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WHERE DID THE CASH GO ?

Liquidity, which is the availability of funds, remains scarce in the Indian economy and you do not need any economist or banker to tell that to you. Ask any small time trader or businessman and he will confirm it to you. Even the Reserve Bank now admits that there has been a chronic shortage of liquidity in the Indian economy, notwithstanding the fact that cash in circulation in the system is over Rs.3 lac crores more than what it was in November 2016, when the blunder of demonetisation was announced. The RBI, upon the government’s constant prodding, has been pumping money into the economy, month after month, but with little improvement being felt at the ground level.

The lack of funds, apart from hampering the business and livelihood of a common man, also significantly erodes his feel-good factor. A man with money in his pocket/bank account feels good and happy, as compared to one who does not and when an entire and growing section of the population does not have adequate liquidity, it gives rise to popular dissent and a tough political problem to resolve, for the party in power. The signs of stress on liquidity appeared in the immediate aftermath of the draconian demonetisation, but a government which has been in a state of denial, was very slow and reluctant to acknowledge it. It has now been pumping cash into the system at a furious pace, to try to ameliorate the lot of those most affected by it ie. the MSME sector.

The moot question that confounds experts is that if the economy has been growing, corporates are making profits, income tax returns are being filed in growing numbers, the cash in circulation is at a record level, the RBI has been pumping money into the system and the government has raised the MSP support prices, then why is the system/economy, so dry of liquidity. There are a number of obvious factors, in play, which the government has failed to recognise, only to aggravate the issue further.

Before we mention the factors due to which the Indian economy has been short of funds, we need to realise what does the shortage of funds/liquidity mean. In simple terms, it means that a person does not have liquid funds and when he needs it, he gets it with great delay and difficulty. That typically happens when the circulation of cash/funds in the economy has stopped/obstructed for various reasons. It is only when one person who holds funds, transacts and parts with it to another, that the liquidity cycle is well oiled and smooth flowing. That explains why we have a liquidity shortage in India. The first is that huge funds continue to remain blocked in sectors such as real estate, infrastructure projects, dud investments in the stock market and NPA assets. When funds are blocked into dead assets, the liquidity cycle stops and breeds scarcity. The other factor is that even though Indian households and corporates are sitting on record savings/bank balances, due to lack of confidence, they have blocked them into static items like fixed deposits, MF units etc. unwilling to rotate them into any other transaction. This too has affected the liquidity in our system. And finally income levels of the common man/small entrepreneur have fallen in real terms, giving rise to a situation where funds are missing/not available.

The lack of liquidity in the India is not just to do with the scarcity of funds. It indicates a deeper crisis which needs to be addressed to improve the flow of funds into the economy viz. fall in real income levels, unemployment, stress in real estate/infra sector, unresolved NPAs and lack of confidence in the direction of the economy. Mere pumping in additional funds, will not resolve the crisis, unless the real underlying issues are addressed.

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