New Delhi: The Narendra Modi government on Tuesday morning went into firefighting mode over reports of cash crunches in various parts of the country, with multiple high-level government officials seeking to assure the Indian public that any shortage of liquidity was a logistics problem and nothing more.
The coordinated attempt as assuaging the concerns of the public come on the heels of multiple reports over the last two weeks indicating shortage of cash at ATMs.
A Reserve Bank of India (RBI) stock-taking analysis found that in the last three months, the rate of cash withdrawal was much higher than normal (and higher than the rate of cash deposits) in eight major states – Bihar, Karnataka, Andhra Pradesh, Maharashtra, Rajasthan, Madhya Pradesh, Uttar Pradesh and Telangana.
Widespread anecdotal complaints of cash shortages at ATMs have been reported primarily in rural and semi-urban regions of these states.
On Tuesday, minister of state for finance Shiv Pratap Shukla kicked things off by announcing that the Centre had formed a state-wise committee to monitor and transfer currency, and blamed the current shortage on “uneven distribution of currency by RBI across states”.
“There is an issue of disparity. Some states have less currency and the others have more. Government has formed state-wise committee and RBI has also formed a committee to transfer currency from one state to the other. In two-three days, this problem will be resolved,” Shukla told reporters.
Finance minister Arun Jaitley followed it up with a rather cryptic tweet noting that the temporary shortage had been caused by “sudden and unusual increase in some areas”.
Have reviewed the currency situation in the country. Over all there is more than adequate currency in circulation and also available with the Banks. The temporary shortage caused by ‘sudden and unusual increase’ in some areas is being tackled quickly.
— Arun Jaitley (@arunjaitley) April 17, 2018
The words ‘sudden’ and ‘unusual increase’ were put in single quotes, in what some industry observers saw as a dig at a reported increase in cash withdrawals in the state of Karnataka due to upcoming elections.
The chief ministers of various BJP-ruled states followed up with more tweets, with the finance ministry putting out a formal statement acknowledging that there had been unusual and sudden demand in recent times and stated that there was “more than adequate currency in circulation and also available with the banks”.
What’s causing the cash crunch and how can it be resolved? The Wire breaks it down.
How much cash is in the economy?
The first and most important factor in ascertaining a cash crunch is examining the quantum of banknotes in circulation. The current currency in circulation is around Rs 18.04 trillion – this is marginally higher than the notes in circulation during demonetisation time, which was Rs 17.74 trillion.
However, when one takes into account the fact that the Indian economy has grown since November 2016, it’s clear that the notes in circulation haven’t grown proportionately. As Business Standard points out, this is shown in the fact that cash in circulation to GDP ratio before demonetisation was 11.6% and it has declined to 10.7% currently.
Former RBI deputy governor R. Gandhi has noted that based on pre-demonetisation trends – that is, if demonetisation had not taken place – India’s currency in circulation should be close to Rs 23 lakh crore.
This difference of Rs 5 lakh crore (Rs 23 lakh crore-Rs 18 lakh crore) hasn’t disappeared. It is simply no longer in the form of cash but sits as bank deposits. The underlying reason behind this being that Indian residents may have shifted to other forms of monetary transactions such as bank transfers and digital payments.
However, if the rate of bank withdrawals has now shot up, as it appears it has in some states, this could explain why there could be cash management issues.
Former RBI deputy governor R. Gandhi has noted that based on pre-demonetisation trends – that is, if demonetisation had not taken place – India’s currency in circulation should be close to Rs 23 lakh crore. Credit: Reuters
Cash mismanagement
The second thing to consider is that there is a supply chain issue and not a supply issue. Local media in Gujarat quoted deputy chief minister Nitin Patel as saying that they haven’t received adequate supply of cash from the RBI.
There have been some other media reports stating that ATMs in the northern parts of Bihar saw cash shortages due to transportation and logistical issues.
On Tuesday, SBI chairman Rajnish Kumar Sinha also stated that it was a “temporary situation, which is mainly due to geographical factors”.
“In some states there was excessive withdrawals, hence there was geographical imbalance. That is being tackled. There is one solution for it that a proper cash management system be maintained,” Sinha added.
But why are there excessive withdrawals?
This currently is the most important question. Initial figures put out by senior government officials indicate that in the last two to three weeks, nearly Rs 45,000 crore has been withdrawn from ATMs across the country. The government, however, has a reserve of roughly Rs 1.75 lakh crore that will be deployed into the system.
Over the last few weeks, the higher rate of withdrawals can be explained, to a certain extent, in some states.
For instance, in states like Andhra Pradesh and Telangana, as The Wire has reported, there is widespread fear among people that they will lose their hard-earned cash if their bank goes bankrupt. These fears have largely been compounded due to the recent Financial Resolution and Deposit Insurance Bill, and its controversial bail-in clause, and recent bank scams like the Nirav Modi scandal.
This panic in Andhra Pradesh and Telangana has resulted in not only heavy cash withdrawals but also people depositing less money. Indian Express quoted one H. Purnima, a regional manager at State Bank of India in Vizag, as saying that all banks have been witnessing high withdrawals since November 2017 and that they were “unable to refill ATMs because people are not depositing in banks”.
In other states like Karnataka, it is suspected, as Jaitley hinted, that higher rates of cash withdrawal could be linked to various political party needs for the upcoming assembly elections.
In northern states like Bihar, Madhya Pradesh and Uttar Pradesh, other factors have come into play such as the need to make payments for agricultural activities. As SBI’s Sinha pointed out, one reason for a greater need for cash is that “procurement season has come and that payments to farmers have gone up”.
Other miscellaneous issues
A number of other reasons for the cash crunch have also been put forward by banking officials The Wire spoke to.
The first is that higher withdrawals could have happened in March 2018 after customers feared that a five-day-long banking holiday would restrict access to their deposits.
The second is that the recent introduction of the Rs 200 notes hasn’t quite worked its way into the mix of various banknotes. In particular, ATMs have to be re-calibrated to accept the new notes. This process of re-calibration is handled quickly in urban and metro areas but takes a longer amount of time in rural and semi-urban areas.
Finally, the liquidity issues that were introduced as a result of the Rs 2,000 note could still be lingering, with the reported increase in Rs 100 and smaller-value bank notes not picking up enough slack.