MPC minutes: If remonetisation is progressing well, why are the ATMs still running dry?

Members of the Monetary Policy Panel (MPC) which met on 5th and 6th of April ahead of the first bimonthly monetary policy review of the Reserve Bank of India (RBI) agreed that remonetisation is progressing well in the economy, aiding the recovery process. Remonetisation refers to the process of infusing cash back into the system following the artificial cash-drought created by demonetisation launched by Prime Minister, Narendra Modi on 8 November as a shock therapy to curb black money and corruption in the country.

MPC members drew comfort from the fact that the fast-paced remonetisation would help to lift the adverse effects of demonetisation in the economy and recalled the panel’s earlier comments that the effects of the note ban will be transitory on the Indian economy. To get a perspective, let’s look at the some of the comments made by individual members of the MPC.



“Several factors indicate positive and modest growth in the economy. The remonetisation drive is progressing well, with the currency in circulation restored to almost 75 percent of its value by end March of this year, which is expected to support discretionary spending,” said Dr Pami Dua. “Spending in cash-intensive activities such as hotels, restaurants, transportation and the unorganised sectors is also on the rise,” Dua said.

RBI deputy governor, Viral V Acharya said. “On the growth front, the remonetisation is continuing apace and many sectors of the economy are recovering steadily after the transient slowdown.”

“The latest data released by the CSO suggested that the impact of demonetisation on economic activity was modest,” said RBI governor, Urjit Patel. “Economic activity is expected to pick up in 2017-18, although there is the usual uncertainty about the monsoon at this stage. Several lead indicators suggest some improvement in the economic outlook,” said Patel.

Overall, the MPC concludes that demonetisation impact was a thing of the past. “Overall, the MPC’s considered judgement call to wait out the unravelling of the transitory effects of demonetisation has been broadly borne out. While these effects are still playing out, they are distinctly on the wane and should fade away by the Q4 of 2016-17,” it said.

A fast fading demonetisation impact is a good thing as it will help the economy to get back on its feet to focus on reforms and economic expansion. It will also help the policymakers address other grey areas in the economy where the actual policy focus needs to be---employment generation, enhancing efficiency of farm output, bringing in private investments and poverty alleviation. But, for the common man, there are a few questions that beg answer from the rate panel:

First, if remonetisation is indeed progressing well, why are a large number of ATMs running dry even after five months since the note ban? According to The Economic Times report (read here), which quotes Loney Antony, managing director of Hitachi Payment Services that manages around 50,000 ATMs in the country, while cash demand has crept up, it is receiving only 50 percent of the cash demanded by banks resulting in the machines to go dry. Cash demand has reverted to pre-demonetisation days, Antony says meaning that people’s love for cash hasn’t faded despite the digital push by the Modi-government.

“Since the limits on ATM withdrawals were removed, we found the average ticket size of each transaction has risen to Rs 4,000, which is equal to the pre-demonetisation days. The average size was Rs 2,000 between November and February," Antony was quoted as saying in the report. Also, the RBI data on currency with the public too shows that there has been a marked decline in the figure in the recent months. Currency in hand increased a meager Rs 22,194 crore from week ended 24 March to 31 March. According to the RBI data, the currency in circulation soon after the note ban saw negative growth for nine weeks from 18 November to 6 January. The sharpest surge in the liquid cash happened in the week ending 13 January -- Rs 52,786 crore, post which  it showed a declining trend barring few exceptions. The question here is this. Is remonetisation actually progressing well as said by the MPC members and claimed by the government or is it simply a claim? Reports on the cash situation shows otherwise.

Second, if demonetisation impact is a thing of the past and the impact is transitory, why the manufacturing sector is still struggling to get back to shape? The MPC has noted an improvement in January IIP numbers. “Industrial output, measured by the index of industrial production (IIP), recovered in January from a contraction in the previous month, helped by a broad-based turnaround in manufacturing as well as mining and quarrying. Capital goods production improved appreciably, although this largely reflected the waning of unfavourable base effects.”

But, what happened in the month after January. In February, the IIP contracted by 1.2 percent in comparison with a 3.3 percent spike in January and, in fact, primarily contributed by a sharp decline in manufacturing (- 2 percent) and capital goods (-3.4 percent) components, respectively.

Also, the bank credit growth has touched the lowest level in at least six decades in the financial year 2016-17, according to latest data from the RBI (read a story here). In the last fiscal year, the credit growth slowed to about 5 percent as against close to 11 percent in the corresponding period in previous year. Total bank loan outstanding at end March is now at about Rs 79 lakh crore as compared with Rs 75 lakh crore in the year-ago period, the data shows. If the economy is indeed picking up why are we looking at such disconnect?

As the MPC has noted, to some extent, government expenditure has made up for weakness in private consumption and capital formation, but absence of a pick-up in private investments continue to be a major area of concern. Foodgrain production has touched an all-time high of 272 million tonnes, with record production of rice, wheat and pulses coming in as a good news but going ahead, the monsoon performance will play a crucial role in deciding the course of inflation.

The MPC observations in the minutes that “activity in cash-intensive retail trade, hotels and restaurants, transportation and unorganised segments has largely been restored” and “significant improvement in transmission of past policy rate reductions into banks’ lending rates post demonetisation should help encourage both consumption and investment demand of healthy corporations” are optimistic assumptions a tad difficult to digest looking at the signals from the informal sector (job losses, business slowdown) and the corporate demand, stressed asset situation in the banking sector. One can only hope that the MPC predictions come true.

Updated Date: Apr 21, 2017 12:30 PM

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