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Less than two years since a hard-hitting cash crunch triggered by demonetization, the Indian economy is facing another cash shortage, but this time the reasons aren’t as predictable. The shortage was first noticed in Southern states of Andhra Pradesh and Telangana in early April and it quickly spread to other states like Maharashtra, Bihar and Uttar Pradesh. Although the Reserve Bank of India and the Government acknowledged the problem and resolved to get everything back on track within two weeks, experts have called it a ‘unique’ situation given that there doesn’t seem to be an agreement about the reason. Thus, it becomes crucial for us to look into the various theories that are being proposed and make our inferences.

First off, in a press release, the RBI blamed the shortage on the logistical issue of recalibrating ATMs and replenishing them.[1] The Finance Ministry followed suit with Finance Minister Arun Jaitley tweeting about sufficient supply and the crunch being triggered by a sudden and unusual increase in money demand. This was further supported by an official statement by the Ministry assuring the country about sufficient reserves to meet any spurt in demand.[2]

Apart from these official responses, it is essential to look at other issues that could have ignited the shortage. Since demonetization, a high-level of uncertainty has been noticed in the masses. This uncertainty might have caused people to start accumulating cash reserves at home in the form of 2000 rupee notes, especially after almost all of their reserves were wiped out during demonetization. The fact that the Government decided to issue a high denomination note of 2000 has also given rise to the theory of hoarding by political parties and the notes ironically being converted into black money, the very practice which they were supposed to discourage. Several media outlets have reported bank officials claiming that they doubted the use of 2000 rupee notes as black money because of their low transportability costs and because they weren’t being deposited back into the banks as frequently as they should have.[3] The political parties come into the picture because of the crunch being first noticed in Southern states some of which will be going into the election in the coming months.

Interestingly, a 2017 report by State Bank of India pointed out the difference between the amount of 2000 rupee notes in circulation and the amount that was printed. The evidence leads the report to conclude that the RBI had not released all the money that was printed and might have stored it for unknown reasons.[4] An important issue that has come to the fore is the logistical issue of recalibrating ATMs with the new notes. The new notes of 2000 and 200, released after demonetization, were different in size as well and this needed ATMs across the country to be recalibrated and replenished periodically. The shortage could have been caused due to this process still being underway in a number of states inspire the target of completing its way back.  

Earlier reports about cash shortage in Andhra Pradesh and Telangana also talked about FRDI (Financial Resolution and Deposit Insurance) bill being responsible for such a cash crunch.[5] According to such reports, these states saw large-scale withdrawals in the aftermath of rumors about FRDI bill. According to the rumors, depositors would have faced huge losses in case of bank bankruptcy and this might have caused panic leading to distrust in bank deposits. Another theory doing rounds is the overestimation of the speed of digitization in the country. The hopes of transforming India into a digital economy lead to the government depending on services like e-wallets and RBI reducing supply. Transactions through such wallets came down recently due to the new ‘Know Your Customer’ norms are making it mandatory for every customer to link their names and addresses with their account. This might explain the increase in demand for hard cash in towns and cities.

The last reason we should look at is the excess of withdrawals over deposits as claimed by a number of bank officials and reported by a number of media outlets. According to the RBI data, in the fiscal year ended March 2018, the bank deposits grew only by a 6.7% which is the lowest in 54 years.[6] Experts claim this to be a result of demonetization and a shift to other assets as forms of savings which is evident in the roaring increase of investments in mutual funds and the equity markets.

Given the above explanation, it is essential to conclude two important things. First, the recent cash crunch cannot be blamed on one reason entirely. It could very well be a combination of factors at play. Second and more important, although this temporary cash situation can be managed in a short time, what we must take away are the lessons. Lessons that there still are a number of ‘demonetization remains’ left in the economy that can come back to haunt the citizens anytime. Hence, the Government and the RBI must look at this as a learning experience and correct the bottlenecks such as the logistical issue of ATMs, the extent of hoarding in the economy or the wide-scale uncertainty about commercial banks especially in the light of the recent scams and frauds at the public sector banks. In the recent years, the public has had to deal with a number of fraudulent bank activities coming to light such as the Nirav Modi scam at PNB, the default by Vijay Mallya or the Winsome diamonds scam. In an environment of mistrust, the savers can’t exactly be blamed for not keeping their money at the banks and it’s high time the government, RBI and other banks come together to realize and solve this problem.

[1] Katoor J. (2018, April 18), RBI Press Release. Reserve Bank of India . Retrieved from: https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=43690

[2] The Quint ( 2018, April 17). What Led to the Cash Crunch? The Finance Ministry Responds. The Quint. Retrieved from: https://www.thequint.com/news/india/reason-for-cash-crunch-in-atm

[3] Shukla S. (2018, April 18) ATMs go Dry as Cash Demand Surges Amid Poll Season. The Economic Times. Retrieved from : https://economictimes.indiatimes.com/news/economy/finance/cash-crunch-ahead-of-poll-season-a-cut-in-supply-rs-2000-notes/articleshow/63807998.cms

[4] Unnikrishnan D. (2018, April 17) ATMs go fry nationwide:Why the Biggest Cash Hoarders- Political Parties and RBI- owe answers for the crunch. FirstPost.  Retrieved from: https://www.firstpost.com/business/atms-go-dry-nationwide-why-the-biggest-cash-hoarders-political-parties-and-rbi-owe-answers-for-the-cash-crunch-4435137.html

[5] Janyala S. (2018, April 5). Cash crisis in Telangana, Andhra Pradesh: Scared of clause in FRDI Bill, people pull out money. The Indian Express. Retrieved from: http://indianexpress.com/article/india/cash-crisis-in-telangana-andhra-pradesh-scared-of-clause-in-frdi-bill-people-pull-out-money-5123787/

[6] Rebello J. & Nayak G. (2018, May 04) Growth in Bank Deposits Falls to Five Decade Low. The Economic Times. Retrieved from: https://economictimes.indiatimes.com/industry/banking/finance/banking/growth-in-bank-deposits-falls-to-five-decade-low/articleshow/64023063.cms

 

Image Source- Telangana Today

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Written By Pragya Mishra

Economics Graduate

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