What Triggered a Cash Crunch 15 Months after Demonetisation?

Here’s our step-by-step guide of how and why the cash crunch happened.

(Photo: The Quint)

Video Editor: Ashutosh Bhardwaj

How did a ‘sudden’ cash crunch revisit us 15 months after demonetisation? Was it because of constant recalibration of more than 2 lakh ATMs across the country? Was there any sudden spurt in demand for cash, catching everyone unawares? Here’s our step-by-step guide of how and why it happened.

First, let’s revisit three key arguments made while sucking nearly 86 percent of currency notes out of the system in November 2016. They were:

1. Eliminate black money.
2. Bring down cash transactions. Unlimited cash circulation needs to be tamed for a clean economy.
3. Digital transactions would grow and bring about a change overnight.

Let’s leave aside the never ending black money debate and examine the other two arguments.

Data suggests that the growth in cash circulation in the financial year following demonetisation was highest in the last seven years. What is more, the growth was even more pronounced in the second half of the fiscal.

In the first three months of 2018, cash circulation growth was in the range of 100-200% compared to the same period last year. This means, while the government wanted a curb on cash circulation, people’s verdict was totally different. 

Despite an overt push, only 8% of the households in the country are actively engaged in digital transaction. The point therefore is very simple. The system has been aware of the rising demand for cash and yet ignored the most visible trend.

According to a recent SBI research report, there are three important reasons for sudden cash crunch: A shortage of Rs 70,000 crore in the system, a possible hoarding of cash and the on-going recalibration of about 2,00,000 ATMs in order to enable the dispensation of newly launched Rs 200 notes.

Remember the year 2016, when ATMs became redundant as new notes worth Rs 500 and Rs 2000 couldn’t fit into the existing boxes placed inside teller machines? What does frequent recalibration of ATMs tell us about the planning or lack of it?

Secondly, the trend in favour of cash was visible for the last 15 months. Yet we chose not to print more notes and went instead for frequent ad-hoc changes like discontinuing production of Rs. 2,000 notes, introduction of Rs. 200 notes etc.

Does the government want to know why people prefer cash? Unpredictability in policy-making is perhaps the reason for that. The reaction to constant administration of shocks is self-preservation.

This time around, rural belts and small towns have been badly hit by cash crunch. It is in these areas that the government’s ambitious digital push hasn’t worked, implying that the transaction has become difficult for them.