Cash & Liquidity ManagementCash ManagementCash Management RegionalIndian businesses struggle as cash crisis deepens

Indian businesses struggle as cash crisis deepens

The government’s decision to withdraw 500 and 1,000 rupee notes has created a liquidity crisis, with ATMs across the country running out of cash.

An announcement by the Indian government on November 8 that 500 and 1,000 rupee (INR) banknotes were being withdrawn has sparked a liquidity crisis, as banks and automated teller machines (ATMs) run out of cash.

Prime minister Narendra Modi launched the demonetisation scheme – aimed at eradicating unaccounted wealth aka “black money” by replacing the high-denomination banknotes with new ones – has been criticised for poor execution. Consumers have been forced to join lengthy queues in order to collect new notes and deposit old ones, while businesses across the country have been hit.

The Finance Ministry announced at the weekend that ATMs will not be able to disburse new currency notes before early December, as recalibration of the machines requires both hardware and software modifications.

In the meantime, activity at many small manufacturing and retail businesses has slowed or even come to a standstill due to the continuing heavy dependence on cash. Goods are not moving because truckers and logistics players are not willing to take these without cash payment. Trade, at the same time, is short of funds and unwilling to restock, with a knock-on impact on manufacturers.

Transport groups claim that truck rental costs will rise sharply as small operators, which work only for cash, go out of business. Ashok Shah, chairman of transport group V Trans India, says: “Big companies like ours which runs approximately 1,100 trucks daily have credit arrangements.

“That is not the case with small operators, who have to pay INR 50,000 to drivers for various expenses over long routes. With the shortage of liquidity, these trucks will make fewer trips, impacting transportation and pushing up rentals.”

Politician Subramanian Swamy, a member of the Rajya Sabha, the upper house of the Indian Parliament and one of Modi’s top aides blamed poor planning and execution by the government for the banknote crisis.

“I am appalled by the lack of preparation,” Swamy told This Week in Asia. “We have been in power for nearly two and a half years. The finance ministry should have prepared for this from the very first day.

“It is easy to argue that the ministry was not in the loop, but that is no excuse for not having a contingency plan.”

The impact has also hit India’s poorest hard, with many forced to pay touts to fill out forms to exchange their currency notes. India still has the highest number of unbanked adults in the world at 21% of the global total, ahead of China (12%) and Indonesia (6%). In 2014, Modi launched a programme to ensure a bank account for every household, halving India’s unbanked population, but it still stands at 233m, according to a PricewaterhouseCoopers India report.

Modi had also prledged to bring back the money rich Indians have deposited abroad. Opposition leaders have criticised the government for letting these “big fish” off the hook while harassing hard-working middle-class with the currency ban.

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