Poor currency management
Authorities should have anticipated demand for cash
Reports have come in from various parts of the country about a shortage of currency notes. In Bihar, Karnataka, Gujarat and Telangana, in particular, there are reports of ATMs running dry, although the phenomenon is not limited to those areas. In response to these concerns, the government and the Reserve Bank of India (RBI) have issued statements intended to reassure the public. The finance minister has said that there is enough currency in circulation. The central bank has said that there is “sufficient cash in the RBI vaults and currency chests”. Both went on to add that there was unexpected demand for currency, leading to localised and temporary shortages. But it is clear that, if there are indeed shortages, then there is, by definition, not “enough” currency in circulation. The government and the central bank have likely miscalculated the demand for currency and overestimated the velocity of money — the rate at which currency changes hands. The increase in the rate of ATM withdrawals — according to the State Bank of India, such withdrawals increased by 12.2 per cent in the second half of 2017-18, 4 percentage points over the normal rate of increase — has clearly been known for some time. It is thus unclear why the authorities did not respond in time to the developing situation. Why should there be a cash crunch before the RBI steps up its printing of notes?
The government has sought to financialise the assets that Indians hold and has urged that savings be deposited in bank accounts. But it is clear that the ATM network is still not up to the task of dealing with increased demand. As a report in this paper suggests, 60 per cent of ATMs in the country are not functioning at present. The demand for currency is a function not just of economic growth, but also of the denominations in circulation.
In order to speed up the remonetisation process last year, the RBI printed many ~2,000 notes. These were not as useful for exchange as lower denomination notes. Now that ~200 notes are being printed and pushed into the market, suppressed demand for currency will be made manifest. This should have been predicted in advance. It is also worth noting that, while the total value of currency in the economy is higher than it was when demonetisation was carried out in November 2016, the value of currency in circulation as a percentage of base money, or even of the gross domestic product (GDP), is still lower than what it was at that point. Thus, an increased demand for currency to restore these ratios to their equilibrium level should have been entirely predictable and planned for.
The government was far too sanguine about the effects of demonetisation, with many officials claiming that it would change consumer behaviour and lead to increasing cashlessness. But that assumption is not being borne out in practice, and should never have been the basis for a currency management policy. Almost a yearand-a-half after it was carried out, demonetisation continues to sting, and clearly has failed to achieve any real change in behaviour. The government and the RBI must move swiftly to restore confidence in banks and the availability of currency before sentiment worsens. They could start by acknowledging the errors of judgement and management that led to this situation.