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Cash crunch: SBI doubting 'genuity' of problem is illogical; the currency shortage is not a made-up story

The country’s largest lender, the State Bank of India (SBI), this week, put out a report on the ongoing cash crunch and titled it:  ‘The (Non) genuity of cash crunch’. “Currency in circulation (CIC) in the economy has surpassed its pre-demonetisation level of Rs 17.98 lakh crore to reach Rs 18.29 lakh crore by Mar’18. Hence, the recent reports of cash shortage appear intriguing and defy logic,” the report said.

The SBI raising doubts about the 'genuity' of the ongoing problem is a flawed logic for multiple reasons.

It is illogical to compare the current CIC with the CIC pre-demonetisation because the note-ban was a forced move on the economy --  it triggered a severe cash shortage, a drop in the CIC and the cash to GDP ratio and hit the informal economy. So, comparing the current CIC with the CIC pre-demonetisation isn’t a proper comparison.

 Cash crunch: SBI doubting genuity of problem is illogical; the currency shortage is not a made-up story

Representational image. Reuters.

As this writer pointed out in an earlier column, if one looks at the average growth in CIC over the past 10 years, the figure is around 14 percent. Just before demonetisation, as on 4 November, 2016, CIC was Rs 17.98 trillion. Suppose demonetisation never happened, and had the CIC grown at an average rate of 14 percent, the CIC in November 2017 would have been Rs 20.5 trillion. However, in November 2017, this figure stood at just Rs 16.5 trillion. This means, the system was short of almost Rs 4 trillion. Hence the cash deficit is real and it exits.

Demonetisation artificially pulled down the cash-to-GDP ratio to around 10.9 percent of GDP as compared with 12-13 percent of GDP prior to demonetisation. In FY17, the figure was 8.8 percent, while in FY16 it was 12.1 percent.

Interestingly, shortly after SBI researchers pegged the cash deficit figure in the system at around Rs 70,000 crore, SBI chairman said the problem will be resolved by Friday.

In another research report, SBI economist Soumyakanti Ghosh cited fourth-quarter (Jan-March) ATM withdrawal data, an argued that the current shortage could actually be superficial. Either SBI economists are playing to the government’s tune, to establish that the cash crunch is a made-up story, or are pretending not to see the problem at all.

As explained in the above calculation, the shortage in CIC in the system is real. Even the government has indirectly acknowledged this fact, after denying it in the beginning. The Reserve Bank of India's (RBI) likely decision to withdraw Rs 2,000 notes from the system even before Rs 1,000 notes were introduced, too contributed to the crisis. Also, large-scale cash hoarding of Rs 2,000 notes ahead of this year's election season added to the woes.

For the above, it's quite clear that a cash shortage has persisted for some time now, but the problem escalated after reportage, in national media about cash shortages, created a panic-like situation that resulted in a withdrawal spree. So the SBI negating the cash crunch defies logic, and what's intriguing is that the lender is ignoring the fact that CIC hasn’t grown enough post demonetisation -- the lender is merely comparing current figures with those during the demonetisation period, which is factually wrong.

A bank union, the All-India Banks Employees Association (AIBEA), highlighting facts about the cash crunch, has threatened agitation. "The RBI governor has made a statement that adequate amount of currency notes are printed. But then where have these notes gone? Are they not to investigate? Are they not to ensure that banks have enough cash to meet the requirements of customers?" AIBEA general secretary, CH Venkatachalam was quoted as saying.

Furthermore, the SBI’s argument that digital modes have gained traction “in a big way” is true in terms of the number of transactions but when it comes to retail transactions such as UPI, the quantum of increase isn’t much.

The ongoing cash crunch is genuine and, as Firstpost reported recently, almost one-and-half months before the cash crunch crisis, the Andhra Pradesh government had sounded out the RBI, the Ministry of Finance and the SBI about the looming problem.

To sum things up, the SBI’s logic -- 'The (Non) Genuity in cash crunch’ -- is illogical and seems to be an attempt to disregard ground realities. India's cash shortage is definitely no made-up story.

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Updated Date: Apr 20, 2018 14:26:47 IST