Multiple Indian states are experiencing a cash crunch as ATMs have been running dry in recent weeks.  

Though the cash shortage does not look like a pan-India phenomenon, several states such as Karnataka, Andhra Pradesh, Telangana, Madhya Pradesh, Uttar Pradesh, northern parts of Bihar and some areas of Maharashtra as well as Delhi have reported that money supply, a key indicator of monetary stability, has been badly hit.

Collectively, these states are home to no less than 300 million citizens.

The federal finance ministry said the shortage occurred due to an "unusual demand" for currency in the past few months but did not pin the reason on any particular factor. 

The Reserve Bank of India (RBI), the country's central bank that follows an econometric model to monitor demand for currency based on GDP growth forecasts, has also been unable to offer a credible explanation for the situation but promised to replenish the ATMs quickly.

Demonetization aftermath

The government and stakeholders are still struggling to pinpoint the cause of the crisis, which has brought back fears of the demonetization bombshell dropped by Prime Minister Narendra Modi in November 2016.

Modi had announced then that the 500 rupee ($7.5) and 1,000 rupee ($15) denominations, the country's highest-valued currency notes at the time, would no longer be in circulation. Following the initial weeks of intense chaos, the administration attempted to inject cash notes by introducing fresh 2,000 rupee and 200 rupee legal tender, and introducing new 10, 50 and 500 rupee notes.

However, these new notes are still not in full circulation to match the earlier flow and this has been compounded by rising demand for more notes. India had a rich and vibrant informal economy that relied entirely on cash-based transactions, and this has taken a huge hit since the demonetization measure.

"The government would like to assure all the people that there has been [an] adequate supply of currency notes which has met the entire demand so far. The government would also like to assure that it will be supplying adequate currency notes to meet even higher levels of demand if such demand were to continue in the coming days or months," the finance ministry said in a statement after days of reported cash shortage in many parts of the country.

At least two bank employees, who did not wish to be identified, have revealed that there is a drop in cash inflow to the facilities but insisted their higher officials are working on the matter.

Read more: 

India to regain top global GDP growth spot in 2018-19

India: better deal for foreign investors

Though no exact reason has been given for the latest cash shortage, various explanations — both speculative and inferential — are being bandied about such as cash machines not being recalibrated to dispense new notes, seasonal demand due to agriculture, logistical challenges of the central bank, upcoming electoral polls, poor supply-demand estimation and more importantly the banking system, which is already crippled by $210 billion worth of bad loans.

Another peculiar cause stated by authorities is the possible hoarding of cash as part of a conspiracy against the ruling administration, but no one from the government was able to substantiate these claims. 

"Now you understand the deception that was demonetization, that terror is back," Rahul Gandhi, the president of the main opposition party Indian National Congress, wrote on Twitter. "Our cash machines are empty once again, and look at the state of our banks," he added, underscoring the increasing public distrust in the banking system, thanks to growing recent scandals and monetary policies.

There has been considerable anecdotal evidence from many cities and rural areas suggesting that banks are turning away customers as they did not have enough cash.

Push for digitalization

One of the stated objectives of the 2016 demonetization clampdown was an aggressive push for digital payments nationwide. However, that has also been a setback for the government because of the slow pace at which people have familiarized themselves with non-cash transactions. 

The currency circulation in April 2018 — 18 months after demonetization during which there was a relentless campaign for digital transactions buttressed by both state and non-state actors — stands at 18.4 trillion rupees compared to 17.98 trillion rupees before demonetization. This figure is still considerably low considering factors such as inflation and economic growth.

There was a sharp rise in cash circulation particularly during December 2017 and January 2018 perplexing financial analysts and banking institutions. Since October 2017, the withdrawal levels from cash machines, another indicator which authorities closely observe to monitor changing cash habits, have also gone back to pre-demonetization figures.

Mobile wallets, which received a surprise drive upwards in the initial months of demonetization, have yet to fully catch on among consumers.  

Yet, the central bank had noted that there has been a steady rise in the payment habits with more consumers utilizing electronic payments, cards and checks.

In its report on tracking digital transactions post-demonetization, the RBI stated, "The increased usage of these three instruments during the demonetization period has been sustained in the post-demonetization period as well, suggestive of a fundamental shift being underway in the payment habits of the Indian economy."

There has also been speculation among some quarters that the Indian economy has been deliberately pumped with less cash in order to boost the practice of online payments.