Deja vu

Finance Minister Arun Jaitley may have reassuring words on the current cash shortage in parts of the country — he says it’s temporary and is being tackled quickly — but for a people scarred by the experience 17 months ago during demonetisation, it is deja vu all over again. ATMs in parts of several States are running dry and banks are helpless as the supply of the high value ₹2,000 note from the Reserve Bank of India has seen a steady fall in recent months. There are several theories — including conspiracy theories — that are doing the rounds explaining the shortage. According to a research report from State Bank of India, there is a shortfall of ₹70,000 crore cash currently in the system. This accounts for a third of the monthly withdrawals at ATMs. According to this report, for the current rate of GDP growth, the currency with the public ought to have been ₹19.1-lakh crore but the actual figure now is only ₹18.42-lakh crore. The irony is that even at this level the currency in circulation is significantly higher than the pre-demonetisation level of ₹17.72 lakh crore.

That said, the Centre and the RBI appear to have clamped down on supply of ₹2,000 notes. According to Economic Affairs Secretary Subash Chandra Garg, there are already ₹6.7-lakh crore worth of ₹2,000 notes in the system and, therefore, their printing has been halted. However, the demand for cash in the economy seems to have shot up to unusually high levels. Average monthly demand for cash has more than doubled from around ₹20,000 crore two months ago to ₹45,000 crore, according to Garg. Ergo, there’s a clear demand-supply mismatch leading to shortage. But what caused the rise in demand? This is where we run into a black hole with explanations ranging from hoarding of ₹2,000 notes, impending elections in Karnataka, marriage and procurement season and even panic withdrawals by citizens. Of these, the elections logic appears reasonable as we have always seen a surge in demand for cash around election times but what about the hoarding part? It is ironic but the fact is that the Centre has made it easier now to hoard money, thanks to the high-denomination ₹2,000 note it introduced post-demonetisation of ₹1,000 and ₹500 notes.

The Centre needs to work simultaneously on two fronts now. It should rush cash to the pockets where there is a shortage, a process which the RBI appears to have already set in motion. Even as this happens, the Centre should go into the causes for the shortage to assess if there is a genuine reason given that cash in circulation is lower now in proportion to economic growth. Are people reverting from digital payments to cash? Or is it back to business as usual in the ‘black’ economy? Whatever be the reason, it is imperative that the Centre gets to the bottom of the alleged hoarding of ₹2,000 notes.