D M DESHPANDE
Oscar Wilde wrote these unforgettable lines in ‘The Importance of Being Earnest’, ‘To lose one parent is a tragedy. Losing both of them looks like carelessness’. This applies in good measure to both the government (Ministry of Finance) and the RBI with regard to shortage of cash reported from parts of several states in the recent past. Yes, the Finance Minister has tried to reassure everyone that it is a temporary phase; we will sort it out quickly. But in the regions where there is actual cash famine, people are worried whether this is the repeat of the demonetisation experience which created unprecedented problems 17 months back.
According to a research report of the SBI, there is a cash shortage of Rs 70,000 crore. This is a third of all the monthly withdrawals from ATMs in the country. Like any other commodity, cash shortage is also due to demand-supply mismatch. As per the same study, having regard to the present rate of growth of GDP, currency with the public ought to be Rs 19.1 lakh crore, but it is only 18.42 crore. Ironically, even this amount is higher than the level of cash prior to demonetisation; currency with people at that time was Rs 17.72 lakh crore. So, one of the objectives of note ban, to enable faster shift to digital mode of payments may not have succeeded.
Demand for cash has more than doubled in the last two months from Rs 20,000 crore to Rs 45,000 crore per month. It appears that the government and the RBI have stopped printing of new Rs 2,000 notes. That is because there is already enough supply of Rs 2,000 currency notes amounting to Rs 6.7 lakh crore. It is only in February this year that the re-monetisation process was completed. It is also pertinent to note that initially after the demonetisation was announced, the RBI first undertook printing of larger number of Rs 2,000 notes in order to re-monetise large sums of money quickly. No new notes of Rs 1,000 were issued. There weren’t enough currency notes of Rs 500. Hence, to get change for higher denomination currency became quite difficult. People tend to keep certain amount of cash to meet unforeseen exigencies. This could hardly be termed as hoarding. Quite contrary to the expectation that people will not hold large currency post demonetisation, actually they may now want to increase the size of their holding due to increased uncertainty.
Why has the currency supply-demand mismatch occurred? Several theories, including the conspiracy ones are doing rounds. The most credible one is the elections in this year and the next and hence the spike in demand. Cash shortage seems to have been reported from states where polls are scheduled or due. Our politicians and parties would like to deal in cash for meeting ‘all’ election-related expenses. The fiasco in UP has only strengthened their resolve to fill the currency chest before the ‘war’! In fact, Rs 2,000 notes are even a better ‘store of value’ than the earlier Rs 1000 notes. All in all, even the RBI statistics point out to the fact that Rs 2,000 notes are not coming back into the banking channels.
Yet another reason for the sudden spike in demand for cash is the fear in the minds of bank depositors, thanks to FRDI (Financial Resolution and Deposit Insurance) bill, they may be asked to bail out the ailing public sector banks. The ‘run’ on the banks is also due to a series of scams with PNB topping this list. Fortunately, these issues are limited to certain locations only and therefore cannot explain fully the reasons for cash shortage pan India.
The other issue is large numbers of ATMs going dry. It is due to cash paucity but deeper analysis tells some other story. Of late the RBI has started printing more Rs 200 notes. However, not all ATMs in the country have been re-calibrated to store these notes. Even in those ATMs where it is done, there is a question of limited space available and how much lower denomination currency can be stored at a time. Alternatively, ATMs could be filled up with cash multiple times during a day or week. But this is resisted by banks because of issues of logistics and costs.
The RBI needs to do a few things quickly. One to replenish cash in areas of shortage, a task which the apex bank has already started. Second, go to the bottom of the problem of cash shortage before it assumes crisis proportion. If money in circulation is not in line with the growth of the economy, then it may have to decide to expand the broad money. Instead, if it is found that there is truth in the possibility of large-scale hoarding of higher denomination notes, then it is back to square one, of generating black money in the economy. Either way, the RBI has got a job on hand.