A few weeks back, ghost of demonetization yet again unnerved general public when it returned with ‘cash crunch’ across various parts of the country, including J&K State. The ‘cash crunch’ situation was picked up by media when people raised hue and cry after they found most of the ATMs cashless, particularly on holidays. For a moment, the situation even unnerved the central government. The union finance minister together with Reserve Bank of India (RBI) were forced to give statements to arrest the panic among general public.
Was this really a cash crunch? Let’s first understand the definition of cash crunch. As per the dictionary meaning, “cash crunch is a state when an organization does not have enough money to operate successfully or in the normal way”. To overcome this crunch, the company or organisation facing the cash crunch take several measures to come out of the crisis. For example, many companies will unload assets or even sell a part of their company to raise much needed cash.
But here in the aftermath of demonetization, this cash crunch was observed with a difference. In November 2016, 86% of the cash in the Indian economy was pumped out in one go when prime minister Narendra Modi declared Rs 500 and Rs 1000 notes no longer legal tenders. So, it was currency shortage which left cash starved. Thereafter, through a continuous process of remonetization, new currency notes including new denominations of Rs.2000 and Rs.200 notes were printed and pumped back into the economy.
There’s an old saying: ‘Cash is king’. Without appropriate amount of cash on hand, individuals as well as businesses can face rough weather. While it’s essential that a portion of your money grows to meet future expenses like to construct a new house or meet higher education needs of the children, it’s equally essential to keep money in liquid. Cash has always helped in the dire circumstances.
Now let’s have a look at the currency in circulation. It is closely linked to the growth in gross domestic product (GDP). So, with the growth in GDP, the currency in circulation grows proportionately. For example, according to an official data, the currency in circulation grew by over 20% during the two-year periods between 2012 and 2014, and 2014 and 2016.
Disproportionate growth in currency in circulation vis-a-vis GDP has been reported between 2016 and 2018. It has dipped to 10%, whereas the nominal GDP grew by 21.7%. So in technical terms, we have less cash in the economic cycle. Currently the currency in circulation is at Rs 18.29 lakh crore and as against the current GDP level (if we consider previous years’ of growth rate of 20%), it should have been Rs 18.80 crore. So, there is a shortfall of Rs.50000 crore in currency.
This sharp dip in currency in circulation has its roots in demonetization. Let me explain. Introducing high denomination note of Rs.2000 has facilitated hoarding of this large value note conveniently. The note once issued by the banks has hardly changed hands. Most of these high value currency notes are missing in the system and stand hoarded.
This hoarding of cash (for whatever reasons) has added more fragility to the existing precarious situation. Notably, the compartment in ATM exclusively meant of Rs.2000 notes remains empty due to the non availability of this note. This means, the ATMs are not filled to full capacity and remain short of cash by 45%.
This situation has necessitated to replenish the machines more frequently. This is costly affair for the banks and in any case it’s not viable. Here the dry ATMs serve as a source of panic among the general public. Once, they observe ATMs remaining cash starved more frequently, they would be prompted to withdraw more than they need. It’s here a mismatch in demand and supply of the currency surfaces.
Mess in banking industry mainly due to burgeoning bad assets (loans) is also a reason for cash shortage. Basically proposed Financial Resolution and Insurance Deposit Bill has created panic among depositors. The Clause 52 of the Bill envisages a ‘bail-in’ option which suggests that depositors’ money could be used by failing banks to cover their losses and stay in business. In this backdrop, people for ‘safety’ reasons pull money out of their accounts at regular intervals and hoard the cash at their own places. ATMs have proved convenient for them to withdraw cash.
Meanwhile, dry ATM does not mean cash crunch. ATM cannot be substitute of a bank branch. Take it cash crunch, if a cheque is returned for non-availability of cash at the bank’s cash counter.
(The views are of the author and not that of the institution he works for)