ATMs running dry: The State should ensure adequate supply of cash

With reports of ATMs running dry in many parts of the country, fears of cash shortage witnessed in the post-demonetisation period have come back. Both the government and the Reserve Bank of India (RBI) have stepped in to allay such fears. A statement by the Ministry of Finance has admitted to an unusual spike in demand for currency in the last quarter. It also underlines the government’s commitment to supply necessary additional cash. The RBI has cited recalibration of ATMs and logistical reasons behind the crisis. At the same time it has also ordered an increase in printing of currency notes to address it. These statements raise an intriguing question. If the problem is due to logistical reasons, which would mean a mismatch between supply and demand of cash across states, what is the need to print more currency notes?

This question is important because the cash-GDP ratio in the economy came down after demonetisation. We were told that this was owing to an increased preference for cashless methods. Currency in circulation came back to its pre-demonetisation levels early this year. But if cash preferences are converging back to their pre-demonetisation levels, the currency in circulation would need to be increased significantly. Was there an error on judgment on part of RBI while deciding on the amount of currency to be supplied in the economy?

There could be other reasons for the cash crunch as well. These include the onset of elections, a revival in economic growth and hoarding of cash by unscrupulous elements. Some people are also suggesting that the crisis in India’s banking sector along with the tightness in supply of cash after demonetisation might have increased the precautionary hoarding of cash by a lot of people.

Irrespective of what factors have led to the current shortage of cash, the government and RBI should make sure that the situation is addressed at the earliest. Demonetisation was meant to extinguish stocks of unaccounted money and encourage people to adopt digital transactions. There was considerable short-term pain in the pursuit of these goals. The manner in which the policy was implemented also raised serious questions on the efficacy of RBI and India’s monetary system. The debate on successes and failures of demonetisation is bound to be mired in political controversy. This political rancour should at no cost be allowed to prevent all that is necessary to ensure that there is adequate supply of cash in the economy for whatever purpose people want to use it for.