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Despite the constant assurances of the Centre and the RBI that there is more than adequate currency in circulation to meet the demand and that the cash crunch is only temporary, owing to a sudden spike in demand, the numbers reveal otherwise.
In fact, a glance at how the levels of currency in circulation have moved in the past decade, the composition of banknotes and daily cash demand, clearly indicated a cash crunch in the offing. It is unclear how the RBI could have missed these signals and have been caught by surprise. Let us consider the currency in circulation first. True, currency in circulation is now at ₹18.4 lakh crore, higher than the ₹17.6 lakh crore in November 2016 before demonetisation. But comparing absolute numbers in isolation, without taking into account the underlying growth in the economy, could be misleading.
Currency in circulation
A look at the data from 2007 shows that the currency in circulation grew by 14 per cent annually (compounded annual growth) until March 2016. The notes in circulation were 11-12 per cent of the nominal GDP. Considering both the pace of economic activity and the general growth in currency notes, a back-of-the-envelope calculation suggests that the currency in circulation should have been at least ₹21-lakh crore.
The ₹3-4 lakh crore shortfall in supply of currency is causing the cash crunch at a time when demand is high (a known phenomenon this time of the year). Cash withdrawals are now 14-15 per cent of the currency in circulation, up from 12-13 per cent a few years back.
The trend in cash withdrawal also shows that pinning hopes on digital transactions to plug the shortfall in supply of currency may have been overdone by the Centre and the RBI.
Usage of debit/credit cards
After shooting up in December 2016 due to demonetisation, the usage of debit and credit cards for purchases has been healthy, but not strong enough to signal a major shift away from cash. Debit cards usage at PoS, which had shot up to ₹58,000 crore in value in December 2016, has since been hovering at far lower levels of ₹36,000-40,000 crore per month.
Debit card usage at PoS is still just 13 per cent of the total debit card transactions; the usage at PoS had shot up to 40 per cent in December 2016 post demonetisation.
Some reports have also suggested that the hoarding of ₹2,000 notes has led to the cash crunch.
This could well be, given that these notes constitute half of the total banknotes in circulation in value as of March 2017.
As of March 2016, the share of ₹500 and above banknotes, together accounted for 86.4 per cent of the total value of banknotes in circulation.
As of March 2017, ₹500 notes constitute only 22 per cent of the total bank notes in circulation.
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