Reports of a cash crunch in certain parts of the country have brought back some of the questions that were asked in the aftermath of demonetisation. In November 2016, when the Narendra Modi led government withdrew 86 percent of the country’s currency, the hope was that the use of cash in the economy would reduce. Not only would the stock of cash, some of it accounted for, find its way into bank deposits, but the use of cash in regular transactions would also fall as customers migrated towards electronic payments.
We Still Love Cash...
Currency in circulation stood at Rs 18.4 lakh crore as on April 6, 2018. In absolute terms, this is above the Rs 17.98 lakh crore in currency that existed before demonetisation.
As a percentage of GDP, cash is currently at 10.8 percent of FY18 nominal GDP compared to 12 percent before demonetisation. The gap is assumed to be a change in consumer preference for cash. The Economic Survey released on Jan. 28, said that the cash-to-GDP ratio had stabilised at lower levels. In absolute terms, cash was lower by Rs 2.8 lakh crore or 1.8 percent of GDP, estimated the Economic Survey.
However, over the last few months, the pace at which currency in circulation is growing has picked up.
“Analysts, for a while, had spotted a sharp rise in cash, particularly in December - January ’18, a puzzling phenomenon, largely unexplained beyond the standard suspects – elections, kharif crop marketing, etc...This trend seems to have persisted in the first 2 weeks of FY19,” wrote Saugato Bhattacharya, chief economist at Axis Bank in a note on Friday.
Is the increased demand temporary? Or does this suggest that the preference for cash, for some reason, is moving closer to pre-demonetisation levels? It is tough to conclude that with any certainty. However, if that is indeed the case, then there may be some aggregate shortage of cash in the economy.
R Gandhi, former deputy governor of the Reserve Bank of India told BloombergQuint that based on pre-demonetisation trends, currency in circulation should have been at close to Rs 23 lakh crore compared to the Rs 18 lakh crore right now. “That Rs 5 lakh crore difference is because of people having shifted from cash to bank deposits. If we assume that people have moved back to cash (that is an assumption), then there would be a shortage. But estimating that is not easy,” Gandhi said.
Neelkanth Mishra of Credit Suisse also pointed out that the Rs 45,000 crore rise in currency in circulation is the lowest since 2013. As a percentage of GDP, it is lowest in nearly 10 years. Could this suggest that growth in currency is not keeping pace with the typical pick-up in demand, leading to a shortage?
We’re Withdrawing More From ATMs...
Cash withdrawals at ATMs is another indicator being tracked to see whether cash habits changed after demonetisation. It may also hold clues to the recent cash crunch.
Data on the value of monthly transactions at ATMs suggests that demand for cash at ATMs rebounded quickly as cash availability improved in the months after demonetisation. By October 2017, the value of ATM withdrawals had hit pre-demonetisation levels.
Since then, economists point out that there have been two noteworthy trends.
Soumyakanti Ghosh, chief economist at State Bank of India, points out ATM withdrawals in the second half of the fiscal saw a larger jump than normal.
“During FY18, ATM withdrawals increased by 12.2 percent in H2 compared to H1. This growth was much higher compared to FY16 or FY15 and even the 5-year average of 8.2 percent,” Ghosh wrote in his report on Thursday.
Could this be simply because of a pick-up in economic activity in the second half of the year? Perhaps.
Bhattacharya of Axis Bank highlights another trend. There has been a drop in transaction volumes in FY18 but not in the value of transactions, implying a steep rise in the average size of transactions.
“In other words, larger amounts of cash were being drawn in FY18 at every ATM transaction. Whether this had anything to do with the larger note denominations is not known,” he wrote.
While ATM withdrawals have remained strong, in recent months, the RBI has been supplying more lower denomination notes, said a senior banker speaking on condition of anonymity. This has meant that banks need to replenish ATMs more frequently, which has been a challenge, this banker said.
Ghosh of SBI also pointed out that the ‘velocity’ of the Rs 2000 note is low. Essentially that means that it takes longer for a Rs 2000 note to return to the bank once its withdrawn. “This indicates possibly currency of higher denomination/Rs 2000 is not getting adequately circulated in the economy,” said Ghosh.
But We Are Also Transacting More Digitally...
As cash has come back, have consumers given up on digital transactions? Not really.
RBI data on digital transactions shows that there was a jump in the immediate aftermath of demonetisation. The lack of cash availability pushed many towards digital payment options like mobile wallets.
The increase has persisted even after remonetisation, the RBI said in its ‘Mint Street Memo’ series in November 2017. According to RBI staffers, three non-cash modes of payment picked up following demonetisation. These segments are retail electronic payments, card usage at point-of-sale terminals and cheques.
“The increased usage of these three instruments during the demonetisation period has been sustained in the post-demonetisation period as well, suggestive of a fundamental shift being underway in payment habits of the Indian economy,” said the RBI report.
Representative data on electronic payments put out by the RBI on a monthly basis does show a continued increase in the volume of transactions.
Trends on the value of payments, however, are more patchy at least on a month-on-month basis. To be sure, on a year-on-year basis, value of transactions continues to be higher suggesting that the increased adoption of digital payments has been sticky.