India’s currency stocks have not kept pace with the need for cash, and there are no reserves that allow the country to cope with sudden spikes in demands, such as those that led to recent shortages in many states, according to an IndiaSpend analysis of Reserve Bank of India data.
These currency stocks should have been adequate for India’s average requirements if Indians had adopted digital transactions at the scale Prime Minister Narendra Modi’s government envisaged after demonetisation, the controversial withdrawal of 86% of the country’s currency, by value, on 8 November, 2016.
Currency with the Indian public was Rs 1.9 lakh crore lesser than it should have been in March 2018, said a 18 April, 2018, report from the State Bank of India (SBI), India’s largest bank. The bank’s chairman denied any such shortfall on 17 April, 2018, an indication of the political sensitivity of the issue.
Provisional figures for digital transactions from four banks for debit and credit card transactions at point of sale, prepaid payment instruments issued by eight issuers for goods and services transactions, national automated clearing house for approved transactions, real time gross settlement, cheque truncation system, immediate payment service, unified payments interface which are indicative, show a falling trend.
Digital transactions did rise since then, but after a peak of Rs 149 lakh crore (in value) in March 2017, they have fallen 22% to Rs 115 lakh crore in February 2018 although they rose consistently by volume implying that Indians are either not willing or unable to give up cash in a country where the connectivity to the banking system is limited, and illiteracy or the inability to use digital means are widespread.
As said, digital transactions have consistently risen by volume.
Many Theories for the Cash Crunch
Automated teller machines (ATMs) in more than five states Uttar Pradesh, Bihar, Andhra Pradesh, Maharashtra and Karnataka have run out of cash in many areas.
The sudden spike in currency demand is variously attributed to upcoming state elections in Karnataka, cash payments in state government schemes in Telangana and Andhra Pradesh, misunderstanding of the Financial Resolution and Deposit Insurance Bill’s ‘bail-in’ clause, which suggested that depositors bear a portion of any loss incurred by the bank.
Monthly ATM cash withdrawals increased from Rs 2.17 lakh crore in April 2017, hit a high of Rs 2.64 lakh crore in December 2017 and declined to Rs 2.47 lakh crore in February 2018, when the cash shortage began to hit supplies.
An ATM can hold Rs 65 lakh in four cassettes, of which one cassette has Rs 2,000 notes, two cassettes have Rs 500 notes and one has Rs 100 notes, on 18 April, 2018. Bankers blamed RBI saying it was not supplying adequate cash despite banks demanding more currency, the report said.
“The supply of cash from RBI to major State Bank of India (SBI) chests has drastically fallen since September 2017,” according to an analysis for Telangana by Factly, a data journalism portal, based on reply by SBI to a right to information appeal by Rakesh Dubbudu, the portal’s founder.
“The average monthly supply in the five months between September 2017 and January 2018 is Rs 629 crore or one-third compared to the average monthly supply of Rs 1,795 crore between November 2016 and August 2017,” Factly’s analysis said.
No new Rs 2,000 note was supplied by the RBI between April & November 2017 to SBI chests in the state, the analysis found. No Rs 500 notes were supplied either between October and December 2017.
“During the 25 months for which data was provided, the supplies touched a peak of Rs 5,377 crore in July last year,” on 11 April, 2018. “At the other end of the spectrum, the supply was nil in September 2016.”
Circulation Is the Bottleneck
Currency in circulation including the currency with the public and cash with banks –increased to Rs 18.3 lakh crore at the end of 30 March, 2018, against Rs 13.8 lakh crore in April 2017.>