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Is Small Currency Worth the Paper ?
by Hargovind Sachdev, Ex GM, State Bank of India & Head of Central European Credit Desk of SBI, Frankfurt, Germany.

          

Is Small Currency Worth the Paper ?

                                    

The delightful journey of a currency note entering a pocket through an ATM is longer than it seems and costlier than it appears. The note fights most against its own identity theft in multiple hands. It does not wish to be replicated easily. Stringent security features are added to protect its duplication which make it costlier. The harder a note to be duplicated, the longer its life, circulation and acceptance. In the USA, more dollars exchange hands outside the country than inside, despite the dollar embodying a confusing single size for all denominations. All denomination dollars are the same size and colour but embedded with three dimensional water marks, micro lettering and security thread spreads which make every dollar uniquely impregnable and the most widely circulated, safe international currency. Indian Rupee is also unique in terms of the sheer numbers printed, more so in different sizes and colours to protect illiterate masses from making mistakes while doing payment, but is still struggling to carve a niche beyond the Himalayas.

 

Post independence in 1947, Rupee was entirely linked to gold. One rupee was given a value of 4.15 grains of gold. One gram of gold was equal to 15.43 grains of gold, implying that one rupee was equal to 0.26 grams of gold which is roughly equal to Rs.1248 today. But in effect it is not worth the paper it consumes presently due to depreciation and handling expenses. No wonder it is being printed rarely anymore.

 

Currency notes have traditionally been printed on paper made from cotton rags. The responsibility rests with the Reserve Bank of India which prints all denominations except one rupee note which are printed under the supervision of the Ministry of Finance and signed by the Finance secretary, not by the governor of the RBI. The RBI follows a minimum reserve system in the note issue. Initially, it used to keep 40 percent of gold reserves in its total assets. But, since 1957, it has to maintain only Rs. 200 crores of gold and foreign exchange reserves, of which gold reserves should be of the value of Rs. 115 crores.

As a currency authority, RBI provides different denominations of currency. The bank has 31 offices across India, for facilitating the transactions. At other centres, the currency requirements are met through currency chests which are maintained with the branches of Banks, Government Treasuries and Sub-Treasuries.

 

RBI manages seasonal variations in currency circulation. In the busy season, when more currency flow is needed, its Banking Department transfers eligible securities to the Issue Department, on the basis of which more currency notes are issued. Entire currency is legal tender guaranteed by the Central Government. The design, form and material of the notes have the approval of the Central Government, which is empowered to demonetise the notes. The Government has to circulate rupee coins through the RBI only. No stamp duty is payable by the RBI in respect of notes issued by it.

 

India has an elaborate process of printing its currency. Since 2015, the country has been self-sufficient in printing currency. Based on annual cash requirements before the beginning of every fiscal year, RBI works on an econometric model to decide the number of currency notes for each denomination. Variables like number of notes currently in circulation, number destroyed and the volume of replacement required for soiled notes are taken into account. The final number of currency notes to be printed for each denomination is decided on the basis of projections for GDP growth rate, inflation and electronic transactions. The decision making remains a closely guarded secret between RBI and the Finance Ministry. 

India has four currency note printing presses at Nashik, Dewas, Mysuru and Salboni. The paper on which currency is printed is designed, produced and supplied  by two mills at Hoshangabad and Mysuru. Hoshangabad has a capacity of printing high-security banknote papers that can turn into 8 billion note pieces. Mysuru mill has double the capacity of Hoshangabad mill. The designing of banknote paper involves embedding various security features including three-dimensional watermark, micro-lettering and security threads. The designs are prepared by an in-house research team. No foreign hand is involved as claimed in the report by Chinese media. Once the banknote paper has been embedded with security features, it is sent to the four printing presses. These presses add an additional security feature of optically variable ink. The printing is done on the big sheets of banknote paper. Each sheet is big enough to carry 40 pieces of Rs 2,000 currency. Pieces are cut and numbered telescopically for packaging. Bundles are sent to the RBI, which in turn transports to its regional centres and storage vaults across the country. From the RBI vaults, the currency notes reach bank ATMs and individual pockets.

The government spends Rs 4.18 on each Rs 2,000 note. The 500 note consumes Rs 2.57 and for Rs 100 note it is Rs 1.51. While for each Rs 10 note the cost incurred by the government is 1 paisa cheaper than the Rs 10 note. The old Rs 1,000 note was printed at a cost of Rs 3.54. Thus, the printing of the new Rs 2,000 note costs 64 paise more than the printing of the Rs 1,000 note. The cost of printing in the denomination of ₹50 and ₹500 has come down, while it has gone up for ₹10, ₹20 and ₹100 notes. No indent was placed for printing ₹2,000 note in FY20. The average life of a currency note is six months due to abrupt storing habits of Indians.

Used banknotes received by RBI from the banks are put through  sorting machines to discern the authenticity of notes and sort them into re-issuable and non-issuable. While the re-issuable notes are again put to circulation, the non-issuable are shredded into very small pieces, compressed into cylindrical bricks and sold off. The bricks are used to make cardboards, plates and packing boxes.

 

When politicians are promising free vaccines, ration and laptops, can a country just print money and distribute to its citizens? 

No, printing money causes inflation in an economy, and if a country prints too much money, it faces hyper-inflation. Few years back, a dozen oranges cost one hundred billion dollars of Zimbabwe bank notes as they were printed disproportionate to the nation's productivity. The value of currency depends on agricultural growth, industrial production, net exports, current and fiscal deficit, inflation, foreign exchange reserves  and interest rates in the economy. Mature and developed countries print 2-3% of their GDP.  Emerging India has more than 14.60% money in circulation as on 31.03.2021 which was 12% as on 31.03.2020, leading to incremental money supply disproportionate to real output in the economy which is increasing inflation and reducing buying power. Imagine the government transferring Rs.15 lacs to every citizen’s bank account. In order to meet this, they start printing money. Every citizen will become richer by Rs.15 lacs. People will start buying four wheelers, consumer durables and all the things which they were not able to afford earlier increasing the demand of goods because purchasing power has been increased. 

But since no matching output has increased, aggregate supply of goods will remain the same. This situation will upset the demand-supply position and  prices of goods would adjust to the level where growth in the money supply or demand will completely reflect in the price increase. So the situation comes back to square one i.e. no one would become richer since actual incremental buying power shall flow to citizens and cost of goods shall go up. Printing money doesn’t improve economic output in any way. It merely causes inflation. 

In the process of becoming rich, a country needs to be technologically advanced and competitive. Rightly said, “Time is more valuable than money, you can get more money but you cannot get more time”. Time has the power to change the value of money. Indians work hard to earn more money, but they should work smart to enhance purchasing power of Rupee in the extant challenging times.

 

(Mr. Hargovind Sachdev has over 39 years of banking experience having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe.)