MUMBAI, (Reuters Breakingviews) - It is crunch time again in India. Automated teller machines in several states from Andhra Pradesh to Bihar have run dry in recent weeks. Officials from the central bank and finance ministry are blaming an "unusual" spurt in demand for bills, while insisting there is no need to panic. There may nevertheless be a political price to pay.

In a country where cash is really king, the latest shortage is an embarrassment for the government. It revives bad memories of Prime Minister Narendra Modi's massively disruptive decision to take 500- and 1,000-rupee notes out of circulation. People were left queuing for days to deposit whatever large-denomination currency they had. That 2016 move was designed to force Indians to give up or burn illicit funds, but the return of almost all the big bills to banks suggest the idea failed, and it certainly came at the expense of economic growth.

The latest squeeze is on a smaller scale, but appears to be another self-inflicted wound. In absolute terms, cash in circulation is back up to where it was before the controversial "demonetization" exercise, according to data published on April 6 by the Reserve Bank of India. The economy has expanded, too, but as Indians make more digital payments the supply of hard currency should now be sufficient.

Meanwhile, the increase in demand for notes may not be as atypical as the authorities are suggesting. At this time of year, Indians withdraw money to celebrate religious festivals and prepare for the harvest. The increase of cash in circulation, and hence changing hands, seen in April is not out of the ordinary compared to past periods, Credit Suisse analysts reckon.

It is possible Indians have gone back to old, bad habits of hoarding hard currency. The central bank is printing more, and taking steps to move existing notes to where they are needed in the hope this blunder is merely a logistical issue. Even if it can be resolved quickly, it underscores Modi's struggle to curb corruption by corralling cash. Indians remain as addicted to banknotes as ever.

CONTEXT NEWS

- The Reserve Bank of India said on April 17 that there was "sufficient cash in the RBI vaults and currency chests" as cash machines in parts of the country ran dry.

- The central bank said the shortage might be due to logistical issues in replenishing automated teller machines and recalibrating them. It added that it had ramped up printing of bank notes in all four of its note presses, and was taking steps to move currency to areas witnessing "unusually large cash withdrawals".

- On the same day, India's finance ministry noted an unusual spurt in demand for cash in the last three months in five states: Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh, and Bihar.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

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