As a political slugfest over a cash crunch in certain states began to flare up, the government and the central bank on Tuesday insisted there is “more than adequate” currency in circulation and the temporary shortage in certain parts of the country is being “tackled quickly”. Finance minister Arun Jaitley said the temporary shortage was caused by a “sudden and unusual increase” in demand in some areas. According to the finance ministry, currency supply rose by Rs 45,000 crore in the first 13 days of April but an “unusual spurt in demand” was witnessed more in some parts of Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar. There is no dearth of money supply but a disparity in circulation in certain areas that have caused the current problem, the government suggests.
The Reserve Bank of India said “logistical issues of replenishing ATMs frequently” and the ongoing recalibration of ATMs in certain parts may have also contributed to the current shortage. Sensing the gravity of situation in an environment of rising credit growth and slowing money supply, State Bank of India has scrapped the 75-paise charge levied on every Rs 1,000 of cash deposit beyond the daily permissible limit of Rs 25,000 into current accounts. Separately, economic affairs secretary Subhash Chandra Garg said the shortage is being fuelled by the hoarding of Rs 2,000 notes and that the RBI will increase the printing of Rs 500 notes fivefold to deal with the cash shortage.
Analysts have also blamed a range of other factors — including a lower cash-to-GDP ratio after the note ban, excessive cash use before elections in states like Karnataka and Madhya Pradesh, high demand for physical currency to pay wages when harvesting is on — for the latest crunch. Speculation that the government’s could move to gradually withdraw Rs 2,000 notes and fill the gap with lower-denomination currency notes may have worsened the latest crisis. While the Rs 18.43 lakh crore of currency in circulation (CIC) as of April 6 was higher than Rs 17.5 lakh crore when demonetisation was announced in November 2016, the cash-to-GDP ratio has eased substantially to 10.9% from as much as 12.1% in 2015-16, said analysts. Also, had the same pace of growth in the CIC maintained even after demonetisation, the central bank would have had to pump in some Rs 4 lakh crore more now, they added.
On top of this, non-food bank credit has been growing at double-digit rates in recent months, exerting pressure on money supply. Non-food credit rose 10.5% year-on-year to Rs 86.09 lakh crore in the fortnight through March 30. While credit offtake was even faster during high-growth periods, the cash-to-GDP ratio was also higher, said analysts. While digital payments have risen since the note ban, their growth has slowed in recent months, suggesting that people haven’t really abandoned reliance on cash. Some others suggested that more cash outgo in recent months due to a higher service tax incidence under the goods and services tax regime and more cash-on-delivery against purchases via e-commerce may have added pressure on cash supply.
Government officials, however, have rejected comparison of the current situation with the immediate aftermath of demonetisation and stressed the shortage is a “localised event” and not a pan-India phenomenon.
The central bank said it is also taking steps to move currency to areas that are witnessing unusually large cash withdrawals as a matter of abundant precaution, and has even ramped up printing of notes in all the four presses despite having adequate reserves. While some reports had suggested that the RBI’s recent restriction on the transfer of excess cash in one circle to another to fill a gap there caused the latest crisis, a central bank source denied any such move. SBI chairman Rajnish Kumar said the current “imbalance” in cash supplies in certain areas are driven by the crop procurement season, when demand for physical currency goes up. He said Punjab, Madhya Pradesh and Uttar Pradesh are seeing heightened demand during procurement season, indicating any logistics failure to fill cash in ATMs regularly during this period can cause a shortage there.
“We’ve cash currency of Rs 1,25,000 crore right now. There is one problem that some states have less currency and others have more. The government has formed a state-wise committee and the RBI has also formed a committee to transfer currency from one state to other. It’ll be done in three days,” SP Shukla, minister of state for finance, told ANI.
Madhya Pradesh chief minister Shivraj Singh Chouhan had on Monday said that Rs 2,000 notes were “vanishing” from the market, and alleged that there was a “conspiracy” behind it. Some report suggested that SBI, which runs around 25% of the country’s ATMs, has no cash available at around one-sixth of its ATMs. Navroze Dastur, managing director, NCR Corp, India, a large ATM manufacturer and service provider, said: “Banks have not been able to get the supply from the RBI in the quantum they are asking for. This has been the case for a fortnight or so.” Radha Rama Dorai, managing director, ATM and allied services, FIS, said: “One of the latest reasons for the shortage could be the conversion of Rs 2,000 cassettes to Rs 200 and emphasis has been on printing lower-denomination notes. The cash-carrying capacity of the ATMs has gone down in terms of value.”