We are Truly Cash ‘Less’

Truly Cash

When demonetization was announced as a ‘surgical strike’ against the black money holders and the counterfeit notes, the Prime Minister Hon. Narendra Modi revealed his governments’ ambitious plans to convert the Indian economy into a cashless economy. Considering certain peculiar features of the economy, back then, many skeptics called his move to make the economy cashless, nearly impossible and a Herculean task. With the cash crunch growing like never before in several states of the country, his critics now understand what the Prime Minister meant by going ‘cashless’. Indian economy, today, is truly a cash ‘less’ economy, with its public finding it very difficult to withdraw their own mone that they once deposited in the banking system. Even as the government blames social media for exaggerating the problem (which is true to some extent) there are a lot of fundamental, structural problems persisting within the Indian banking sector.

One of the most recent structural shifts that the Indian economy witnessed was the pursuit of the policymakers to drag the economy into the realms of the digitalization and thus, to reduce the number of transactions made on currency notes and liquid cash in its physical form. Though the end in itself was visionary, the means to achieve the same wasn’t something based on the economic reality and prevailing situations in the country’s domestic sectors. As per the official estimates, there are 2,06,659 ATMs in the country to serve the public. According to the February estimates of Reserve Bank, nearly 8,850 crores are withdrawn through ATMs every day. This implies that each ATM needs, on an average, nearly 4.25 lakhs per day to cater the withdrawal requests of the customers. As of the last round of estimates with the various banks in the country, the total number of Debit/Credit/Cash cards in the country is nearly 90 crores. Since the per capita income is increasing and the fact that the seasonality components plays a crucial role in determining the money demand in the country, banks often face the dilemma of shutting down the ATMs, when there is a growing demand for money to be withdrawn.

One of the problems that the money market in the country faces today is the severe cash crunch, owing to the growing proportion of the larger denomination notes in the economy. When the demonetization drive was initiated in the month of November 2016, the government was under severe pressure to ‘refill’ the economy to address the severe cash shortage created by the demonetization of 500 and 1000 denominations. The fastest way to bring back the economy from the impact of demonetization, thus, was to introduce an even higher denomination of notes. This was the motive behind the introduction of the 2000 rupee note. However, what the economy started to witness soon was a systematic imbalance in the cash demand. For example, imagine a person who just needed 1000 rupees from an ATM. In the pre-demonetization period, the ATM could dispense the money as a single 1000 rupee note. With the post-demonetization changes, the possibilities are either two five hundred notes or a message showing no cash. Now, many of us have had the experience, at least once, of withdrawing a higher sum even though we wanted less, just because the ATM didn’t have the lower denomination notes. Imagine several thousands of people, if not lakhs, experiencing the same problem every day. The probability of this scenario is quite high, given the number of lower denomination notes released since the demonetization is lesser compared to the high denomination notes.

Another possible explanation for the surge in the demand for the currency notes and the resulting cash crunch is the upcoming elections in the States of Karnataka, Rajasthan, and Madhya Pradesh. Though it is not something that is acknowledged officially, it is a well-known fact that there would be a higher demand for physical money in the election prone states. Similarly, the proposed legislative reform under the Financial Resolution and Deposit Insurance (FRDI) Act has created confusion among the depositors, causing a fall in the savings and deposits rates with the banks. Indian banking sector recorded a relative decline in the rate of deposits that the banks receive for the first time in the past 54 years. When the deposits declined, however, there was no relative decline in the demand for withdrawals and this further aggravated the crisis.

Thus, what the present cash crunch reveals to us is simple; as the economy transforms tremendously, there must be also reforms at all levels to feed the growing requirements to maintain the economy at equilibrium. A failure to make the policies adaptive would lead to a failure in the economy in the long run.


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