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Why India is Short of Cash Again

Apr 19, 2018


There is a currency shortage in large parts of the country with the ATMs running dry, even before the wells could run dry this summer. Various reasons have been offered for this, but primarily this is a supply problem.

This basically means that there isn't as much currency (or cash) going around in the economy, as the economy needs.

The growth in currency in circulation is closely linked to the growth in gross domestic product (GDP, a measure of economic growth). Take a look at Figure 1, which basically plots the growth in currency in circulation along with nominal GDP growth (i.e. GDP growth which hasn't been adjusted for inflation), over a two-year period, over the years. We have taken two-year periods into account, primarily to adjust for demonetisation, which had led to a massive fall in currency in circulation.

Figure 1:

What does Figure 1 tell us? It tells us that during the two-year periods between 2012 and 2014, and 2014 and 2016, the currency in circulation grew by over 20%, as did the nominal GDP.

This changed between 2016 and 2018, when the currency in circulation grew by just 10%, whereas the nominal GDP grew by 21.7%. Hence, the growth in currency in circulation has slowed down substantially.

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And this is basically what has created the shortage of currency or cash, in large parts of the country. There simply isn't enough currency or cash going around.

Let's try and estimate the gap. The currency in circulation as of March 31, 2016 was at Rs 16.63 lakh crore. This increased by 10% over a period of two years, and as of March 31, 2018, stood at 18.29 lakh crore.

But as we showed earlier, this increase is an anomaly and is too low, compared to the economic growth during the same period. Now let's say, demonetisation hadn't happened and the currency in circulation had grown at the kind of pace, as it used to before.

Let's say this growth was 25% (an average of the growth for the previous periods). At 25%, the currency in circulation as on March 31,2018, should have been around Rs 20.8 lakh crore. Of course, some part of this currency in circulation would have been replaced by digital transactions. The State Bank of India in a report points out: "The shift to digital modes could be at least Rs 1.2 lakh crore."

This basically means that the currency in circulation as of March 31, 2018, should have been at Rs 19.6 lakh crore (Rs 20.8 lakh crore - Rs 1.2 lakh crore). It is currently at Rs 18.29 lakh crore. This means a gap of around Rs 1.3 lakh crore.

If we assume a more conservative growth of 20%, then currency in circulation should have been around Rs 18.8 lakh crore, or Rs 50,000 crore more than it currently is.

While, the currency in circulation number can change depending on the assumptions we make, the broader point is that there is a shortage of currency. The government has also admitted to it. As the economic affairs secretary SC Garg put it: "We print about 500 crore of Rs 500 notes per day. We have taken steps to raise this production 5 times. In next couple of days, we'll have supply of about 2500 crore of Rs 500 notes per day. In a month, supply would be about Rs 70000-75000 crore."

Actions speak louder than words. And this is the government admitting to the fact that there is a shortage of currency, and they are looking to increase the supply. Also, this is yet another indicator of the fact of how demonetisation cost this country dear and continues to create problems, despite its ill-effects coming down. If the Modi government hadn't demonetised Rs 500 and Rs 1,000 notes, in November 2016, the current shortage of currency would have never happened.

Another theory being offered is that elections in Karnataka scheduled on May 12, 2018, have also played their role in the shortage. Data shows that the currency in circulation tends to increase much faster, when elections (state assemblies or Lok Sabha) are around the corner.

The trouble is that elections happen all the time, but ATMs don't run dry, as they have during April 2018. So how do we explain this situation?

In the week ending April 13, 2018, the currency in circulation has gone up by around 1.8% or Rs 33,000 crore. This is clearly on the higher side. In the past, similar jumps have happed around election time, which basically means that people (or should we say politicians) hoard on to money in order to be able to spend it before elections.

Clearly, something of that sort is happening in Karnataka as well, given the historical evidence. Past evidence also shows that such hoarding happens in the states bordering the state where elections are scheduled.

Over and above this, currency shortages have been on in a few states for a while now. Take the state of Telangana. On a recent visit to Hyderabad (in early April) we were told that the state had been facing a cash shortage for a couple of months.

In fact, MPs had even raised this question in Parliament, asking the government, if it was aware that large number of ATMs in the states of Telangana and Andhra Pradesh, had been running out of cash. This question was answered on March 18, 2018. (Here is the link to the government's answer).

The government in its reply said that the RBI had supplied Rs 51,523 crore to its Hyderabad office, between April 2017 and February 2018, which was the highest in the country. Clearly it wasn't enough.

The feeling we got when we were in Hyderabad was that people were generally worried about the money they had in the banks. This was aggravated by the Nirav Modi episode, which brought to the fore, the mess that public sector banks are in and all the WhatsApp rumours going around the proposed FRDI bill.

This led to people withdrawing more money from ATMs and banks than they normally would. This hoarding of cash (for both electoral as well as non-electoral reasons) obviously made the already fragile situation where the economy was generally short on cash, even more precarious. It also explains why ATMs did not run out of cash during elections previously, but have this time around.

The best way to prove this would have been to look at the total amount of cash withdrawn by people from ATMs in the states of Andhra Pradesh, Telangana, Bihar etc., where there has been a significant cash crunch. But given that state wise cash-withdrawal data is not publicly available, we will have to give this a skip.

Over the past few days as the news of cash crunch has spread, it has become what economists call a self-fulfilling prophecy. The expectation that something will happen is making it happen.

Also, as we have mentioned in the past, the economy is finally coming out of the ill-effects of demonetisation, and this has led to greater economic activity and more demand for cash, given that most economic activity in India is carried out in cash.

Further, the Rs 2,000 note, which was introduced after demonetisation, is the preferred note of choice, when it comes to hoarding cash. The logic is simple. You can hoard more money in lesser notes. Also, the next highest denomination note now, after the Rs 2000 note, is the Rs 500 note, unlike the Rs 1,000 note earlier. And it takes four Rs 500 notes to replace a Rs 2,000 note. This accentuates the cash crunch.

All these reasons have been responsible for the shortage of currency in India. But the major reason remains the lack of supply of enough notes in the financial system.

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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6 Responses to "Why India is Short of Cash Again"


May 1, 2018

In the last one month whenever I needed cash I have been able to withdraw from ATM with no problems. There could be some shortage in some areas because of spurt of requirement. Only thing is as an individual it is a challenge to carry cash around so use electronic means. This does not mean I am short of cash. Any statistics on India is dubious . There is no way to collect accurate data and there is not enough technology to slice and dice through entire demography and geography. So everything boils to perception.



Apr 27, 2018

Vivek, your articles are always one sided but now you are making strange claims and deductions. I am sure no one learnt anything from this useless piece of tripe.



Apr 24, 2018

Mr Vivek,
Post Demonetisation,the ATMs were calibrated to accommodate Rs 2000 notes and new notes of lower denomination.. A better indicator would have been to find the quantum of denominations of notes in circulation.Since the ATMs dispense large number of notes of higher denominations it is likely that the notes of higher denominations are being cornered/ hoarded in view of the ensuing elections or could be a ploy used by the volunteers of opposition parties in a concerted manner to create an artificial shortage and create panic among the people to negate the benefits derived from Demonetisation.Its also likely that the hoarders may be stocking the Rs 2000 denomination notes and making a kill at an Oppurtunie time by selling at a premium.



Apr 24, 2018

I think there are multiple reasons for the cash crunch:
i) The rumors like that Banks are going to fail, Nirav Modi & others have taken more than 10000 crore cash. In short rumours of the dooms day.
ii) There is very strong possibility that Cash is once again being hoarded by black marketeers, builders as Govt has not initiated any action against the hoarding of the cash and cash payments beyond Rs 2 lacs,as per the laws passed by the Government.
iii) More cash requirement from farming community for harvesting
iv) Insistence on e KYC for payment banks and payTM etc by RBI. Insistence on AADHAR for various payment modes and electronic mode of payments
v) Rumours that on providing AADHAR Cards and using electronic mode of payment, Government agencies will start surveillance of the persons and that notices will be issued by the Income Tax authorities.
vi) A negative mind set of Tax authorities by issuing notices without applying mind.
vii) Heavy charges on the use of electronic payment and none for the use of cash.

It is a wake up call for the Government to ensure steps are taken to encourage use of electronic mode of payment, incentives are made for electronic transactions ans disincentives for cash transactions. banks are happy in giving cash to customers for which they don't charge a penny but for electronic transactions Service charges and GST is imposed.


Rajiv Putuval

Apr 20, 2018

Mr. Vivek, I slightly disagree with you in this post. You are emphasising more on what government should have done to avoid the cash crunch. I have always felt your mails criticising the government for all the problems. If there's one post that advised what the people should be doing, then I would have treated your posts as unbiased, but no, you seem to blame the government for everything. I think it is time that you stood in election, win the election, and do all that you say the government did not do. In short, it is easy for anybody to sit on the sidelines and blame the government.

Anyways, you have mentioned about the cash hoarding, which is same as black money economy. The objective of every government should be to get rid of black money economy. The demonetization was tested with that objective , but somewhere it failed, but I don't see it as a negative view, because finally this government showed the guts to try getting rid of the black money economy.

You view everything from one view, did you ever try viewing the same from the people's point of view. If the people are afraid of their money staying in banks , there should have bought gold or invested somewhere . Is cash hoarding the right approach? You are one of the few who still believe in black economy, pray you are not participating in it. More currency printing, huh!! Are you in the right state of mind to recommend that! Cash hoarding, they are doing the very thing that defeats the purpose of demonetization. Only difference is earlier the business community used to do it, now all are doing it. What should the people be doing to invest their hard earned money, this is what you should be writing in your diary , otherwise everybody will have only one option, that is, to hoard money. For that, we don't need to pay you fees for your diary because I may be wrong, but never did I find in your diary an advice on what should we subscribers do, since the government did this, did that. All we see is only blame. That anybody can do, we don't put our hard earned money in your diary to hear the blame stories.

I do not like what the government is doing, nowadays to the salaried class like me, so if anybody has a view that I am a fan of this government, it is only their imagination. Good day!

Like (1)

Narayan Krishna

Apr 19, 2018

I am sorry to refute your one sided logic on the shortage of currency in India. RBI has printed more notes than previous period. One must understand that this is an election year with every party to outwit others thru goodies etc. So long as there is no control of the party funds thru centre funding this is bound to happen.. This will be more so with the entire Opposition gearing up to defeat Modi govt by any means. You simply cannot criticize the govt for this artificial shortage. Prior to every election in any state there is an artificial shortage of daily consumption commodities like onions,dal, potatoes or tomatoes. This is so because the markets are controlled by unscrupulous politicians of NCP, SP etc. There should be a radical shift on political funding in India otherwise this sort of situation is bound to happen.

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