The Big Picture- Cash Crunch in Indian Economy
Queues outside the banks across the nation after the Government’s demonetization move had been a common scene for the last few days. Shutters down or no cash is found at most ATMs with the primary reason being non availability of Rs.100 notes with the banks while the recalibration of ATMs is in full swing. The Government has assured that there is no need to panic and there is enough cash for the entire nation. But the brunt of cash crunch is being faced by the common man in day to day life.
Reasons and Impact:
- 85-86% that has been demonetized is in the process of getting replaced. The speed at which the currency is being issued and even assuming that 2-3 times more notes can be printed, the currency shortage will take at least 8-10 months to go away. What was required normally, we will need more than that because people are going to hold on to currency notes or hoard them as they are not sure when the shortage will go away.
- It is also being heard that the Government will give part of the salary as cash to its employees because people are unable to go to the bank and withdraw money. If this happens, the private sector may also be forced to do the same. This might lead to a further increase in shortage of currency.
- There are about four printing presses for currency in India and depending upon the value and number of pieces of Rs.500 and Rs.2000 to be printed, it might take a long time taking into account the large scale of withdrawal of the monetary base. It would not be a bad idea to dispel the uncertainty and instill confidence on the pace of re-monetization among people either by Government or RBI. Even if all the printing presses work in 3 shifts, it would require at least 108 days replenishing the currency notes.
- The other thing which has complicated the issue is the lack of standards in the currency notes. New currency notes have got new set of standards which cannot be used in the ATMs without recalibration. This has further added to the chaos. If the standards would have been same, the ATMs could have disbursed the notes without any delay. The economy was used to a system by and large where people do not need to visit their banks for day to day purposes. Management wise, response system of the banks has not been satisfactory.
- There might be a downturn in the economy because of the lack of demand and businesses not running as usual. As far as the black money issue is concerned, this step only checks the stock of black money and not the flow which is the root cause.
- India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world. Cash dominates even in malls, which are visited by people who are supposed to have credit cards; therefore, it is no surprise that cash dominates in other markets as well. Despite the recent expansion in digital wallet usage as well as the introduction of specialized payments banks, a lot needs to be done before cash is taken out of the Indian economy.
- The payments system in any country should be planned of as a network. It will grow rapidly provided a sound network comes in and more people begin to use digital cash. But this can happen only if all users have equal access to the network.This has not happened so far because, daily wage earners, domestic helpers or labourers tend to receive their income in cash and they even prefer to do so.
Conclusion:
This is a huge reform which touches the life of every citizen. One can only look ahead from here. It would be an interesting experiment and one should watch out as to how the citizens accept such a huge radical change.
