Does cash crunch across the country threaten recovery of MSMEs and economy?

The news of ATMs running out of cash has come as a rude shock to most entrepreneurs. It reminds them of cash crunch faced during demonetisation

A large number of automated teller machines (ATMs) and banks across the country have run out of cash. The situation was first reported last week in some parts of Andhra Pradesh and Telangana, but the problem seems to be going out of control in the whole country.

On Tuesday morning, many banks in the southern, eastern, western as well as central India were unable to provide cash with their ATM machines displaying the “No Cash” notice. While the cash shortage in the country is still not of the nature that was witnessed during demonetisation between November and December 2016, but going by the speed at which the number of banks are reporting cash shortage in the country, the situation may go out of hand very soon.

The union government on its part is yet to ascertain the real reasons behind cash shortage, giving way to speculations that there is lingering economic crisis in the country. Taking not of the situation West Bengal Chief Minister Mamata Banerjee said in a tweet, “Seeing reports of ATMs running out of cash in several States. Big notes missing. Reminder of #DeMonetisation days. Is there a Financial Emergency going on in the country? #CashCrunch #CashlessATMs.”

Aware of the panic-like situation in the country, which may lead to mass hysteria with people running to banks to withdraw cash, finance minister Arun Jaitley tweeted, “Have reviewed the currency situation in the country. Over all there is more than adequate currency in circulation and also available with the Banks. The temporary shortage caused by ‘sudden and unusual increase’ in some areas is being tackled quickly.”

According to the news agency ANI, the finance ministry held a meeting with the Reserve Bank of India (RBI), banks and state government officials on Thursday last week to take stock of complaints of cash shortage in some states. Chief minister of Madhya Pradesh Shivraj Singh Chouhan was quoted by a newspaper alleging that a conspiracy of hoarding Rs 2,000 notes had led to this situation.

Impact on MSMEs, small traders and agriculture

While cash crunch affects the whole economy, the biggest sufferers in a situation like this are the small and medium enterprise owners and traders, who have to rely on cash for sourcing their raw material and payment to labourers.

Post demonetisation, about 1.5 million jobs were lost in just four-month period of January to April 2017, according to the Centre for Monitoring Indian Economy calculations.

One can gauge the importance of the SME sector from the fact that it contributes 45 per cent to India’s manufacturing output and employs 40 per cent of India’s workforce. The 1.3 million SMEs in the country account for 40 per cent of India’s total exports.

“Most of our dealings are in cash. In the morning I wanted to withdraw cash worth Rs 50,000 from our bank to make payments to our two vendors, but there was no cash in the bank. I hope the situation improves in a day or two. Otherwise, once again we may be doomed. We have already suffered so much due to demonetisation,” said Bhawani Shankar who runs a garment manufacturing unit in east Delhi.

People in the wholesale grocery market were also worried in the Delhi due to the news of cash crunch in the city. “We have cash for dealings for the next two days at home. But, if the situation does not improve, we will lose business once again. The business is already down since demonetisation and GST,” said Rahul Arora, who runs a wholesale grocery store in the Govindpuri Extention area of Delhi.

The bigger players, however, do not seem overtly perturbed and are cautious in interpreting the situation. “I think the situation is temporary, and the government is in the position to control this. We do hope the problem will be sorted out soon. I don’t think there will be any effect on SMEs, as this is a temporary phenomena,” said N K Goyal, the chairman emeritus of the Telecom Equipment Manufacturers’ Association of India.

Moreover, India has just entered the rabi crop harvest season, with farmers visiting mandis to sell their crops. If there is continued cash shortage with traders in the coming days, there would be no payments to the farmers, forcing them to sell their produce at below production cost. This is what had happened post demonetisation, leading to crash in the farm prices. While this can bring down inflation, such a situation is undesirable, as the farm sector is already under pressure. A further squeeze in the farm incomes can have cascading effects on various other sectors, including commercial vehicles, construction and farm and allied sector activities.

How much cash?

The RBI data released in March this year showed that that currency with public stood at Rs 17.06 lakh crore as on 18 February as against Rs 17.01 lakh crore seen on 28 October 2016.

Currency with the public excludes cash with banks, while currency in circulation includes notes in circulation, rupee and small coins, and deposits with commercial banks in current and savings accounts. According to the same data, as on 23 February, total currency in circulation was Rs 17.82 lakh crore, or 99.17 per cent of pre-demonetisation levels of Rs 17.97 lakh crore.

Given the amount of currency with public and banks, it is difficult to understand why there is a sudden shortage of notes in the economy.

A situation like this requires some immediate measures on the part of the government and it has reportedly begun increased the printing of notes at press to meet the sudden cash shortage. Economic affairs secretary Subhash Garg on Tuesday told the media that to meet the additional demand of currency Rs 500 currency notes worth Rs 2,500 crore are being printed every day. The government plans to print Rs 70,000 crore to Rs 75,000 crore worth of notes in a month. Banking secretary Rajiv Kumar has said that the shortage of Rs 500 notes will remain for five to seven days, as the government had stepped up the supply. Kumar said that more than 85 per cent of ATMs in the country were operational and only 10 to 12 per cent had run out of cash.

Why the cash crunch?

According to media reports, there was a rumour in Andhra Pradesh that due to the proposed Financial Resolution and Deposit Insurance Bill and frauds like the Punjab National Bank scam, money was not safe in the banking system. In banking parlance, this situation is called a Bank Run. In this situation a rumour that a bank is going to become bankrupt may lead to a large number of people withdrawing cash on the same day, forcing the bank to shut its counter. If this happens at the level of the whole banking system, the results could be disastrous.

The Indian economy had suffered a major setback in November 2016, when Prime Minister Narendra Modi had withdrawn the legal tender on the currency notes of Rs 500 and Rs 1,000 in the country. The move had sucked out 86 per cent of the currency in circulation or Rs 15.5 lakh crore from the Indian banking system, forcing crores of people to stand in queue outside banks for over three months to meet their basic cash requirement.

Given the fact that the Central government is already under pressure due to under performance of the Indian economy in the past four years, it will not want any new trouble in the form of unexplained cash crunch in the system. The sooner the finance ministry solves the mystery of cash shortage, the better it will be for the government.

(With inputs from Parichit Mainra)

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