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Why The Modi Government Should Print Currency Overseas

14/12/2016 1:59 PM IST | Updated 15/12/2016 8:47 AM IST
Ajay Verma / Reuters

On 8 November, Prime Minister Narendra Modi stunned the nation by announcing the demonetisation of ₹500 and ₹1000 notes. These denominations which comprised about 85% of the currency in circulation would no longer be valid from the midnight of that night, he said. The stated objectives of the move were to unearth hoarded black money, counter terrorism and address the issue of counterfeit currency. While how much demonetisation will impact any of these areas remains to be seen, a month down the line, the vast majority of India is struggling hard with the cash crunch. Fact is, the time being taken to "remonetise" the economy is taking a serious toll—as of 7 December less than 30% of the withdrawn value of cash was replaced—and prima facie is outweighing the possible benefits of demonetisation. The need of the hour is to beef up the circulation of currency in the shortest time possible.

A mere 25% contraction in money supply wiped half of America's GDP during the Great Depression. What can we do to avoid similar effects?

The major challenge of beefing up circulation of cash is the time taken in printing new currency notes. In retrospect, it seems utterly bizarre and even juvenile that those at the helm in the Finance Ministry and RBI didn't think this through in detail or weighed in on the impact that this would have on the citizens of India and the economy. In hindsight, it is clear that multiple options could have been exercised, even if the announcement and subsequent process were kept secret (although even the level of actual secrecy is in question).

Now, the past cannot be undone, but what can we do now? The economy is already suffering because of the cash shortage and there may be worse to come—former Prime Minister Manmohan Singh has estimated a 2% reduction in the GDP growth, while some brokerage houses have predicted halving of GDP growth. Some analysts have even predicted recession after few quarters. One can argue about the extent of damage due to the absence of adequate currency, but no one can deny that contraction in the economy is evitable. The government is pinning its hopes on the currency deposits in bank, which can increase the liquidity in the economy, leading to recovery. I believe such a complacent mindset, and putting all eggs in one basket, can only be disastrous. The only way to salvage the situation is the printing and distribution of replaced currency notes in the shortest possible time.

Now, let us look at the biggest bottleneck in remonitisation—printing.

First, what's the production capacity of institutions of state entrusted with printing new currency notes of ₹2000 and ₹500? According to reports, the ₹2000 note is being produced by the Bharatiya Reserve Bank Note Mudran Pvt Ltd (BRBNMPL), which has the capacity to produce around 60-70 crore pieces per shift and is working two shifts. Fact is, even if it works three shifts , it can at most produce 190-200 crore pieces, so the lead time to replace the demonetised ₹1000 notes—which stood at around 600 crore pieces at the time of demonetisation—with ₹2000 notes will be around the end of December or even later. (

Printing currency expeditiously seems to be the only plausible solution to the cash crunch. Given that we have severe constraints in domestic printing, why can we not look overseas?

The key will be lead time to replace the demonetised ₹500 notes; replacement of these in a short span of time, in my understanding, is difficult. The ₹500 note is being printed by the Security Printing & Minting Corporation of India Ltd, and its estimated capacity is 100 crore pieces a month, so in standalone function it will take at least 16 months to replace 1600 (approx) crore pieces of demonetised ₹500 notes. After the printing of ₹2000 notes is over by December, my sense is BRBNMPL will be utilised for printing 500 notes; still it is unlikely the ₹500 notes will be replaced before May 2017, and I'm being optimistic here.

This is too long a time for an economy to be bereft of notes that form a major portion of currency stock, and the effects could be deleterious both in the long and short terms. I am appalled that the Prime Minister and his "acolytes" didn't think of this side-effect of demonetisation. Mere 25% contraction in money supply wiped half of America's GDP during the Great Depression. What can we do to avoid similar effects, now that a rollback is not possible (it will at best add to the chaos)?

Given this government's penchant for marketing and optics, such a move can also be showcased/sold as an innovative and bold step.

Given this government's penchant for marketing and optics, such a move can also be showcased/sold as an innovative and bold step.

Printing currency expeditiously seems to be the only plausible solution. Given that we have severe constraints in domestic printing as I mentioned earlier, why can we not consider printing money overseas? I am quite sure there must be lot of currency printing units idle, given the nature of their periodic utilisation. I know it entails lot of design, security, machine adjustments issues to address but my strong belief is that this option is still worth exploring, rather than waiting for a long period for our printing setup to crank out what we need. The regular bureaucratic structures of the RBI and Finance Ministry cannot be entrusted to scout for such printing presses. In my opinion, a private agency such as a cash management service or consulting entity can be roped in with a mandate to search out and forge an alliance with a printing press in the shortest possible time. Once the printing press is identified and a potential alliance is put in place, the RBI can take the reins and expedite the process of printing and transportation of currency.

Stifling money circulation for long will be a monumental blunder, not only for the economy but for the political fortunes of the current ruling dispensation. To counter the damage the option of overseas printing offers potential recourse. Given this government's penchant for marketing and optics, such a move can also be showcased/sold as an innovative and bold step.

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