Over the past fortnight, especially as we approached the financial year-end and after, people from all over the country have been complaining about automated teller machines (ATMs) running dry even in metropolitan cities. Why is this happening? Where has the cash disappeared? After tracking the outpouring of anger on social media and checking with some banking sources, Moneylife has pieced together what is going on with India’s currency supply. As always, the buck stops at the Reserve Bank of India (RBI).
Until the first phase of demonetisation of Rs500 and Rs1000 notes ended on 31st December, the central government, under pressure due to the visible hardship faced by people standing in long queues, was in a mission mode. It had taken the help of the army and air force to distribute currency securely, directly from the printing presses in Mysuru, to key parts of the country, which faced acute shortages. This continued until the elections in various parts of the country, including Maharashtra, Punjab, Goa, Manipur and Uttar Pradesh.
Supplying cash directly from the printing presses is an expensive business and the RBI has to pay for security as well. So, such direct lifting of currency has stopped sometime after 31st December. The RBI decided that the system was sufficiently remonetised and went back to its slow, currency supply system.
However, ATMs began to run dry immediately after, even in metropolitan cities. Officially, all restrictions on cash withdrawals ended on 31st March as per an RBI notification. However, the central bank seems to have goofed up on assessing the actual currency requirement and its own ability to supply it.
Public anger is directed at banks. Banks have been equally callous and are attempting to impose costs on cash withdrawal, as they are running short of cash. Here are some facts about why we are running short on cash:
1. As part of the demonetisation exercise, the RBI printed Rs 2000 denomination notes at its printing presses in Mysuru, with the bright idea of faster remonetisation. However, this backfired badly, since the government presses could not produce enough of Rs500 notes. When this led to a furore, the RBI ordered a stop to printing of Rs2000 denomination notes and the Mysuru presses were also told to switch o producing Rs500 notes.
2. India’s currency requirement today is in the region on Rs19 lakh crore of cash currency.
3. Of this, the printing of Rs2,000 denomination has almost stopped at just 3.5 billion (350 crore) pieces of currency, valued at Rs7 lakh crore.
4. Meanwhile, there are only six billion pieces of Rs500 denomination currency printed, with a value of Rs3 lakh crore.
5. If one includes the stock of Rs100 denomination currency in the country, the total stock is Rs13.5 lakh crore.
6. Bankers estimate the shortfall of currency is about Rs5.5 lakh crore of 10 billion (1,000 crore) pieces.
7. This means that unless the government or the Prime Minister gets into the act and demands a crank up of currency printing and supply, we are destined to suffer currency shortages for the next six to eight months or even a year. This is what sober experts have been predicting late last year.
Other Problems:
The mystery of the vanishing currency is further exacerbated by two other factors. First, that people have gone back to using cash for their regular needs, since it is just so much simpler. Meanwhile, media reports as well as rumours that the government plans to phase out the Rs2000 denomination notes over time has only increased the demand for Rs500 from cash hoarders and the currency is disappearing from banks very fast. The impact is two-fold – ATMs can stock less currency if the denomination is Rs500 notes and Rs100 instead of Rs2000. A lot of Rs500 notes are going out directly from the banks to favoured customers.
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Also, the disproportionate wealth you mention exists globally, and there is no short-cut to solve it. IMHO, crony-capitalism is the root cause of income disparity between the rich & the poor everywhere. The only solution is for India (and every country) to strike a fine balance between being a free-market economy and a Welfare State.