Cash as a store of value, or as a prime mode of saving, has shown a downward trend in the country during the last 50 years.
But the velocity of currency (ratio of nominal GDP to cash in circulation) has declined, implying faster growth in currency holdings than nominal GDP.
Time deposits upThis is the finding of a research by R Mohan (till recently with Indian Revenue Service), N Ramalingam (Gulati Institute of Finance and Taxation, Thiruvananthapuram) and D Shyjan (John Mathai Centre, Thrissur).
The holding of cash as a store of value is on the decline while time deposits occupy a much better position, the research shows.
It sought to track trends of cash holding, estimate tax leakage and size up the extent of tax-evaded income in India. While the first is based on long run trends, the second and third are based on latest three years for clear empirical reasons.
Banking substitutesThe velocity of currency declines in an economic situation in which GDP grows faster, implying that cash held by public has grown faster than GDP.
This happened during a period when cash-to-bank deposit ratio headed south, the research shows.
In the 2000s when substitutes like Internet banking and credit/debit cards were introduced, the velocity had declined indicating a boost in cash holdings even as nominal GDP grew faster.
The higher cash holding could not be attributed to a higher tax ratio since lower tax rates had more or less stabilised during this phase.
Govt spendingA probable reason could be higher government spending to fight the global economic slowdown and evidenced in the rise in revenue deficit-GDP ratio.
As regards tax evasion, the study estimated that during 2012-13, 2013-14 and 2014-15, the actual direct tax collection was at 44, 45, and 43 per cent of the potential. The size of tax evaded income worked out to 40.96 per cent of official Gross Value Added (GVA).
These estimates hold good if the downward bias of about 25 per cent in GVA estimated as found in a study in 2015 by Sacchidananda Mukherjee and Kavita Rao (NIPFP), is factored in.
Direct tax leakageIf this downward bias in GVA is excluded, direct tax collected would be 63, 64 and 62 per cent of the potential and tax-evaded economy would be 21 per cent of official GVA, which is still substantial, the researchers said.
Such large direct tax leakage calls for serious thinking especially in the context of technology based tools having entered direct tax administration in a big way.
Leakage in direct tax mop-up could have led to a shrinking of the divisible pool of taxes with for states, the researchers surmised.
A major cause of tax leak is the poorly coordinated actions by different agencies without proper sharing of information and in good time.
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