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Thursday, April 19, 2018

India Moves to Fix Inexplicable Cash Shortages

As India battled an inexplicable currency shortage across many parts of the country, the government has quickly moved to assure the nation that it is fixing the shortfall.

Hundreds of people this week have been encountering “Out of Cash” signs at automated teller machines which have run dry in some of the country’s largest states like Karnataka, Telangana, Andhra Pradesh and Bihar.

The Central Bank has said that printing of currency notes has been ramped up, supplies are being augmented to the worst-hit areas and there is enough cash in its vaults. It said ATM’s are emptying faster than usual as people withdraw extra cash at the start of the Indian financial year, which began on April 1.

But days after the shortages began to be reported, there are no clear answers as to what has caused the problem.

There is usually a spurt in demand for bills at this time of the year when Indians celebrate religious festivals and prepare for the harvest season, but this has never caused currency shortages in the past.

Without elaborating, Finance Minister Arun Jaitley attributed it to 'sudden and unusual increase' in some areas. In a statement earlier this week he said that there is more than adequate currency in circulation and available with banks.

“There is no reason to believe for anyone to have any fear or any apprehension. Please be completely assured that our banking is totally, totally safe,” said S.C. Garg, a top official in the Department of Economic Affairs.

Despite the assurances, the shortages this week brought back memories of the controversial currency ban of high value notes in 2016 that triggered a massive cash crunch. Prime Minister Narendra Modi said at the time that the move was intended to combat widespread tax evasion that led to people hoarding cash and to digitize India's economy to make it more transparent.

In a country where more than 75 per cent of transactions are done in cash, the government had announced incentives to nudge people toward online payments.

However the latest shortages suggest India has apparently not been able to shake off its addiction to cash.

“It is also a matter of habit, you are used to cash, so it is difficult to shrug it off unless you have an alternate system that is very efficient,” said D.K. Joshi, chief economist at rating agency Crisil in Mumbai. Economists have often underlined the challenge of shaking off a dependency on cash in a country where internet access is patchy, especially in rural areas.

However some saw a silver lining – the rising demand for cash could be due to an economy that has been picking up pace.

The cash ban a year and a half ago had slowed India’s economy for months and led to widespread criticism that it had caused more pain than gain.

And while the latest shortages are expected to be a passing phase, they could embarrass the government and raise questions about its handling of the economy just ahead of a crucial round of state polls this year and national elections next year. At least one of the states grappling with cash shortages, Karnataka, heads for the polls next month.

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