The Indian government will move quickly to alleviate any shortage of cash in parts of the country, said Sanjeev Sanyal, principal economic adviser in an interview to BloombergQuint.
Earlier in the day, the government clarified reports of cash shortage in some parts of a country. Finance Minister Arun Jaitley in a Twitter post said that the temporary shortage has been caused by “sudden and unusual increase” in some areas. Sanyal, while declining to speculate on the causes for the currency shortage, said that there has been some evidence of hoarding as judged by the volume of currency coming back to the banking system.
Here are edited excerpts of the interview:
What is your best understanding of what is going on and what parts of the country is impacted by the currency shortage?
There was a sudden and unusual spike in demand of cash in some parts of the country in Karnataka, Telangana and some of the surrounding states and we have seen that spread in few other parts of the country too. I will not want to speculate on who [is responsible] and why this spike happened but let me assure that the government is very aware of what has happened and will respond. There is no need to panic.
We have more than adequate cash and this will be supplied to ATMs and bank branches very quickly in next few days.
Is it fair to assume that it is not linked to usual drivers like a pick-up in inflation, or festival season, or elections when historically we see currency in circulation move up? So, are you saying it is none of this or is it these plus other factors?
I am not in a position to speculate what has caused it. It is unusual. It is more than normally what would have happened due to seasonal factors, which would have already been accounted for by the RBI. So, there has been a spike. Our first order of response is to make sure that adequate cash is available at ATMs and banks, so that whatever demand is there is met. Because there is no crisis and banks are in perfectly good shape. We have more than adequate cash. We will print more if it is necessary to supply. So, there is no need for anybody to panic about this.
As a percentage of GDP, currency in circulation is at 10.9 percent. Before demonetisation, this was at 12 percent of GDP. The assumption being made was that a behavioral change will allow us to stay below demonetisation levels. But if that behavioral change has waned, then maybe we are short of currency even at an aggregate level?
Based on that one data point, I wouldn’t want to make any grand forecast on long term behavioral change. Let’s wait and watch this. This is only something we can tell after little bit of time has elapsed. The first response for the time being, as policy makers, is to make sure that cash is available throughout the system. So, that is first instance. We will investigate why this is happening and whether it is persistent behavior. Again, policy responses will be formulated. Let us not take that away from the fact that our immediate response is to make sure that everybody has enough cash. Especially, since there is no reason to be getting excessively concerned. We have cash in reserve and we are entirely capable of printing more.
Earlier today, a government official suggested there were some concerns about hoarding. Is there any evidence that has come to your notice which suggest hoarding? If so, what is that evidence?
Yes. To some extent, the money going out is not coming back which shows in the proportion of cash to GDP. While we have watched this happen, I am not in position to speculate what caused this to happen. Our first response is to make sure everybody has the adequate cash for the time being. Even in normal course of things, you do get periods where unusual things happen in economy. One shouldn’t begin to read too many things into it. Nonetheless, if we do find that this was something which needs further investigation or policy action, appropriate action will be taken.
Are these reports coming specifically from the states where there is a shortage of cash?
Yes, that is certainly the case.
Is the government mindful of concerns around depositor confidence? Is it doing anything to alleviate these concern, if at all they exist?
If the citizenry is concerned about something, it is our business to alleviate (those concerns). If there is shortage of cash availability in banks or otherwise, this is not a reflection in any way on the solvency of the bank.
We have carried out, in the last year, a major clean up of the banks. It is a good thing that we forced recognition of bad assets. Now as we go through the insolvency process, using the IBC code and the NCLT courts, we have begun to clean up the banks, auction off and liquidate the bad assets. Some of this has just happened in the last few days. If anything, we are cleaning up the banks and putting them on much better footing. Rather than get concerned about this, you should look at the fact that we are now cleaning them and putting them in much better state.
In any case, the availability and cash in the system has nothing to do with all of this. This (cash shortage) is a logistical problem which is now being fixed and we will fix it. We were surprised by the sudden spike in demand but we are more than in a position to supply whatever cash is necessary for whatever reason by the public at large.
Watch the full interview here.