Of Course India Needs More Currency – The Economy Is Growing

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It might not be all that common to find a general agreement between Milton Friedman and Karl Marx but here is one – of course India needs more currency because the economy is growing. Thus this statement from a Reserve Bank of India official just isn’t a surprise, it’s a statement of the obvious:

With the country’s GDP size increasing in quantitative terms, there could be need for more currency in the economy, a Reserve Bank of India official said Thursday. Following demonetisation in November 2016, when the government junked high value currency notes of denominations 500 and 1,000, there was a shrinkage in currency in the system. Now, with the growth in Gross Domestic Product (GDP), “there may be a need for more currency in the system,” the RBI official said during an interactive session here.

Both Friedman and Marx would point us to the MV = PQ equation. Money times the velocity of its circulation equals price times quantity of transactions in the economy. As I say, might be odd to see agreement between those two but here’s one instance when we’ve got it.

So, the economy expands, that PQ is larger. V is something rather difficult to change – it does change but deliberately causing it to do so is difficult. Thus we need more M around.

Seems simple enough and the easiest way to think of this is to consider a restaurant. Take the same place which suddenly gets busier. Goes from serving lunch to 100 a day to 200. Assuming that it’s using real plates it has the choice of washing them up faster or getting more plates. That second is rather easier.

This has very little to do with demonestisation, it’s simply that the Indian economy is growing at 7 and 8% a year, a growing economy needs more money in it. Thus India needs more money. Simples.

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