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11 Reasons Why Is There A Cash Crunch In India?

Cash shortage is being reported from all across the country, especially in states such as Andhra Pradesh, Telangana, Karnataka, Jharkhand, Madhya Pradesh, Bihar, Uttar Pradesh and Rajasthan. The cash crunch has already been officially acknowledged by the government on 17th April 2018. The exact reasons for the shortage are still not so clear. Stories of people finding multiple ATMs completely empty are being reported widely. Government officials have addressed the issue in various statements. Some have blamed the unusual increase in currency demand, although it hasn’t been proved yet. Even if it is due to an increase in demand, then why has come now. Below is our detailed analysis on 11 Reasons Why There Is A Cash Crunch In India?

The current situation of cash crunch (or currency shortage) has led to rumours and speculations of what is happening post-demonetization. People and officials across the country have put forward their reasons and theories about the issue. Some may seem too far-fetched, meanwhile, address the issue by raising fundamental questions about why India is facing a cash crunch all of a sudden.

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1. Fewer Deposits And More Withdrawals Causing Cash Crunch

The RBI (Reserve Bank of India) has given an explanation to one of the news publications. The RBI analyzed that rate of cash withdrawn in some states is much higher than the rate of deposits in states like Rajasthan, Telangana and Uttar Pradesh etc. Even due to increased tax queries, people are not depositing their cash. They are just keeping it to themselves. But even this explanation doesn’t explain why the need for withdrawals have increased, and rate of deposits have decreased.

2. Cash Crunch Due To Increase In Currency Demand

The Finance Ministry has already released an official statement saying, “There has been an unusual spurt in currency demand in the country in last three months… This unusual spurt in demand is seen more in some parts of the country like Andhra Pradesh, Telangana, Karnataka, MP, and Bihar.” As already mentioned, Finance Minister Arun Jaitley tweeted a similar statement through his official handle to reassure the people that necessary actions and decisions were being taken to solve the issue. But this reason doesn’t really explain the sudden out-of-the-blue increase in currency demand.

3. Cash Crunch Due To Reduced Cash Supply

P. Chidambaram (Former Finance Minister) posted several tweets on 19th April 2018 accusing the government of allegedly enforcing an arbitrary reduction of currency supply. Even though he wasn’t direct about it, but it is to be believed that the government doesn’t want a return to the pre-demonetisation level of the cash-to-GDP ratio. It could lead to a complete loss of the government’s plan to create a cashless economy.

4. Shortage Of Raw Materials

It has been reported by The Economic Times that an anonymous source familiar with currency dynamics has blamed the shortage in raw materials like ink and paper. According to the source, the shortage has been prevalent for quite some time. This makes some sense, but if it is true then the government should have planned everything pre-demonetization.

5. Cash Crunch Due To Distribution Issues

It has been alleged by the Minister of State for Finance, SP Shukla that the sudden cash crunch is due to the irregularities in cash distribution in some states when compared to others.

6. Increase In Welfare Payments

The chairman of SBI (State Bank of India) Rajnish Kumar has blamed the cash crunch to the procurement season for farmers. He explained that due to the procurement season, the farmers have to be paid (which has increased). So the state government has been withdrawing huge sums of money to pay the farmers and welfare beneficiaries which have caused an increase in cash demand. If this turns out to be true, then we should be facing similar cash crunches at the end of rabi and kharif every year!

7. Cash Crunch Due To Recent Bank Scams

It is being stated by the Opposition party that the banking system has collapsed due to recent scams like the Nirav Modi case. The government is being blamed for its lack of governance. Congress President Rahul Gandhi has explained that the government allowed Nirav Modi to flee the country with his fraudulent money. Meanwhile, the government’s supporters have blamed the Opposition of organizing large-scale withdrawal from ATMs to cause a shortage leading to panic pre-elections.

8. Pre-Elections Stockpiling Causing Cash Crunch

With the General Elections coming up next year, and Karnataka elections to be held soon, people have suggested that the Rs. 2,000 notes are being hoarded to use during the campaigns. It has always been common for the rise in cash levels during an election year. Parties need to compete against each other, and campaigns in India usually showcase a lot of currency and wealth.

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9. Hoarding Of Two Thousand Rupee Notes

It is being speculated that the inflow of Rs. 2,000 notes have become lesser. It might possibly be happening due to the stockpiling of this high-value note. According to economist Ajit Ranade, It is easier to hoard the Rs. 2,000 note. The government replaced the Rs. 1,000 note with a higher denomination note. The Rs. 2,000 note makes 60% of our circulated currency currently, but are not very useful. Local shopkeepers usually don’t accept the note due to a lack of change, so it is stockpiled. New RBI guidelines for cash management subcontractors have been slowing things down. As banks receive incentives to put Rs. 2,000 notes into their ATMs have led to an increase in the application of it. So people usually receive this note and hoard it.

10. Regional Factors

Towards the end of 2017, rumours spread that the new Finance Resolution and Deposit Insurance Bill permitted the usage of depositors money to save banks in a case of crisis rather than repaying the amount. The government denied it, but it led to panic. People began to withdraw cash, especially in Andhra Pradesh, which might have led to the cash shortage.

11. E-KYC Rules And Regulations

To kickstart the cashless economy, the government introduced a stringent e-KYC process for authenticating e-wallet accounts again the name and address proofs. Due to this, e-wallet services have begun to fall and people have begun to withdraw cash on an increased basis. This has naturally led to a demand for more currency, especially in the urban areas.

Companies and ordinary citizens have been hit by GST and demonetization. Businesses have been facing high tax slabs with long credit periods which led to an increase in banks loans in order to pay the taxes. The cash crunch situation is not new and unusual in India, even though it is the lowest in 2013 and even GDP% is the lowest in almost 10 years. As the GDP% hasn’t settled into the normal seasonal pattern, and the government could have stopped printing Rs. 2,000 notes could lead to concerned frenzy and stockpiling of currency.

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