Re: Currency Demonetisation and Future course of Indian Economy
Posted: 15 Nov 2016 17:39
The task of replacing notes (Rs 1000 and Rs 500) withdrawn from circulation and substitute it with legal tender of new Rs 500 and balance in combination of Rs 2000 will be a mammoth exercise even if we assume that 75% of the notes demonetised are are black money and is unlikely to be tendered. Here is the maths.
The notes in circulation under Rs 1000 and Rs 500 as of March 2016 was 6,326 and 15,707 million pieces respectively. The figure might have since gone up before the demonetisation. But for the sake of argument let us assume that no new notes were added in the period between April and October or at least what was added was restricted to replacing soiled notes. So we are stuck with March 2016 numbers as the starting point.
If we assume the most optimistic scenario of 75% of it is black money and is unlikely to be tendered that still leaves the Government with the challenge of replacing the balance with new currency notes. This works out to 5,507 million pieces of currency notes. The Rs 500 currency notes need to replaced on a like to like basis. So we are looking at replacing 3,927 million pieces on a like to like basis. The Government has done away with Rs 1000 currency notes and replaced it with Rs 2,000 notes. While you could print half the number of existing Rs 1,000 notes post adjustment for frozen black money notes (1,581 million) in Rs 2,000 denomination the actual maths would work somewhat differently as not all transactions could be fulfilled using Rs 2000 currency note exclusively but would ,require a sufficient combination of Rs 2,000 and the new Rs 500 notes to keep the wheels of commerce flowing smoothly. So one Rs 2000 note cannot be an effective replacement for two Rs 1000 notes. Similarly two Rs 2000 notes cannot be an effective replacement for four Rs 1000 notes because of fractional values having to be accommodated. But six Rs 1000 notes can be replaced with a combination of two Rs 2000 notes and four Rs 500 notes (same number of currency notes 2+4). But eight Rs 1000 notes can be replaced with a combination of three Rs 2000 notes and four Rs 500 notes (seven notes 3+4). From the point of view of the printing load the last option seems slightly more burdensome more but more preferable from the point of view of better balance although there is no scientific rigour to this ratio in the absence of information on the actual commerce that is being transacted in cash.
So essentially we are looking at replacing 1,581 million pieces of with 1845 million pieces of Rs 2000 and Rs 500 denomination currency notes. We are looking at injection of 5,772 million pieces between now and December 31st, which is the time limit that the PM had sought.
If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter
. This is of course made up of all denominations from Rs 10 to Rs 1000. Even if the Government suspends printing of every other denomination and print only the new notes in denominations Rs 500 and Rs 2000 we are looking at a window of anything between three and a half to four months. Mind you, this also means that there wouldn't even be printing currency notes in other denominations as replacement for old and soiled notes.
The notes in circulation under Rs 1000 and Rs 500 as of March 2016 was 6,326 and 15,707 million pieces respectively. The figure might have since gone up before the demonetisation. But for the sake of argument let us assume that no new notes were added in the period between April and October or at least what was added was restricted to replacing soiled notes. So we are stuck with March 2016 numbers as the starting point.
If we assume the most optimistic scenario of 75% of it is black money and is unlikely to be tendered that still leaves the Government with the challenge of replacing the balance with new currency notes. This works out to 5,507 million pieces of currency notes. The Rs 500 currency notes need to replaced on a like to like basis. So we are looking at replacing 3,927 million pieces on a like to like basis. The Government has done away with Rs 1000 currency notes and replaced it with Rs 2,000 notes. While you could print half the number of existing Rs 1,000 notes post adjustment for frozen black money notes (1,581 million) in Rs 2,000 denomination the actual maths would work somewhat differently as not all transactions could be fulfilled using Rs 2000 currency note exclusively but would ,require a sufficient combination of Rs 2,000 and the new Rs 500 notes to keep the wheels of commerce flowing smoothly. So one Rs 2000 note cannot be an effective replacement for two Rs 1000 notes. Similarly two Rs 2000 notes cannot be an effective replacement for four Rs 1000 notes because of fractional values having to be accommodated. But six Rs 1000 notes can be replaced with a combination of two Rs 2000 notes and four Rs 500 notes (same number of currency notes 2+4). But eight Rs 1000 notes can be replaced with a combination of three Rs 2000 notes and four Rs 500 notes (seven notes 3+4). From the point of view of the printing load the last option seems slightly more burdensome more but more preferable from the point of view of better balance although there is no scientific rigour to this ratio in the absence of information on the actual commerce that is being transacted in cash.
So essentially we are looking at replacing 1,581 million pieces of with 1845 million pieces of Rs 2000 and Rs 500 denomination currency notes. We are looking at injection of 5,772 million pieces between now and December 31st, which is the time limit that the PM had sought.
If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter
