India faces yet another currency crunch, but nobody around seems to know the real reason behind it. You can still see long queues outside the ATMs or a notice saying, ‘No Cash’, over a year after demonetisation. States like Gujarat, Madhya Pradesh, Bihar, Andhra Pradesh have complained about cash shortage with ATMs across the state going dry. So, what are the reasons behind this currency shortage?
The biggest reason was the 54-year low growth in bank deposits witnessed at the end of the financial year 2017-18 which emerged from the RBI provisional figure report. The study of the bank’s report says the total outstanding money deposited in the country’s banks by March 30 stood at Rs 114.75 lakh crore compared to Rs 107.58 lakh crore a year earlier. Though the outstanding deposit (receipts which have been recorded in the books, but which will be received later) saw an progressive growth of Rs 7,17,334 crore, it registered the slowest growth of 6.7 per cent in total deposits in a fiscal year in the past 54 years. The reason behind this was demonetisation, as the government was pushing for a digital solution for this problem, they failed to assess the demand and supply.
Several other reasons are believed to be responsible for this sudden cash-crunch – like a sudden spike in cash demand by people for festivals like Baisakhi, Ugadi and Bihu, and because of the wage payments at the end of the harvest season. Some believe that the high demand of cash for the upcoming Karnataka elections along with the termination of printing of the Rs 2000 notes to be the reasons towards the shortage of cash.
Interestingly, of Rs 6.7 lakh crore worth of Rs 2000 notes in circulation (out of the total Rs 18.43 lakh crore of current in circulation), nearly 25 per cent have not returned to the banking system and hence are believed to have been hoarded. In order to put a stop to this practice, the government decided to stop printing the high value bills, as a result this forced them to fill the ATMs with lower value bills, which run out quickly, further perpetuating the cash crunch.
Public perception of banks (particularly public banks) has not been favorable due to the recent activities. In February, Nirav Modi stole around Rs 1,323 crore from Punjab National Bank, a major state-owned lender. Due to events like these, along with the commonly held belief that these banks are mismanaged, people are scared to put their money in banks as deposits for fear of losing their money. As a result, they are keeping their money in their houses or investing in real-estate as alternative options.
So how is the recent cash crunch different from what was seen during demonetisation? During demonetization, there was a cash crunch at the ATMs as well as the banks, as old notes of Rs 500 and Rs 1000 were withdrawn from everywhere and new notes were yet to come in adequate numbers. This time, the crunch is only at the ATMs. During demonetisation, the banks had huge deposits as the public, including the people holding the black money, deposited the old-high value notes. But with time, these deposits reduced as people ran out of money to deposit, leading to a temporary cash crunch. Another aspect is the speed of the cash, meaning how fast a currency changes hands. If the speed is low, it makes it easier for the hoarders to store large amounts of money with them.
Majority of the Indian population work in informal jobs whose daily transactions involve cash. People in jobs like these have already seen some work dry up because of the shock 2016 demonetisation, as well as the imposition of the goods and service tax in 2017. The current cash crunch may further dent the income of these workers, who are a critical part of the Bhartiya Janata Party’s vote bank.“If this kind of shortage is there and the unorganized sector gets hit again, which it will, if the cash shortage persists, then there has got to be fallout from that,” said Arun Kumar, a professor at the Institute of Social Sciences in New Delhi who studies public finance and the illicit economy. “That will be very damaging to the ruling party.”