Cash crunch at ATMs could be the after-effects of demonetisation
Analysis suggests shortage of cash in ATMs could be a result of persistence of tightness in overall money supply after demonetisation.india Updated: Apr 18, 2018 14:59 IST
Over the past few days, multiple reports of non-functional ATMs have revived fears of a cash shortage in the economy. A statement issued by the ministry of finance on Tuesday tried to allay such fears. The statement notes that “there has been unusual spurt in currency demand in the country in last three months”. The statement also held out an assurance that adequate currency notes would be supplied to “meet even higher levels of demand if such demand were to continue in the coming days/months”.
The statement named Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar as the states which have witnessed unusual demand for currency.
If the government’s prognosis is right, the cash shortage should subside within days.
However, a statistical analysis also suggests that this shortage could be a result of persistence of tightness in overall money supply which started after the November 2016 demonetisation of high-value banknotes. Here’s why.
Bank-notes in circulation reached their pre-demonetisation levels in February 2018. Whether or not this is enough to cater to demand for cash in the economy depends on the extent to which cash preference has fallen in the post-demonetisation period. As has been pointed out by R Gandhi, former deputy governor of the Reserve Bank of India (RBI) in an interview to Bloomberg Quint, currency in circulation should have been Rs 5 trillion more than what it is today had demonetisation not taken place.
By extension, if electronic or cashless transactions haven’t touched that number, it means there is a shortage of cash in the system.
We can look at two indictors to understand whether the replenished currency stock is enough to cater to the demand for cash in the economy: ATM withdrawals as a percentage share of total banknotes in circulation and growth in bank deposits.
The former gives an idea of day-to-day cash demand. The latter would capture whether people are hoarding cash outside of the banking system.
Both these indicators were influenced by the disruption caused by demonetisation. However, even after remonetisation had been completed, they are not back to their pre-demonetisation levels. Total value of ATM withdrawals as a percentage of total banknotes in circulation in February 2018 was still higher than corresponding values in the pre-demonetisation period.
It needs to be understood that ATM withdrawals would underestimate the day-to-day demand for money if ATMs are not working, because people would not be able to withdraw cash.
Similarly, annual growth in bank deposits is still lower than pre-demonetisation values. This suggests that some people are hoarding money rather than depositing it with the banks.
An attempt to replenish cash stocks used for carrying out economic activities outside the tax-net could be behind the move.
In his interview with Bloomberg Qunit, Gandhi listed elections, festivals and central/state government payments in social welfare schemes as possible reasons which could have led to an increase in demand for cash in certain regions. Gandhi also said that if people had gone back completely to their pre-demonetisation cash preferences, existing supply of cash would not be enough to meet the demand.
CP Chandrasekhar, professor of economics at Jawaharlal Nehru University said that at a time when the cash supply situation is already tight, even a minor shortage can trigger hoarding due to panic.
This is likely to further worsen the supply situation.
It will take some more time to say with certainty whether the current cash shortage is due to logistical or structural factors. In case it is the former, a mere transfer of cash stock from surplus to deficit states would solve the problem.
In case of the latter, it would require a significant increase in supply of currency.