Saturday, 24 December 2016

[ ::: ♥Keep_Mailing♥ ::: ]™ DEMONETISATION DEVILS

We are 15 days away from the 50-day deadline,

set by the PM, to end the worst effects of the scrapping of

86 percent –by value–of India's currency.

In the chest-thumping, hand-wringing and 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 Indian printing presses and currency distribution

indicates that, at current rates, the Prime Minister'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 percent 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 India's presses cannot, currently, print in adequate number.

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


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

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 percent 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.

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