More to cash crunch than supply issues

More to cash crunch than supply issues

Context

Currency in circulation has grown slower in the past 2 years than GDP growth; digitisation has not helped cut the demand 

What has happened?

The unusual cash crunch situation in several States has thrown up a conundrum. Is this due to an unmet demand in cash supply or an unusual drop in the circulation of currency due to high withdrawals that have dried up ATMs? A look at data related to cash in circulation and GDP growth shows that there are both supply and demand issues that have resulted in the cash crunch in some States 

Reasons

• Demand related issues that have lingered since demonetisation, exacerbated by upcoming elections in various States
• Government’s desire to keep the cash-GDP ratio low, one of the justifications for demonetisation
• There has not been an appreciable growth in the digital payments
• Possible hoarding of Rs. 2000 notes. Hoarding could not only be a cause for the unmet demand but could also be a consequence of it, as people tend to hoard if they perceive that it is difficult to access or withdraw money 

State specific reasons for cash crunch

• Karnataka has elections scheduled next month and cash use has been known to be high during polls
• P., Telangana, Rajasthan and Madhya Pradesh also have elections scheduled later this year or within a year from now
• Bihar figuring in this list must have to do with the fact that it has the lowest ATM density among major States; this means a relative lack of supply to a large population.

Supply issues

• Beyond reasons of demand, there is also the fact that the RBI has either halted or slowed down its supply of Rs. 2,000 notes and has instead supplied lower denomination notes to meet cash requirements
• Since April 2017, more than 48% of the new notes supplied have been of lower denominations, according to a reply by the Ministry of Finance in the Lok Sabha.

Conclusion

The cash crunch seems a consequence of both demand and supply issues.