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Don't dash for that cash PDF Print E-mail
Thursday, 19 April 2018 03:55
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Shobhana edi

Several reasons have been ascribed to the recent cash crunch in some half a dozen states, including Bihar, Madhya Pradesh, Karnataka, Telangana and Andhra Pradesh. All of these—elections in Karnataka, payments to farmers, the wedding season—suggest there is a spurt in demand for cash, which is quite plausible since there is clearly a pick-up in the economy. It is, for instance, not unreasonable that more money is being spent on weddings this season, given the pain of demonetisation is over. To that extent, cash seems to be in short supply. As economists have pointed out, the currency in circulation (CIC) at Rs 18.43 lakh crore on April 6, 2018, is higher than that on November 8, 2016, of Rs 17.5 lakh crore.

However, this is inadequate to meet the demand for cash, which, extrapolated from past trends, is estimated at around Rs 22 lakh crore. Indeed, CIC as a share of GDP today is lower than what it was in previous years. While the switch to digital channels had reduced the need for cash, it nonetheless remains popular. The ‘under-supply’ of cash could be a conscious ploy by government and the Reserve Bank of India (RBI) to encourage the public to use less cash. The amount of CIC is just about enough to meet the normal demand. However, whenever there is some incremental spending—during elections, for instance—there is a shortfall in the availability of cash. And, if the incremental spending on several counts is bunched up—elections, weddings, payments to farmers—the system is well and truly short of cash. Unfortunately, the scare of a shortage seems to have led to the public hoarding cash.

The question is whether the government and the central bank will rein in the CIC to push digitisation. Already, the share of high-denomination notes in the total CIC is higher than what it was at the time of demonetisation, which is probably why 2,000-rupee notes are reportedly no longer being printed. However, given the public scare this time around—and the fact that the parliament elections are just a year away—it is likely currency notes will be printed soon enough and stuffed into the ATMs.

Some Rs 1.75 lakh crore of currency notes are ready to be moved to ATMs, while Rs 75, 000 crore of 500-rupee notes can be printed in a month. The Rs 2.5 lakh crore of additional currency should take the total CIC close to Rs 21 lakh crore, or close to the estimated demand. Ideally, the shift to digital channels, although very impressive, should have been faster. All the digital modes—IMPS, cards at PoS machines, mobile wallets and UPI—have seen a jump both in volumes and value over the past year. With more UPI apps and the government pushing BHIM, digital channels should become even more popular in the next few years.

 

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