Cash crunch will damage economy

the State Bank of India, the country’s largest bank, has said that there is a shortage of Rs 70,000 crore in the supply, which is about a third of the monthly withdrawals from ATMs. (PTI file photo)

The ghost of demonetisation has come to haunt the nation again, 15 months after the distressful event was first announced, with ATMs running dry in many states and explanations from various authorities failing to quell the anxieties of people. Six states — Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Bihar and Gujarat — are in the grip of a cash crunch since the last fortnight, and the problem seems to have started in the first two. Many reasons have been cited, and some of them are speculative. Elections to be held in many states and for the Lok Sabha, festivals, social welfare schemes, tightness of money supply, logistical problems and the lurking effects of demonetisation are all mentioned as reasons. People may be returning to cash after being forced to do digital transactions. The fear that a legislation under consideration which will enable the government to use customers’ money in savings accounts to help stressed banks may have prompted some people to prefer to keep cash at home. It is also possible that notes of bigger denominations are being hoarded for wrong purposes. There is also the view that the supply of notes in the country has not kept pace with the increase in the GDP. 

Some or all of these reasons may have contributed to the present distress. Both the government and the Reserve Bank of India (RBI) have issued statements to explain the situation and to reassure the public. The finance ministry has said that there is enough currency in circulation. The central bank has said that there is sufficient cash in its vault and the currency chests. Despite these claims, the State Bank of India, the country’s largest bank, has said that there is a shortage of Rs 70,000 crore in the supply, which is about a third of the monthly withdrawals from ATMs. The experience of customers also supports this. So, government’s assertions that there is no shortage cannot be accepted. ATM withdrawals have been increasing in the past few months and the shortage was being felt. The failure to address this shortage with printing and supply of currency notes in required quantities and denominations calls for an explanation. There has clearly been some lack of preparation, failure to take corrective steps in time and mismanagement on the part of the authorities. 

The situation should be remedied quickly. Such runs on ATMs or banks may lead to a bigger crisis because people have a tendency to draw more cash than required in order to hoard it for safety when they don’t trust the banking system or the government. If it is not resolved, the situation can lead to the dreadful scenes after demonetisation and again cause serious damage to the economy.

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