Demonetisation impact: Decoding the note shortage

Starting Monday, the Reserve Bank of India (RBI)’s presses will start printing the new Rs500 denomination currency, after stopping the print run of Rs2,000 denomination at around 1,900 million (190 crore) pieces.

The decision is recognition of the huge mess up in anticipating currency requirements and the blunder in failing to recognise that people cannot possibly be asked to manage with absolutely no intermediate denomination between Rs100 and Rs2,000 notes. The blame for this has to lie squarely at the doors of the Reserve Bank of India (RBI), which is responsible for currency management and for advising the government on preparedness. They are also responsible for what turned out to be a deadly blunder in printing, and reducing the size of the currency, thus rendering over 2.2 lakh ATMs useless at a crucial time. These ATMs have not been fully recalibrated as yet, despite a massive team being pressed into action. The function is headed by one deputy governor of the RBI, who also heads RBI’s wholly owned subsidiary the Bharatiya Reserve Bank Note Mudran Pvt Ltd (BRBNMPL).

Let us look at what to expect when RBI’s modern presses at BRBNMPL’s Mysuru facility start printing the Rs500 note. But here is some background. For the purpose of clarity, this article will refer to RBI currency presses and Central government printing presses, the details of which are explained at the end of the article.

Rs2,000 story: For starters, the RBI presses were only asked to print the Rs2,000 currency notes and seem to have done a great job of it, expect for the policy goof-up on the size of the note. We are not clear whether they knew that they were preparing for currency demonetisation, but there was certainly a sense of great urgency in preparing for and printing a large number of Rs2,000 notes.

These preparations began even before Dr Urjit Patel took over as governor of the RBI. Sources tell us that the RBI presses at Mysuru had kept the plates and designs including the full obverse printing (the side without the RBI governor’s signature) ready even before 4 September 2016, the day Dr Patel took over. By 7th September, his signatures were obtained for the new notes and the press went into action. The printing cycle is one of 21 days starting from creating printing, drying and quality checks.

The RBI’s modern, offset printing press at Mysuru would have produced 1,900 million (190 crore) pieces of currency per day by this weekend after which it will switch to printing the Rs500 denomination using the offset and intaglio printing method. The RBI presses at Salboni, near Kolkata and Mysuru can print over 45 million (4.5 crore) pieces per day and supply over a billion (100 crore) pieces by end of December. But this is still a fraction of India’s currency requirement. But more on that later.

The Rs 500 mess: The job of printing the Rs500 note was entrusted to the central government presses (Security Printing and Minting Corporation of India Ltd -SPMCIL) and although officials here have been speaking selectively and anonymously, the story here is one of serial errors, lack of preparedness and absence of any supervision from the Ministry of Finance.

For starters, these are older presses using old technology. Unlike the RBI presses, they could not keep the printing plates for the new Rs500 denomination notes ready, besides having technology issues. This was resolved with the help of the RBI presses at Mysuru and a team of six was even provided additional training to implement the new printing formats.

We learn that Dewas and Nashik presses started printing the new Rs500 note only at the beginning of October 2016 partly with imported paper. As of now, the Dewas and Nashik presses are understood to have printed only 90 million (9 crore) pieces of Rs500 denomination notes.

The Hoshangabad unit, which supplies security paper also announced problems with its core technology issues although it was supplied the dye for the Rs500 note in August itself. According to reliable sources, the technology problem was fixed with the help of the RBI’s team at Mysuru. Meanwhile it was decided to import some security paper to be supplied to the government presses to allow them to start printing. We learn that the Nashik and Dewas presses had produced 90 million pieces of the Rs500 denomination as on 8th November.

The government presses were clearly caught unaware and unprepared for the mammoth exercise of replacing 84% of India’s currency. But the big question is, didn't someone check the level of preparedness and account for it before a decision to throw the entire country into turmoil was announced? Since the entire exercise was highly secret, the buck would stop at just four or five people at the head of the RBI and the Central government.

Way forward: Now consider some numbers. In 2014-15, both RBI and the Government presses together supplied six billion (600 crore) pieces of currency. With Rs1,000 note scrapped and Rs2,000 introduced, the requirement of notes will reduce, but the Rs500 currency is the one used for transactions and the supply of one billion (100 crore) notes at the end of December. The RBI presses, despite their modern technology, can only print 16 billion (1,600 crore) pieces of currency in a year, that too working in two-shifts. Another 10 billion (1,000 crore) pieces can be printed at the Dewas and Nashik presses, which will add up to around 26 billion (2,600 crore) pieces of currency.

This means that we need to be prepared for a much longer period of hardship and currency shortages. The government is doing its best to ensure fast distribution and is using planes from the Air Force to reduce transportation costs, but there is little that can be done to crank up the printing process any further.

The massive exercise to try and get people to move to cash-less systems and online transactions is born as an afterthought and due to the realisation that the only way to cover up the lack of preparedness of the government is to reduce the usage of currency. We will need to watch the success of this exercise, because less financially literate persons may switch to digital technology and can become victims of electronic fraud.