One of the most unusual things about the cash crunch that is affecting a number of Indian states, which the government officially acknowledged on Tuesday, is that the causes of the shortage are unclear. In various statements, government officials have pointed the blame at an “unusual spurt” in currency demand, although they have yet to convincingly explain the reasons behind that spike and why it has come now. Beyond the official statements, others have added many more potential theories in an attempt to explain what seems to be a sudden spell of ATMs running dry.

The lack of clarity on what is happening in the economy, from trustworthy Gross Domestic Product or employment numbers to the government’s deliberate opacity over demonetisation figures, has led to much speculation about what might actually be happening here. Some of the theories do not go beyond describing what is happening. Others seem less tethered to facts than a need to explain away the crunch. A third set, however, raise more fundamental questions about the currency shortage. Here are the theories floating around:

Telling us what we know

  1. Unusual spurt in currency demand: Finance Ministry
    This is the official position of the Ministry of Finance which put out a release on Tuesday saying, “There has been unusual spurt in currency demand in the country in last three months... This unusual spurt in demand is seen more in some parts of the country like Andhra Pradesh, Telangana, Karnataka, MP and Bihar.” Finance Minister Arun Jaitley tweeted something similar. The statement attempts to reassure the public that the government will do what is necessary to address this demand, but gives no explanation for why the demand has spiked in the first place.
  2. More withdrawals than deposits in these states: RBI
    One simple explanation for the shortage, which ties into the “unusual spurt” is the conclusion of a stock-taking analysis by the Reserve Bank of India, as reported by the Business Standard, which concluded that the rate of cash being withdrawn in some states was much higher than the rate of deposits there. As with the previous explanation though, it does not get into the question of why there have been more withdrawals than deposits.

Accusations and weak explanations

  1. RBI did not distribute money to states properly: MoS Finance SP Shukla
    SP Shukla, the Minister of State for Finance, did not bring up excessive withdrawals or insufficient deposits. Instead, he claimed that the shortage was due to a disparity in the amount of currency dispatched to various states. “There is an issue of disparity. Some states have less currency and the others have more... In two-three days, this problem will be resolved.” Again, this was an explanation for what may have happened, but did not answer the question of why it had happened.
  2. Cash supply arbitrarily reduced (to keep cash-GDP below DeMon levels): Ex-finance minsiter P Chidambaram
    Former Finance Minister P Chidambaram posted several tweets on Tuesday alleging that the cash supply to India has been “arbitrarily reduced”. Although Chidambaram did not spell it out, one of the main theories offered here is the belief that the government does not want the cash-to-GDP ratio to return to pre-demonetisation level, because that would be to admit defeat on Jaitley’s plan to create a cashless economy.
  3. Procurement season for farmers: SBI
    Rajnish Kumar, the chairman of the State Bank of India, said that the shortage was mainly due to increased demand. “One reason is that procurement season has come and the payment to farmers have gone up,” he said, echoing a refrain that others also have used, suggesting that it is the withdrawal of cash by state government to hand out to farmers and other welfare beneficiaries that caused the spike in demand. By this logic, however, India should see see similar cashouts at the end of kharif and rabi every single year.
  4. Shortage of raw materials like paper and ink: Anonymous person familiar with currency dynamics
    The Economic Times on Tuesday threw up another theory about the shortage: It has something to do with the lack of raw material to pint currency. The piece does not have a named source, and the anonymous one mentioned is not even said to be part of the government. The source, nevertheless, tells the reporter that “there have been issues with raw materials like ink and paper for some time now”. If that were the case, however, the government should have seen this shortage coming.
  5. Nirav Modi took all the money, banking system collapsed: Opposition
    The most simplistic response comes from the Opposition, which is using this moment to target the government both on its lack of governance as well as drawing attention to recent scams. Congress President Rahul Gandhi argued that Modi had allowed Nirav Modi, a jeweler who is accused in a huge scam, to flee the country with money and, as a result, has destroyed the banking system.
  6. Opposition took all the money, caused the shortage: Right-wing supporters
    An even more questionable theory comes in response to the Opposition’s argument: The allegation that actually there has been organised large-scale withdrawal from ATMs to cause a shortage that can subsequently create panic and reflect badly on the government.

Credible theories

  1. Hoarding of Rs 2,000 notes: Economic Affairs Secretary Subhash Chandra Garg
    Adding a little more detail to the proceedings was Economic Affairs Secretary Subhash Chandra Garg, who ventured a guess about the potential causes of the shortage. “Rs 2,000 notes are circulating but of late we have noticed there has been lesser inflow coming back in the circulation. We have not got this investigated, but you can assume this is the one note which most suitable to hoard as this is a high value note,” he said, though he took pains to insist it had nothing to do with Nirav Modi or any banking scam. “(The crunch) may be some states started distributing more cash benefits rather than otherwise. Some psychological feeling why not keep some cash in pocket rather than keeping in banks. It has nothing to do with recent scams.” Madhya Pradesh Chief Minister Shivraj Singh Chouhan, meanwhile, said there was a “conspiracy” claiming Rs 2000 notes from the market.T
    The point about it being easier to hoard the Rs 2,000 note was made by economist Ajit Ranade as well. India replaced its Rs 1000 note with one of an even higher denomination, the Rs 2000 note. And the government printed a large amount of those notes, such that 60% of the currency in circulation is in those notes. But they are not very useful. “It is likely that your autorickshaw driver or your grocery person will not accept it. Instead of being widely and speedily circulated in the market, the Rs 2,000 note is likely to be hoarded and used as a store of value,” Ranade said. What this theory doesn’t explain, however, is the abruptness with which the cash squeeze has developed.
  2. Logistical issues for ATMs: Market analyst Deepak Shenoy
    Capitalmind founder Deepak Shenoy offered several more technical explanations on Twitter for why the money in ATMs may have run out. He deliberately stays away from the political theorising and instead suggests two other things: new RBI guidelines for subcontractors who do cash management that is slowing things down and the incentive for banks to put Rs 2,000 notes into ATMs, even if people do not want those high-value notes. A finance professor, who has been on several RBI committees, agreed that post-demonetisation, cash logistics has not recovered. That said, the professor, who spoke on the condition of anonymity, stressed the need to study the cash shortages keeping the nature of the states’ economy in mind.
  3. The role of regional factors: Various sources, starting in Andhra Pradesh
    In December 2017, word spread like wildfire across messaging platforms that the new Finance Resolution and Deposit Insurance Bill, would allow depositors’ money to be used to save the banks in case of a crisis, instead of repaying the amount – a turn of events referred to as a ‘bail-in.’ Though the government tried to rebut this, the rumour has persisted, and showed up in February and March in Andhra Pradesh in particular, where the subsequent withdrawals of cash are being blamed for currency shortage. That is one regional factor which might have contributed to the cash-out. There are others. After their bifurcation, has the requirement for black money gone up in Andhra Pradesh and Telangana? The first, remember, is trying to build a new state capital.
  4. KYC rules for e-wallets: Reports
    One of the theories that might explain at least some of the demand for cash comes from changes to the way e-wallets, like PayTM, work. Starting March, anyone intending to use these wallets had to first go through a stringent Know Your Customer process of authenticating their accounts against name and address proofs. As a result, transactions on many of these services have fallen over the last two months, and that gap has naturally led to a demand for cash. Although this is unlikely to explain how widespread the crunch is, it might have added to the demand for currency, particularly in urban areas where the wallets might have been used earlier.
  5. Hoarding by politicians in run-up to elections: Reports
    With elections coming up in the big southern state of Karnataka, and General Elections due next year, one theory suggests that the Rs 2,000 notes are being stored by politicians for use in campaigns. It is common for cash levels to go up in an election year, and so this theory attempts to answer the question of the unusual spurt in withdrawals with the straightforward, but not very unexpected, response about it being close to election time.
    Traditionally, as academic Milan Vaishnav and others have described, real estate – a favorite sink for politicians’ money – orders less cement than usual before elections. That is because, as he and Devesh Kapur write in this paper, cash gets pulled out of real estate for election expenditure. With polls looming ahead, it is incontrovertible that parties need to start putting their warchests together. The BJP deserves additional blame here for converting each poll into a high-expenditure game where parties now focus on outspending each other. That said, what is unclear is, especially with real estate in a slump, where this cash is being extracted from. The cash being withdrawn will be wholesale cash, withdrawn from bank branches. Given banks’ need for cash stocks at their branches, it is no surprise that cash levels at ATMs have slipped. This trend needs to be seen in conjunction with the one below.
  6. People are depositing less: RBI
    As the RBI said, people are depositing less. This piece in the Hindustan Times also looks at the data to arrive at the same conclusion, that withdrawals at ATMs are continuing apace, while deposits have slowed down. Per the finance professor, after demonetisation, people who would have deposited cash in banks are not depositing their money any more. Take a person who has sold a house. Will she put that money into a bank? Or will she worry about income tax queries? This is the long tail of demonetisation. People are wary of putting their cash into banks while those with a cash deficit are withdrawing. That said, the number of people withdrawing goes beyond just politicians. See the point below.
  7. Is the Indian economy informalising:
    Between demonetisation and GST, small and medium companies in India have been very badly hit. In Hosur, for instance, high tax slabs coupled with long credit period in the automotive cluster have resulted in auto-component providers taking bank loans in order to pay their advance taxes this March. For some time now, businesses in such clusters have been wondering if they should exit the formal sector and reposition themselves around servicing the informal spares market.
    Last year, when spoke to small and medium companies in the textile cluster of Surat, those units too were contemplating a regression where they would go back to doing a part of their business in black and a part in white. As a trader in Hosur told us on the phone: “Shortly after GST and demonetisation, most transactions became pucca. People paid through cheques and wanted bills. In the last six months, this has now gone the other way. More transactions now happen in cash. This money, obviously, doesn’t go to the bank.” To accomplish this switch, businesses will have to start by withdrawing a lot of their cash from banks and then operating with twin balance sheets. In that context, it is worth noting that this cash crunch coincides with the start of a new financial year.