Why Are We Facing Cash Crunch?

K Jayadev

Over the last couple of days, we are all reminded of November 8, 2016 - the day when Prime Minister Narendra Modi announced demonetisation and made the entire nation run for money from pillar to post. After that drastic move, people faced a host of problems and many ended up with losses in their business deals. Now, we are again facing similar, if not a more serious crisis for money.

It is not our state alone, several states in India are facing severe shortage of currency for the previous two weeks. Some of the states which are badly affected are Assam, Andhra Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and Madhya Pradesh. The dried up ATMs have left people frustrated and furious. But the government claimed that there is enough money in banks and adequate currency in circulation!

Some critics of the ruling party claim that all the money has been diverted to Karnataka where elections are due next month. Since Karnataka has been taken seriously by BJP and the Congress, the money would have been diverted, claim the critics.

The Centre today admitted to the cash crunch and blamed it on uneven distribution of currency by the RBI across states. “There is an issue of disparity. Some states have less currency and the others have more. The Government has formed state-wise committee and RBI has also formed a committee to transfer currency from one state to the other. In two-three days, this problem will be resolved,” Minister of State in Finance Shiv Pratap Shukla told TV channels.

According to the minister, the government has cash currency of Rs 1,25,000 crore right now. "There is one problem which is that some states have less currency and others have more. Govt has formed state-wise committee and RBI also formed committee to transfer currency from one state to other," the Minister said. The government has termed the situation as sudden and temporary which it wants to fix in three days.

A month ago, the RBI disallowed banks from moving excess cash in one circle to cash-hit circles. Due to this, now many circles have excess cash and others have less or nothing. Banks are saying the RBI is providing more of Rs 200 and Rs 100 notes.

There are various reasons that are being pointed out for the shortage of cash, which include mismanagement of cash flow by banks, recalibration of ATMs to support the new currency notes, and logistical issues. These apart it is said that there is a demand for cash to make payments for agricultural activities.

The Economic Times reported that the certain provisions in the proposed Financial Resolution and Deposit Insurance Bill-2017 sparked a rumour that the money would not be safe in banks if the Bill became a law. This rumour drove people to ATMs and bank branches to withdraw their deposited money, the newspaper said.

Explaining about bringing normalcy to this major crisis, Economic Affairs Secretary told the media that there are two ways in which the situation can become normal. If the demand becomes normal, then the government doesn’t need to increase supply. In the second scenario, the government should meet as much demand as is there, but that could create a new normal for currency usage. “We are prepared for the new normal. We are prepared for both scenarios,” said the economic affairs secretary.

Even as the government is trying to address the issue, people have already become panicky thanks to the media attention the issue has been receiving. Fire-fighting calls for pumping in currency into the system and ensure people get the money they key in for at an ATM.