Cash crunch: Where has all the money gone?
Regional factors have more to do with the cash shortage than anything else
In the past few weeks, “cash crunch” has become the talk of the town. According to Cambridge dictionary, it is a situation in which a company or country does not have enough money available to do the things it usually does.
We are not experiencing this. Around 15% of the ATMs were non-functional in some weeks of April and early this month but this has not been a nationwide phenomenon. Many ATMs in north-eastern states were not dispensing cash for a few weeks in April. A similar situation was observed in parts of Karnataka, Maharashtra, Andhra Pradesh, Rajasthan, Uttar Pradesh, Madhya Pradesh, Bihar and Telangana at that time and in early May too.
Bankers, analysts and economists have been citing different reasons for the sudden spurt in demand for cash or decline in supply. They include state elections (typically in the run-up to the elections, cash in circulation goes up), holidays and festivals such as Bihu and Baisakhi, re-calibration of ATMs to accommodate new Rs200 notes, logistics and distribution issues caused by a few banks’ delay in payment to the ATM service providers. There is also a feeling that the banks have started keeping more cash in branches.
One thing is for sure though that after leaving bank branches and ATMs, the Rs2,000 notes do not seem to be circulating well. Many believe that people have started hoarding them. Crudely put, their storage value is higher than their transaction value. Possibly, this is why the Reserve Bank of India (RBI) has stopped printing the Rs2,000 notes and instead, the focus has primarily been on Rs500 and to some extent on Rs200 notes.
The Indian government decided to demonetize high value bills accounting for 87% of the notes in circulation or NIC in November 2016 to fight black money and encourage digitalization. The value of notes banned was Rs15.4 trillion out of Rs17.97 trillion NIC. By February this year, 14 months after demonetisation, the value of new notes in circulation fully replaced the old notes that were withdrawn.
NIC now is around Rs18.29 trillion, more than in November 2016 when India banned the high-value notes. However, most economists say this has not kept pace with India’s nominal GDP growth. To be in sync with the nominal GDP growth, it should be around Rs19.5 trillion, says State Bank of India’s chief economic adviser Soumya Kanti Ghosh. Neelkanth Mishra, India economist and strategist of Credit Suisse, has said the rise in NIC now is the lowest in past five years, implying the growth in NIC is not keeping pace with the rise in demand. Former RBI deputy governor R. Gandhi has even said that based on pre-demonetisation trends, NIC should have been close to Rs23 trillion now.
Incidentally, from March to December 2017, NIC increased by Rs1.5 trillion but by May 2018, in five months, it rose by Rs2 trillion. Why has it risen so fast? If indeed NIC has not been in sync with the demand of Indian economy, why did not we see long queues outside ATMs and bank branches in the second half of 2017? Ideally, the demand for cash should be rising continuously. Why the sudden momentum in demand?
Possibly, the regional factors have more to do with the cash shortage than anything else. For instance, the proposed Financial Resolution and Deposit Insurance (FRDI) bill, which talks about using depositors’ money to save the banks in case of a crisis (bail-in clause), had led to large-scale cash withdrawals from ATMs and bank branches in Andhra Pradesh in the last quarter of fiscal year 2018.
Some of the Indian states are also launching welfare schemes where money is distributed through cash, bypassing the banking system. They are doing so because the beneficiaries are already indebted to banks and if the money is circulated through the banking channel, the banks may net off their debt before passing on the money to them.
This is even true for some of the centrally sponsored schemes where money moves from the Centre to the villages and districts in Indian states. Apart from leakage, this spoils the spirit of digitalization. If this trend increases in the coming months leading to general elections, cash shortage may continue sporadically in different parts of India and the digitalization movement will become the biggest casualty. Besides, the banks will also be the losers and individual defaulters will get away not paying banks’ dues.
Tamal Bandyopadhyay is a consulting editor at Mint and advisor Bandhan Bank Ltd. His Twitter handle is @tamalbandyo.