With an increasing number of methods of electronic payment, the value of transactions as a proportion of nominal GDP routed through the banking system has risen from around 4X in FY 2006 to 6X in FY2012. The trend clearly indicates that the proportion of economy that was earlier ‘cash’ is now moving to being ‘traceable’.
In fact, the Reserve Bank of India’s Payment System in India: Vision 2012-15 report has underlined the need to promote a less cash society and facilitate greater financial inclusion in the country. As a first step, the central bank reduced the Merchant Discount Rate for debit cards to encourage all categories of merchants to deploy the card acceptance infrastructure and also facilitate the acceptance of small value transactions.
However, different measures of capturing the velocity of money (the average frequency with which a unit of money is spent in an economy)—defined as GDP/M3—show different results. While RBI data show the ratio has been falling—from 1.4X in FY2004 to 1.2 X in FY12—an analysis done by Kotak Institutional Equities with a different ratio (value of transactions to broad money) suggests that Indians are churning their money more. The research note wonders whether Indians are making more transactions that have no impact on its GDP.