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
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 :
http://economictimes.indiatimes.com/
