Nagaon: People wait outside an ATM, in Assam's Nagaon district on April 17, 2018. Currency shortage was reported in Andhra Pradesh, Telangana and Madhya Pradesh in the past few weeks. There were also complaints of shortage in parts of Maharashtra, Gujarat and Bihar.

Mumbai: India's currency stocks have not kept pace with the Indian need for cash, and there are no reserves that allow the country to cope with sudden spikes in demands, such as those that led to recent shortages in many states, according to an IndiaSpend analysis of Reserve Bank of India data.

These currency stocks should have been adequate for India's average requirements--if Indians had adopted digital transactions at the scale Prime Minister Narendra Modi's government envisaged after demonetisation, the controversial withdrawal of 86% of the country's currency, by value, on November 8, 2016.

Currency with the Indian public was Rs 1.9 lakh crore lesser than it should have been in March 2018, said a April 18, 2018, report from the State Bank of India (SBI), India’s largest bank. The bank’s chairman denied any such shortfall on April 17, 2018, an indication of the political sensitivity of the issue.

Provisional figures for digital transactions--from four banks for debit and credit card transactions at point of sale, prepaid payment instruments issued by eight issuers for goods and services transactions, national automated clearing house for approved transactions, real time gross settlement, cheque truncation system, immediate payment service, unified payments interface--which are indicative, show a falling trend.

Digital transactions did rise since then, but after a peak of Rs 149 lakh crore (in value) in March 2017, they have fallen 22% to Rs 115 lakh crore in February 2018--although they rose consistently by volume--implying that Indians are either not willing or unable to give up cash in a country where the connectivity to the banking system is limited, and illiteracy or the inability to use digital means are widespread.

As we said, digital transactions have consistently risen by volume. Post demonetisation, provisional data suggest that transactions have seen considerable increase, reaching over 1,122 million transactions in January 2018, an all-time high since November 2016, down 2% in February 2018.

Source: Reserve Bank of India
Note: Digital payments does not include mobile banking figures. Data are indicative, and from only a few institutions as explained above.

Many theories for the cash crunch

Automated teller machines (ATMs) in more than five states--Uttar Pradesh, Bihar, Andhra Pradesh, Maharashtra and Karnataka--have run out of cash in many areas.

The sudden spike in currency demand is variously attributed to upcoming state elections in Karnataka, cash payments in state government schemes in Telangana and Andhra Pradesh, misunderstanding of the Financial Resolution and Deposit Insurance Bill's 'bail-in' clause, which suggested that depositors bear a portion of any loss incurred by the bank.

Cash withdrawals from ATMs hit a high of Rs 2.47 lakh crore in February 2018 compared to Rs 2 lakh crore in April 2015, RBI data show.

Monthly ATM cash withdrawals increased from Rs 2.17 lakh crore in April 2017, hit a high of Rs 2.64 lakh crore in December 2017 and declined to Rs 2.47 lakh crore in February 2018, when the cash shortage began to hit supplies.

Some reports (here and here) suggest that the RBI is not supplying Rs 2,000 notes to banks. So, ATMs are operating at half of their capacity.

An ATM can hold Rs 65 lakh in four cassettes, of which one cassette has Rs 2,000 notes, two cassettes have Rs 500 notes and one has Rs 100 notes, The Economic Times reported on April 18, 2018. Bankers blamed RBI saying it was not supplying adequate cash despite banks demanding more currency, the report said.

"The supply of cash from RBI to major State Bank of India (SBI) chests has drastically fallen since September 2017," according to an analysis for Telangana by Factly, a data journalism portal, based on reply by SBI to a right to information appeal by Rakesh Dubbudu, the portal’s founder.

"The average monthly supply in the five months between September 2017 and January 2018 is Rs 629 crore or one-third compared to the average monthly supply of Rs 1,795 crore between November 2016 and August 2017," Factly’s analysis said.

No new Rs 2,000 note was supplied by the RBI between April & November 2017 to SBI chests in the state, the analysis found. No Rs 500 notes were supplied either between October and December 2017.

"During the 25 months for which data was provided, the supplies touched a peak of Rs 5,377 crore in July last year,” The Hindu reported on April 11, 2018. “At the other end of the spectrum, the supply was nil in September 2016."

Circulation is the bottleneck

Currency in circulation--including the currency with the public and cash with banks--increased to Rs 18.3 lakh crore at the end of March 30, 2018, against Rs 13.8 lakh crore in April 2017.

Source: Reserve Bank of India 1, 2

Currency with the public also increased to Rs 17.5 lakh crore at the end of March 30, 2018, against Rs 13.2 lakh crore at the beginning of the financial year 2017-18.

The government will print enough Rs 500 notes to bridge “perceived shortage” and provide for future demand, economic affairs secretary Subhash Garg was quoted as saying in this April 18, 2018, report by The Economic Times.

However, as we said, an SBI research team said that “income velocity”--ratio of GDP to money supply--based on currency with the public, went down from 0.93 in October to 0.84 in March.

"This indicates that currency of higher denomination/Rs 2,000 is not getting adequately circulated in the economy,” said the April 2018 SBI report, The (Non) Genuity Of Cash Crunch, we referred to earlier.

Based on nominal gross domestic product (GDP) growth of 10.8% and 9.8% in the financial year 2016-17 and financial year 2017-18, currency with the public should have been Rs 19.4 lakh crore by March 2018, the report said.

"However, currency with public is at Rs 17.5 lakh crore, which shows a gap of Rs 1.9 lakh crore. The increase in digital modes of payment compensates some part of the existing gap. The shift to digital modes could be at least Rs 1.2 lakh crore. The apparent shortfall thus could be around Rs 70,000 crore or even less."

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