According to an SBI Ecowrap report, the apparent shortfall in cash could be around Rs 70,000 crore or even less.
The government and banks scrambled all machinery at their disposal on Wednesday to step up supplies of cash in states that are witnessing a shortage, with the finance ministry directing banks to ensure adequate availability of bank notes in deficit areas within 24 hours. Analysts said the currency deficit — pegged by one analyst at Rs 75,000 crore — reflected the inherent nature of India as a high-cash economy would take more time to change, despite the digitisation drive. An unusually high spurt in ATM withdrawals since the second half of last fiscal, partly due to stepped up economic activity, might have also caused the crunch, they added. But if the government manages to release a part of the currency reserves with the Reserve Bank if India (RBI) — close to Rs 1.75 lakh crore — expeditiously, the shortfall could be bridged without causing much economic disruptions or hassles to the public.
Given the gravity of the matter, however, the Prime Minister’s Office is learnt to be keeping a close vigil of the situation, although finance ministry officials rejected any comparison of the current situation with the immediate aftermath of demonetisation. For their part, public sector banks have already boosted replenishment of empty ATMs. Neeraj Vyas, deputy managing director at State Bank of India (SBI), said the availability of cash in its ATMs has improved in the last 24 hours and efforts are being made to raise cash availability even further in a few geographies. Punjab National Bank (PNB) stressed it “hasn’t faced any cash shortage in its ATMs across the country and continues to function as usual”. Cash is available in 90% of PNB’s 9,679 ATMs across India, which is pretty normal, it said. Bank of India managing director Dinabandhu Mohapatra said the shortage in a few pockets will be corrected very soon.
While cash may soon be back in ATMs in deficit states, analysts say a shift in the currency composition with a bias towards smaller-denomination notes in recent months may have caused the temporary crunch even if the overall money supply remains adequate, as — in such a scenario — more frequent replenishment of ATMs is warranted. In fact, the central bank said on Tuesday the shortage may be largely due to logistical issues of replenishing ATMs frequently and the ongoing recalibration of ATMs.
Additionally, heightened economic activity starting the fourth quarter of FY18 has meant that the demand for working capital of companies may have increased, putting further pressure on cash transactions.
According to an SBI Ecowrap report, the apparent shortfall in cash could be around Rs 70,000 crore or even less. Based on the nominal GDP growth of 10.8% and 9.8% in FY17 and FY18, currency with the public should have been Rs 19.4 lakh crore by March 18. However, currently currency with the public is at Rs 17.5 lakh crore, which shows a gap of Rs 1.9 lakh crore, it said. The shift to digital mode of payments, which compensates a part of the physical transactions, could be at least Rs 1.2 lakh crore.
Also, withdrawals from ATMs jumped 12.2% in the second half of FY18, compared with H1. This growth was much higher than FY16 or FY15 and even the five-year average of 8.2% (FY12-FY16). While cash withdrawals in H2 are always more than the H1 for reasons ranging from festivals and procurement season, but such a large increase is still not self-explanatory, said the report.
Also, while currency in circulation (CIC) in the economy has surpassed its pre-demonetisation level to reach Rs 18.29 lakh crore by March 2018, the currency with public has touched as much as 96% of the total CIC. This means cash in hand (cash at ATMs, etc) with banks has declined. During FY18, cash in hand with banks peaked to Rs 0.92 lakh crore by the end of September 2017 but it has reduced to Rs 0.7 lakh crore by mid-March. These suggest high-denomination notes may not be changing hands frequently. Analysts also said bank deposits are growing at a much smaller pace than earlier, which reinforces fears of hoarding even if a drop in interest rate on savings in recent months is factored in.
The growth in bank deposits was a modest 6.7% in March, much lower than over 10% in the beginning of 2017-18. Both the RBI and the government have insisted there is no dearth of money supply and even reserves. Economic affairs secretary Subhash Chandra Garg has said a reserve (additional cash) of Rs 1.75 lakh crore is still there and printing of Rs 500 notes will be raised fivefold, which can generate around Rs 75,000 crore more in a month.