Dec 14, 2016,
We are
15 days away from Prime Minister Narendra Modi's 50-day deadline to end the
worst effects of the scrapping of 86 per cent, by value, of currency. In the
chest-thumping, hand-wringing controversy that has ensued since the
announcement on November 8, 2016, there has been an absence of facts on the
question of re-monetising
India.
An
extrapolation of 2016 Reserve Bank of India (RBI) data on the capacity of
printing presses and currency distribution indicates that, at current rates,
Modi's deadline will not be met. Getting adequate money to banks and ATMs nationwide
will depend on how many bank notes the government wants to put back into
circulation.
If the government wants to introduce Rs 9 lakh
crore ($135 billion), or 35 per cent less money than it pulled out, it will
take up to May 2017, and if it wants to reintroduce the entire Rs 14 lakh crore
($210 billion) that it withdrew, that could take up to August 2017.
The crux of the problem is change, specifically
the Rs 500 note, which the country's presses cannot, currently, print in
adequate numbers.
Here are the facts:
*The
RBI has four presses at Dewas (Madhya Pradesh), Nashik (Maharashtra), Salboni
(West Bengal) and Mysuru (Karnataka).
*
The printing capacity of these presses is roughly 2,670 crore (26.7 billion)
notes a year, according to the RBI's 2016 annual report (page 90). Or roughly
7.4 crore (74 million) notes a day .
*
If the presses worked three shifts a day instead of two, their daily production
capacity could be raised to 11.1 crore (111 million) notes a day.
*
However, less than half of the machines in the presses have the ability to
print the security features required for high-value notes (Rs 500 and above).
*
This means that even if all the machines that print high-value notes in all
four presses printed only Rs 500 rupee notes 24 hours a day, we would at best
be able to print 5.56 crore (55.6 million) Rs 500 notes every day..
*
This translates to about Rs. 2,778 crore ($418 million) in value printed every
day in Rs 500 notes.
Before
the announcement of demonetisation, the government had already arranged for the
printing of 200 crore (2 billion) Rs 2,000 notes, or roughly about Rs 4 lakh
crore ($60 billion) in value. So, these were the first set of notes to be
circulated. This is why there are so many pink notes in circulation.
Let's explore
the time to disburse in the two scenarios we mentioned:
* Scenario 1 : Rs 9 lakh
crore (or roughly two-thirds the total Rs 14 lakh crore that was demonetised)
needs to be returned to the system.
* Scenario 2 : Rs 14
lakh crore (full amount) needs to be recirculated.
For
this amount to be liquid, a key condition needs to be met: Rs 2,000 notes can,
at most, account for half the total amount to be circulated. The logic: If we
do not have enough change, then the Rs 2,000 note will always be hard to
"break" into smaller denominations, which is the situation nationwide
today.
The
other half needs to be available in lower-denomination notes. The total value
of Rs 100, Rs 50, Rs 20, and Rs 10 notes is Rs 2.19 lakh crore ($33 billion),
according to the RBI's annual report.
If
we put this in a math equation where t is the
total value of Rs 2,000 notes and f is the
total value of Rs 500 notes, we end up with this equation:
total
value of 2,000s ( t ) = total
value of 500s ( f )+total
value of 100s and below
or
t = f + Rs 2.19 lakh crore
t = f + Rs 2.19 lakh crore
This
means the requirement of Rs 500 notes is as follows:
*
In Scenario 1 (Rs 9 lakh crore disbursal):
t+f Rs 9
lakh crore
Solving
for f, the value of Rs 500 notes needed is 681 crore (6.81 billion) notes X Rs
500 Rs 3.405 lakh crore.
*
In Scenario 2 (Rs 14 lakh crore disbursal):
t+f Rs 14
lakh crore
Solving
for f, the value of Rs 500 notes needed is 1,181 crore (11.81 billion) notes X
Rs 500 Rs 5.905 lakh crore .
As
on November 30, 2016, less than 10 crore (100 million) Rs 500 notes were
printed and ready (or two days worth of printing), according to an RBI source,
quoted in Mint.
We
arrive at the crux of the problem:
India needs to print at least 681 crore
(6.81 billion) Rs 500 notes. In Scenario 2, the Rs 500 requirement is for 1,181
crore (11.81 billion) notes. However, the peak printing capacity of the presses
is 5.56 crore (55.6 million) notes a day-or 0.8% of what it should be.
At
this rate, we will take anywhere between 122 days and 212 days to print enough
Rs 500 notes. Given the fact that the RBI started printing Rs 500 notes in
earnest after November 30, 2016, printing all the required 500s will be
completed only on March 10, 2017 (Scenario 1), or July 8, 2017 (Scenario 2).
Taking
into account the time taken for cash transportation and the speed at which
banks can push out the money, calculations indicate that complete disbursal of
Rs 9 lakh crore can happen in early April 2017.
In
other words: India awaits some "April showers" but a full
"monsoon" will have to wait until July.
source : ET