Current state of the Indian economy can be coined perfectly by two famous expressions from Shakespeare’s greatest dramas. One is that when problems come, they come in legions; and another is the summary of King Lear’s life, which was full of struts and vaunts, signifying nothing, dignifying nothing.
Similarly, the Indian fairy-tale growth story as the fastest-growing economy in the world is now reducing to a pre-independence state by fast losing its quivering spirit through multiple punctures, such as the constant depreciation of the value of the Rupee over the last 12 years, now bordering on the precarious state of 100 per dollar, being the second weakest currency after Indonesia. This is apart from ceaseless depreciation against many currencies in the world, including, most ironically, a 22% depreciation against Pakistan and an 18% depreciation against Bangladesh currencies in the last two years.
The Indian stock market has gone red since 2024, with either negative returns on investments or intermittent returns of 3–9%, contrary to 36–67% returns by the Pakistani stock market and up to 238% by South Korea, thus lagging behind even the tiny Taiwan stock market. This has earned a coveted reputation of being among the Fragile Five nations in the world economy and the second most vulnerable economy in a worsening financial wilderness.
Now, from the common people’s perspective, who are ill-afforded to leave the country like the 17 lakh rich people who have done so in the last eight years for greener pastures elsewhere, the most dreaded thing on the anvil is the vanishing cash flow from the domestic market. Paradoxically, this is occurring at a time when cash circulation in our domestic economy has touched its zenith, with a staggering ₹43 trillion compared to ₹13 trillion in 2013.
This cash-flow crunch issue is assuming serious proportions due to the burgeoning number of ATMs going completely dry from day to day, mostly in rural and semi-urban areas. This has constrained the apex association of the nation’s ATM operators to ask banks to augment cash supplies to drying ATMs in view of more than a 50% cash-supply deficiency by banks to ATMs operating in India.
Now, naturally, two serious issues are under deep discussion among the nation’s economists and financial journals. First, how can the ATMs of a nation having the highest cash circulation globally in its domestic economy be drying up day by day due to huge supply deficiencies? Second, why are banks unable to supply even half of the total cash requirements to the ATMs?
These two clinching realities logically point to a central issue: where are these staggering ₹43 trillion now? By macroeconomic policy regulations and systems in every nation’s domestic economy, this cash flow circulates partly in the market through government spending by way of salary payments, pensions, grants, and capital expenditure, while the lion’s share remains within the domestic banking system to keep the banking system running and to confront any financial eventuality during times of crisis.
The glaring inability of banks to provide sufficient cash to ATMs logically strengthens the fact that banks are suffering from an acute liquidity crisis, despite the staggering capitalization of the domestic banking system by the RBI from time to time, particularly during the last three years, to maintain adequate liquidity—the lifeline of the national economy.
Therefore, the most rational corollary is that the banking system is drying up rapidly for want of adequate liquidity support from the Central Bank. The core issue now is how such a grave liquidity crisis has surfaced in the domestic economy and assumed such an unmanageable proposition within the nation’s banking system.
The apt answer rests not in a solitary issue, since this crisis is the only sacrosanct evidence as well as the current abridged balance sheet of an economy standing on the threshold of total collapse.
Actually, the liquidity crunch in our banking system first started six years ago for four reasons. One is the lack of adequate public deposits due to shrinking national savings, caused by the great want of meaningful job generation with adequate remuneration that would leave people with spare money to save. Another is the constant depreciation of the Rupee, particularly during the last five years, forcing banks to hive off huge amounts of Rupees for dollar and other currency swaps to be provided to importers for burgeoning imports.
The next reason is the unprecedented drawdowns from the Central Bank by the government during the last five years in the form of dividends to meet huge current account deficits, which have severely dented the financial health of the Central Bank. Lastly, there is the staggering spiral of bad debts or NPAs.
These negative factors have played havoc with banking liquidity despite the frantic and ceaseless efforts of the Central Bank to maintain adequate liquidity in the banking system.
Now, this grave cash-flow deficiency is assuming dangerous proportions due to soaring valuation differences, mainly arising from dollar–Rupee swaps, and massive cash withdrawals by common people from banks due to spiralling inflation and stagnant incomes.
If this problem persists for even two or three more months, then most financial activities, particularly in rural and semi-urban areas constituting 65% of our economy, will be severely affected. This would also impact people engaged in the service, agriculture, and manufacturing sectors, which together constitute 85% or more of our national economic activity and GDP.
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