SBI: Research Punches a Hole in Government Claim, Pegs Cash Shortfall

SBI Research punches a hole in government claim, pegs cash shortfall at Rs 70,000 crore

SBI Research on Wednesday dropped a bombshell saying the shortfall in currency with public stood at a staggering Rs 70,000 crore.

The fresh data point is at odds with the government and RBI’s assertions that there is no cash shortage whatsoever in the system.

According to the Finance Ministry, the government has reserves worth Rs 1.75 lakh crore or a sixth of the currency in circulation and the prevailing cash crunch is due to the unusual demand for cash since February.

However, SBI Research’s data hints that the shortage is partly due to shortfall in annual cash supply. Based on the nominal GDP growth of 10.8 per cent and 9.8 per cent in FY17 and FY18, SBI Research estimates that currency with public should have been Rs 19.4 lakh crore by March 2018 against the current figure of Rs 17.5 lakh crore, indicating a gap of Rs 1.9 lakh crore.

“The shift to digital modes could be about Rs 1.2 lakh crore. The apparent shortfall thus could be around Rs 70,000 crore or even less,” said Sowmya Kanti Ghosh, chief economist, SBI Research in a note.

Responding to reports of ATMs running short of cash, the government on Tuesday said the current crisis is a temporary one caused by an ‘unusual’ spurt in cash withdrawals and that there’s no shortage of cash.

From an average Rs 20,000 crore a month, demand doubled in the past two months, which market watchers attribute to the upcoming elections in Karnataka and hoarding of Rs 2,000 notes.

ATM withdrawals had shot up 12.2 per cent in the second half of FY18 compared to the first. This is higher than the five-year average of 8.2 per cent.

“Cash withdrawals in H2 are always more than H1 due to many reasons like festivals, but in FY18 such a large increase is still not explanatory,” Ghosh said.

According to him, the reason for the dramatic change in demand for cash was a ‘forced shift’ in currency composition with more smaller denomination notes in circulation now.

The currency in circulation surpassed the pre-demonetisation level of Rs 17.98 lakh crore to reach Rs 18.29 lakh crore last month.

Ghosh reasoned the income velocity declined in FY18, especially during the second half, possibly indicating that higher denominations like the Rs 2,000 notes aren’t getting adequately circulated in the economy.

“SBI Research’s internal estimates suggest that in states like Bihar, Gujarat and southern states, the income velocity is far less than the national average,” he explained.

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