Re-monetisation Debacle: Why Didn't the RBI Print the New Notes At Foreign Printing Presses?

Nineteen billion notes of Rs 100, 50 and 10 denomination released so far, says the RBI. Would engaging foreign printing presses have helped with the Rs 500 and Rs 2,000 note supply crunch?

Currency: Nowhere to be found. Credit: Reuters

Currency: Nowhere to be found. Credit: Reuters

New Delhi: Why didn’t the government or the Reserve Bank of India consider printing the new Rs 500 and Rs 2,000 notes at foreign printing presses as a means of overcoming the current shortage of new notes? According to senior banking officials, a six-year push towards greater indigenisation, initial misplanning and a handful of past, controversial outsourcing incidents may have put off the RBI.

Ever since the demonetisation of Rs 500 and Rs 1000 notes was announced on November 8, the printing of new notes and increased circulation of old notes (Rs 100, Rs 50 and Rs 10) has severely lagged behind demand.

Notes, notes notes

At the central bank’s post-monetary policy review press conference on Wednesday, the RBI gave a handful of official clues as to how it has been handling the re-monetisation process. Approximately 19 billion notes have been released back into circulation since November 10, which is when banks re-opened after demonetisation was announced.

A rough breakdown of the 19 billion notes released are as follows: eight billion of the notes are of Rs 100 denomination, 1.8 billion of the notes are Rs 50 denomination and the number of Rs 20 and Rs 10 notes released are 3.1 billion and 5.7 billion respectively.

The total value of the notes released is a little under Rs 4 lakh crore. To put that into context, with demonetisation, roughly Rs 14 lakh crore (~15 billion Rs 500 notes and ~6.7 billion Rs 1000 notes) was taken out of the system.

The RBI’s figure of 19 billion notes, however, do not include the new Rs 500 and Rs 2,000 notes that have been printed and released into the system.

How many of the new 500 and 2,000 rupee notes have been printed? Sources with second-hand knowledge of the matter told The Wire that the number of new Rs 2,000 notes that have been printed ranges between 1.5 billion-2.2 billion, and that the number of new Rs 500 notes is minuscule in comparison (between 250-400 million notes). Other media reports put the number of new Rs 500 notes printed at higher quantities. Nevertheless, the number of new Rs 500 notes clearly falls short of the 15 billion 500 rupee notes that used to be legal tender.

Slow printing

Why has printing of the new notes lagged? Multiple calculations put forth over the last three weeks say it’s simple mathematics: former finance minister P. Chidambaram and economist Saumitra Chaudhuri have similar calculations. Twenty-one billion notes need to be replaced, and the combined capacities of the two major printing press entities (one operated by the RBI, and one under the supervision of the ministry of finance) is around three billion notes per month; this three billion figure is also with an increased number of working shifts.

The bottom line – it will take six-to-seven months for re-monetisation to be complete.

Multiple banking sources told The Wire that while this broad calculation holds true, it doesn’t take into account what the new currency stock composition should look like; the existence of Rs 2,000 notes and the cancellation of Rs 1000 notes changes this dynamic.

One senior private sector banker pointed out that it is difficult to guess whether the new Rs 2,000 notes would mean increased or reduced demand for Rs 500 notes; much of this depends on how small and medium businesses (that held ~40% of all Rs 500 and Rs 1000 notes before demonetisation) will react. The government consequently will find it difficult to predict whether the demand of Rs 500 notes will go up, down or stay the same – and this doesn’t even include the impact that an increased government push for digital payments may or may not have.  

Chidambaram and Chaudhuri’s calculations also don’t take into account that the printing of Rs 2,000 notes started two months before demonetisation was announced.

Nevertheless, the slow printing pace of the new Rs 500 notes and the increasingly visible signs of cash-crunch at the ground-level, show that the printing of new notes was simply misplanned. Sources say that the problem started when Rs 2,000 notes were first prioritised over Rs 500 notes.

In remarks to a TV channel on Thursday, SBI chairperson Arundhati Bhattacharya specifically singled out the curiously missing Rs 500 note.

“There is a scarcity syndrome and this leads to hoarding. What will change is the entry of Rs 500 notes. Hopefully, in the coming weeks, we will have enough 500 notes to give them out of ATMs. Then I think things will go back to normal pretty quickly.”

Abroad abroad

Why then were the new Rs 500 notes not sent to foreign printing presses? While The Wire could not confirm with the RBI ( a questionnaire was sent to the central bank), a number of experts within the banking industry point to a handful of factors.

Firstly, the RBI has printed currency notes abroad before – and was severely rapped for it by a parliamentary panel in 2010.

A  2010 report by the Committee on Public Undertakings (COPU) points out that “outsourcing of the printing of notes [was done] to three foreign countries in the year 1997-98.”

The RBI governor at the time was Bimal Jalan. During 1998, roughly 1,600 million pieces of Rs 500 denomination and 2,000 million pieces of 100 rupee denomination were outsourced to the American Banknote Company (in the US); 1,365 million pieces of Rs 100 denomination were outsourced to UK’s Thomas De La Rue; and 1,600 million pieces of 500 rupee denomination was given to Germany’s Giesecke Devrient Consortium.

The total amount of notes outsourced, the RBI disclosed, amounted to Rs 1 lakh crore. The reasons the RBI gave for printing Indian currency notes abroad was that a number of existing notes were in “bad condition” due to the “spoilage factor” and that the “RBI system of assessment with respect to the demands of the bank notes in the country had been off the mark resulting in a gap between demand and supply of note.”

The parliamentary committee was not amused at this foreign printing. It slammed the RBI, saying that there was “a grave risk of unauthorised printing of excess currency notes”, a potential for “misusing India’s security parameters” and that during that “particular fateful period,” India’s “economic sovereignty was at stake”.

Make in India concerns

Senior bankers say that the COPU report could have weighed on the minds of RBI officials.

Secondly, and more importantly, looking towards foreign printing presses may have been unwise in the current ‘Make in India’ political atmosphere. Over the last six years, even before the Modi administration assumed power, there has been a strong push towards indigenisation of the currency process. In April 2015, during the 80th annual RBI celebrations, Modi singled out India’s currency printing presses and argued that the “paper and ink [used] to print currency” should be manufactured domestically.

“Mahatma Gandhi fought for Swadeshi,” said Modi at the time. “Does it behove us to print his photograph on imported paper? Does India not have the entrepreneurs to make the paper in India?”

A senior economist who advises a public sector bank and who declined to be identified said that it was difficult to understand the Make in India impact on approaching foreign currency printers.

“On one hand, this is an emergency situation. Parliament could look at printing the new notes abroad favourably if it would ease the situation on the ground. But it could also raise unnecessary anger and upset people at a delicate time,” the economist said.

UK printer concerns

Other factors that could hold the RBI back from printing currency notes abroad include a strained relationship with one of its former printing partners. Shortly after the 2010 panel report, the relationship between the RBI and UK’s De La Rue – a printing company that not only printed currency notes for India back in 1998 but also continued to supply a majority of the RBI’s banknote paper requirement until 2011 – soured.

Sources say that at the time, there were major faults in De La Rue’s banknote paper quality and possible security concerns. In January 2011, the RBI decided that the UK firm would not receive any new contracts for supplying banknote paper.

The RBI and the government also received a further shock during the release of the Panama Papers earlier this year. The Indian Express reported that in 2002, De La Rue had “contracted a New Delhi-based businessman to help it bag tenders in India in return for a 15% commission.” In a statement at the time, De La Rue said that the “events took place many years ago and that the individuals mentioned have long since left the business”.

According to senior bankers, the RBI may not have wanted to risk this incident being brought back into the public attention. Of course, to be clear, there are a number of other European and American companies that could have still supplied the printing concerns.

Timeline, dateline?

Another question that inevitably arises that even if the central bank decides to print notes abroad, how quickly would it take the foreign printing presses to accept the order, print the notes and then deliver them to India?

If it would take European or American printers anything more than three months (after November 8, the day demonetisation was announced), it would make little sense to risk a potential controversy by printing currency notes abroad.

Fortunately, there is some data and precedent with regards to how quick banknote printers can react once they are contacted by the RBI. De La Rue apparently organised the “complex operation to replace Iraq’s old currency in 2003-4” and delivered the notes just ten weeks after the order was placed. That means that if India placed an order on November 9, it isn’t inconceivable for it to have received a large shipment of 500 rupee notes in the first half of January. What would help India further is if these foreign printing presses had printing locations close to India – De La Rue, for instance, has an operation in Sri Lanka.


What adds to the foreign printing press issue, are the apparent differences between the two major currency printing entities in India – the Security Printing & Minting Corporation of India  Ltd (SPMCIL), which operates currency printing presses in Nashik and Dewas and is a central public sector enterprise, and the Bharatiya Reserve Bank Note Mudran Pvt Ltd (BRBNMPL) which is a RBI subsidiary, was set up in 1995 and operates printing presses at Mysore and Salboni.

While BRBNMPL was given the task to print the new Rs 2,000 notes, the new Rs 500 note was allotted to SPMCIL’s presses. According to sources, due to the immediate need for more 500 rupee notes, the Mysore and Salboni printing presses have also started pumping out Rs 500 notes.

Cryptic public statements by former RBI deputy governor K.C. Chakrabarty point to a rift between the RBI and SPMCIL; Chakrabarty also noted that the SPMCIL’s presses were “lethargic” and in remarks to the media blamed the finance ministry for the delay in printing notes.

Documents presented by the COPU to the parliament and past testimony by SPMCIL officials show some signs of this. For example, the parliamentary panel in 2011 pulled up SPMCIL for not having calculated its installed capacity in various units “on a scientific basis, giving due consideration to operating machine speed and actual utilisation of man hour [sic].”

When it came to curbing the counterfeit currency, SPMCIL officials also appeared to be somewhat cavalier. As the COPU report notes, when it came to the operational role of SPMCIL in stamping out counterfeit currency, the “CMD [Chairman and Managing Director] of SPMCIL washed off his hands during evidence stating ‘…counterfeit matter remains with the government. I am basically their vendor.'”

“Ultimately, the government and RBI may have expected SPMCIL to quickly and efficiently reach its peak production capacity but this has not happened. How much of it is SPMCIL’s fault and how much of it is the fault of the government for not prioritising Rs 500 notes first is difficult to say. While one can’t rule out foreign printing presses, it is unlikely that it will happen now,” a senior executive of private sector bank said.