Why everyone's keen on holding so much hard cash

India has become a giant cash guzzling machine. While this is true literally, given the number of corruption scandals now surfacing from every pore of the economy, the problem is the demand seems insatiable.

First, the public seems to want to hold lots of raw cash. Between March-end last year and 9 March this year, currency with the public has risen by Rs 1,17,701 crore - a huge increase of 13 percent. That’s like every Indian - man, woman and child - with around Rs 1,000 each in the pocket.

Now, a 13 percent rise in hard cash may not sound like a big number when the GDP has grown 7 percent and inflation has added another 8-9 percent to that number, but we are talking hard cash, not money - which can be in banks, too.

Why does the public need to hold so much liquid cash? We’ll look for an explanation later. (Read a previous Firstpost story on this ).

Second, banks are borrowing hand-over-fist. Mostly from the Reserve Bank of India - and on a daily basis. In the daily repo auctions, banks are borrowing Rs 1,80,000 crore of overnight money from the central bank because they are short on liquidity. This might seem like ordinary monetary stuff, but this is happening even after the Reserve Bank has released Rs 80,000 crore of primary liquidity by reducing cash reserve ratios by 1.25 percent over the last three months. Excluding the CRR, banks would have been borrowing Rs 2,60,000 crore a day.

To be sure, some of the liquidity tightness may reduce once the year-end window-dressing by banks and companies gets over - everyone wants to show cash on the balance-sheet on 31 March - and we enter the slack season from April, but one doubts if the crunch is really over.

Third, the government is borrowing like crazy. And will continue to do so. We know last year the finance minister missed his borrowing targets by a mile, but next year is going to be no better. In the coming six months, the Centre’s borrowing plans include Rs 3,70,000 crore of borrowings - and in the year as a whole, it would add up to Rs 5,13,590 crore.

This means, in the next six months, the government will be borrowing an average of Rs 2,055 crore daily from banks and others. This, in turn, will create its own demand for funds. And we haven’t even talked about what the corporate sector might want to borrow or what the Food Corporation may want to borrow to procure grains from farmers.

Little wonder, even as everyone is speculating on when the Reserve Bank will cut interest rates, banks are actually increasing short-term deposit rates. On Tuesday, the State Bank of India raised deposit rates by 0.25-1 percent on deposits tenures going upto a year. The government also did so - it raised rates on post office deposit schemes .

The government’s insatiable demand for cash is easily explainable: it cannot make ends meet, so it borrows. The banks’ appetite for cash is linked to this: when government borrows, banks have to lend.

Fourth, even companies may be hoarding cash. As Firstpost reported in February, Indian companies are sitting on cash - in their case, not hard cash, but as money in the bank - instead of investing. They are using cash to generate more earnings. In March 201, the top 100 listed companies had cash or cash equivalents of Rs 3,30,000 crore. This figure may have gotten bigger this year - but we will only know later this year when the full-year’s results are out.

But if corporates are hoarding cash due to bleak business prospects, why is the public so keen to hold cash? Don’t they trust banks?

Two or three explanations are possible. One could be the increasing payments on rural schemes like NREGA, where people taking up daily wage work receive payments. Wage payments on NREGA have just been raised to Rs 122-191 a day, depending on which state you live in. The poor tend to hold more cash than the rich even if they are paid through bank accounts.

The second explanation is that a growing economy anyway needs more cash sloshing about - but this argument is weak in the context of a strong financial sector where cash can be held in banks or other financial institutions. Most urban Indians now use debit and credit cards - and big payments are often paid electronically or by cheque.

The third explanation is more likely: the only big scale activity that needs lots of raw cash is corruption and the financing of elections . In the recent Uttar Pradesh elections, the authorities seized cash of over Rs 37.46 crore - two-thirds of the total of Rs 52 crore confiscated in all the election-going states.

Since this is only likely to be the tip of the iceberg - with the rest of the cash either going scot-free or being dispensed to voters through free liquor and other gifts - the chances are the high demand for physical cash is related to elections.

However, the state assembly elections are over, and the high cash component in money supply since then suggests that India has already shifted into election mode on this count.

The dash for cash seems to suggest that politicians are hoarding cash for the next elections.

Sadly, coupled with the government’s own demand for borrowings, it means that the Reserve Bank will keep rates higher for longer this year, as inflation could remain high . So kiss goodbye to that cheap home loan. But pensioners should be happier: they will continue to receive more for their deposits.