Even after demonetisation and digitisation, Indians stash more notes than ever before
Why do Indians love cash so much? That is a question that needs answering after a report emerged in the media that despite demonetisation, the proportion of cash as a share of total savings kept by Indians increased to a quarter of their overall reserve. In fact, a quarter of the currency notes in circulation are actually unproductive and stay at home. These figures were released by National Account Statistics and paint a worrying picture. This is because the cash that is saved up, rather hoarded for a rainy day, is an extremely inefficient way to use any asset because sitting inside a locker, under a bed or even stuffed inside a mattress, it is losing value every passing day. However, with the real estate market bubble bursting, the equity markets tepid and a loss of confidence in the banks have meant that many of India’s non-professional and non-salaried middle and upper income classes have few investment options to grow money. And even though the markets have been climbing of late, there has been a lack of investor confidence as negative economic news percolates through to even lower-run small investors, thus creating a vicious cycle. The bursting of the real-estate bubble in particular has had a vicious effect, as property was for years the best way to deploy cash for many Indians.
To encourage Indians to circulate their hoarded cash and at least return to the previous 10-12 per cent levels of cash holdings as a proportion of their overall savings, the Government should encourage easy investment options in start-ups and also instill a renewed sense of optimism in banks. For one, the amount insured in every account of a scheduled bank, which currently stands at one lakh rupees, should at least be doubled or tripled. The collapse of the PMC bank, even though it was a loosely regulated cooperative bank, has further shaken the confidence of depositors. The gap between the actual and potential output of the economy, that has been referred to by several economists as a direct consequence of this, is not something that can be closed soon. Any action, such as further rate reductions by the Reserve Bank of India, because the money is there, is not being deployed. There is clearly a crisis of confidence, which is causing the problem, and may be the Finance Ministry could simply increase the limit for cash spending without the requirement for a PAN card from Rs 2 lakh to Rs 5 lakh. That will jumpstart the consumer economy once again.
Courtesy: The Pioneer