggest this could be due to hoarding of undisclosed income in the West.
India’s huge informal economy, which shares a considerable portion in the GDP, is a major player in the dominance of cash in day-to-day transactions. The informal sector and parallel economy are going to struggle the most under demonetisation.
Despite the loud rhetoric of Jan Dhan Yojana, statistics show that the rural folk has negligible average balance in JDY accounts.
The highest average deposit is among people in Lakshadweep which is merely Rs. 9248. All the other states and UTs have much lesser average around Rs. 3500-5000. Tripura has the lowest average deposit of Rs 742.
This figures suggest that those dependent on the informal economy might not have been using bank facilities regularly and are most vulnerable to the transition costs.