One of the biggest collateral damage of demonetisation even after more than a month is on spending. This is happening as the cash crunch is leading to curb on spending as most consumers are hoarding cash.
As per LocalCircles recent survey on usage of the new currency notes, the government has been saying that they have released enough currency notes into the system, citizens feel otherwise.
Around 68 percent of the citizens polled say that have not yet received a Rs. 500 note. This shows that Rs. 500 note which is most popular currency note as it highly fungible across transactions.
It was circulated on a small scale by RBI in the week after demonetisation and then volumes were increased in late November. Since demonetisation, only the Rs. 2000 note has been in regular circulation.
Even on Rs. 2000 currency note, 59 percent of the citizens are not using it often. 45 percent are using it only when its absolutely necessary and hoarding it anticipating future cash crunch. And 14 percent say they are keeping it for emergency and not using it at all. While 41 percent are saying that they are using it frequently.
In an earlier survey done by LocalCircles 48 percent citizens had admitted to spending less and 60 percent of the spending reduction can be attributed to not enough currency in circulation while the remaining 40 percent can be attributed to uncertainty. Since 59 percent of the citizens are not using the Rs. 2000 note frequently, as a result the velocity of transactions are going down.
In a related LocalCircles survey, 90 percent of the traders have seen a decline in their business with 44 percent reporting business decline between 30-90 percent.
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This problem feeds on itself and created a vicious cycle. If the transactions of cash currency do not increase it will not make people confident enough to spend their cash. Which is why even RBI has urged citizens to not hoard currency, promising enough currency notes.
The collateral damage on spending will in the short run have an impact on the GDP of the country which is why it is important for the government to look at pumping in Rs. 500 notes into the banking system.