Opinion / Opinion
How much black money will get back into the system?
James Wilson| Monday, December 26, 2016 - 16:03

This was first published here on December 20. This is a shorter, edited version. 

As of November 8, high-denomination notes of ₹500 and ₹1000 were 86.4% of the total currency in circulation, and ceased to be legal tender due to the demonetisation. RBI denotes these demonetised notes as “Specified Bank Notes” (SBN). As per RBI Annual Report 2015-2016, as of March 31, 2016, the value of the total SBN is ₹14.18 lakh crores. Volume-wise, it consists of 15,707 million ₹500 notes and 6,326 million ₹1000 notes, that’s a total of 22,033 million notes. Meanwhile, the total currency in circulation value-wise increased to ₹17.975 Lakh crores (4/11/2016) from ₹16.415 lakh crores (31/03/2016). 

Exact information of the amount of SBN as on 8/11/16 is now in public domain, thanks to an answer submitted in the Rajya Sabha, which shows that 17,165 million pieces of ₹500 (₹8.582 lakh crores) and 6,858 million pieces of ₹1000 (₹6.858 lakh crores) are in circulation (Total Value: ₹15.44 lakh crores; Total Volume: 24023 million pieces).

To print and replace 24,023 million notes is an enormous challenge, considering this sheer volume of notes to be printed and capacity of our printing presses.

Capacity of Printing Presses

How can RBI achieve this target with the resources at their disposal? 

How much time will RBI take to print and replace all SBN with new notes? 

To understand this, from the perspective of resources management alone, we have to examine the output capacity of our currency note printing presses.

We have two currency printing presses under Security Printing and Minting Corporation of India Limited (SPMCIL), one at Nashik in Maharashtra and the other one in Dewas in Madhya Pradesh. The Nashik Press was established in 1928 and Dewas in 1974. Also, two more modern currency printing presses were added later to augment the printing capacity, one in Mysore in Karnataka and the other at Salboni in West Bengal, under the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), which was established by Reserve Bank of India (RBI) in 1996.

First, look at the capacities of Nashik & Dewas presses under SPMCIL. I have read the Annual Report of the SPMCIL as well as a presentation available on the internet by the Currency Management Wing of the RBI. From the above records, it is inferred that Nashik's capacity is 5800 million notes per year and Dewas's capacity is 2620 million notes per year.

Meanwhile, BRBNMPL's Mysore and Salboni presses together can print 16000 million notes in 2 shifts in a year. See the screenshot of BRBNMPL website. So, all these four presses can together print 24,420 million currency notes in a year, and this is closer to the supply RBI has been getting for the last 3 years too. 

So, all four presses together having a printing capacity of 66.90 million/day. If we take Mysuru and Salboni alone, this will be 43.84 million/day.

The RBI and government have made it clear earlier that outsourcing of printing notes is out of the question due to security reasons.

₹2000 note - a short shrift solution

Now look at the ₹1000 notes, volume-wise its quantity is 6,858 million notes. If we convert the entire ₹1000 notes to ₹2000 notes, keeping the same value, then the volume will be halved to 3,429 million notes to facilitate quick printing and disposal.

But there is a catch. RBI has to tweak the ratio between ₹500 and ₹2000 to provide easy change and mobility between these two notes. So obviously, there should be less volume of ₹2000 notes and more volume of ₹500 notes to keep the equilibrium of the system. For the time being, let us assume that RBI has gone with a complete swap of ₹1000 with ₹2000 notes, totally discarding the mobility in the system. Definitely this is a short shrift exercise without considering the much-needed mobility and velocity of the demand of these various denominations of the currency notes in circulation. In that scenario, too, RBI has to print at least 20,594 million notes (17615 million ₹500 &+ 3429 million ₹2000) in a short span of time. 

Higher denominations will aid hoarding - RBI Study

The elimination of ₹1000 note and introduction of ₹2000 note is really perplexing and the RBI's explanation seems like a joke. In this context, I invite your attention to RBI Study No. 39 “Modelling Currency Demand in India: An Empirical Study” to see how RBI and Government of India all along resisted issuing high denomination notes even when inflation was to be controlled, considering there are chances of this high denomination currency being used to hoard black money.

The irony is that now a high value currency note of ₹2000 has been introduced in the very guise of controlling hoarding of black money, and at the end of the day it will help the hoarders in transporting and hoarding. This hasty and irrational decision was taken without considering the statistical principles of distribution of various denominations of the currency in circulation and also fully sidelining the prudent decision to eliminate the chances of hoarding. This short shrift route of going for ₹2000 by RBI without considering any of the above consequences into account and only taking the ease of printing, is a telling reflection of how an Institution like RBI let its independent stature be eroded to please the political masters.

Printing target - An estimation

I discarded here the essential tweak required for maintaining the equilibrium between ₹500 and ₹2000 notes and also the increase of currency required to meet the demand of cash in the economy in the coming months till this disaster is mitigated. Many Government sympathisers may definitely point out that the entire ₹15.44 lakh crores of SBN will not return into the system and there is no need to replace the entire currency. My opinion is that these two factors balance and neutralise each other. Hence for the time being, I decide to go ahead with the figure of 20,594 million new notes as our target for printing.

In the initial days, the WhatsApp army was busy in forwarding daring claims that only 50% of the SBN will return into the system. Even our Attorney General told the Supreme Court that the RBI and the Government expects a maximum of ₹12 lakh crores of SBN to return to the system. Recently we heard from the media, quoting Ministry of Finance sources, that around ₹14 lakh crores worth SBN has already returned to the system. Remember, that we are still a few days away from the date set by Government to deposit the SBN at banks. So, it’s time for the RBI and the Government to eat humble pie. It is important to understand that the above cut-off date will not set free RBI’s responsibility to exchange the rest of the currency in circulation at their counters, it only limits the option of depositing/exchanging at banks. That is a detailed matter as it is entangled in legal provisions and other issues and hence will be discussed in a future post.

Demonetisation Planning - Rajan or Patel?

To understand the currency printing schedule, first see the letter of transmittal dated August 29, 2016 of the RBI Annual Report 2015-16 signed by Former Governor Raghuram G Rajan. Kindly note the above date, it is very important. We know that the present Governor Urjit R Patel assumed office on September 4, 2016.

Now look at the same Annual Report again. Look at Table VIII.4, "Indent and Supply of Bank Notes by BRBNMPL & SPMCIL". Look at the indent for the year 2016-17, RBI has given an indent for 5,725 million ₹500 notes and 2,200 million ₹1000 notes along with other lower denomination currency notes. If there was a plan in advance to demonetise these denominations, then why did RBI print and disburse such large quantities of SBN into circulation? This is nothing but sheer wastage of exchequer’s money.

Moreover, if RBI had such an advance plan to replace the above SBN, they should have devoted their time and energy to print lower denominations notes instead of SBN. Hence it is beyond doubt that the entire demonetisation plan was put into play after Urjit Patel took charge. The new denomination notes of ₹2000 bear the signature of the new Governor Patel, not of Governor Rajan, which is also another explicit piece of evidence to prove that these notes were introduced after Governor Rajan left RBI. 

The RBI disclosed that it has 2,473.2 million ₹2000 in stock for disposal as of 8/11/2016 in response to an RTI query. With the printing capacity of 43.84 million/month of Mysore and Salboni together in 2 shifts, it will take 57 days to print the 2473.2 million notes, which means it started on September 12, 2016. Take another possibility, that RBI took an effort to enhance printing to 3 shifts from 2 shifts, then they can print 65.76 million/month, ie, means it will take 38 days, that means printing started on October 1, 2016 only.

I was really shocked to find that there was not a single ₹500 note with the RBI when they unleashed this demon over the nation! That means RBI unleashed demonetisation with just 32% of the total SBN in circulation, that too a less mobile ₹2000 note stock! They themselves will be aware that within the 50-day window period, they can't print the rest of the SBN.

Disbursal of Currency

Then, I looked for patterns of disbursal of currency at various dates, which was inferred from the data provided through the press releases by RBI. Look at the table below:

We can see that there was a substantial increase of disbursal of currency between November 27 and December 5, from ₹12589 crores/day to ₹20548 crores/day, this is definitely due to the disbursement of salaries on the first of December. Thereafter, the disbursal drying up substantially in the succeeding period to ₹16000 crores/day. If we take the entire 31 days of demonetisation, the average daily release from November 10 to December 10 is ₹14871 crores/day. If the money is disbursed in the above daily average rate, between the next 20 days a further ₹2,97,420 crores can be disbursed. Hence, Government may be able to disburse a total of ₹7,58,420 crores or a maximum of ₹8,00,000 crores by December 30. That means just 52% of the total SBN is going to be disbursed to us. But even this quantity is doubtful with the present printing woes, which is going to be examined in the subsequent paragraphs.

There is some serious cash delivery issue in the system due to inferior planning and poor judgement on the part of RBI as well as the Finance Ministry. Otherwise what is the justification for various new restrictions unleashed every day by RBI without respecting the notification dated November 8? It is quite depressing to see that even the address to the nation by the Prime Minister is not honoured.

RBI deleting information - why?

While looking for these data, I found something really shocking finding. RBI published a transcript of the statement given by R Gandhi, Deputy Governor on December 7, on its website under the title "press releases". But it seems to have been removed later.

However, the video of the press conference is still available on the internet (https://www.youtube.com/watch?v=IuSzeRX31ms).

What information was there in the above transcript, which forced RBI to delete it from the website, sacrificing its institutional credibility? What is there to hide from the public which was not there in the full video coverage of the 5th bi-monthly monetary policy press conference 2016-17?

A friend grabbed the release from the cache, and here it is.

What is the relevance of this information? It can lead you to the printing volume of new notes disbursed by RBI as of 10/12/2016, which they have refused to divulge so far.

Disbursal of currency denomination wise

Look at the total value of the lower denomination notes of 19.1 million disbursed by RBI from the above. It comes only to ₹1.059 lakh crores! That means the higher denominations notes are ₹3.81 lakh crores minus ₹1.059 lakh crores = ₹2.75 lakh crores. As RBI has not given the volume of high denomination notes, I was not able to decipher the possible numbers of them.

But in the next press conference on December 13, RBI provided the numbers to decipher the new currency notes in the system. Look at the statement of R Gandhi, Dy Governor.

When we will get back our currency?

Data shows that 0.444 billion ₹500 notes would have been printed up to 10/12/16, then how much time will the RBI take to print the remaining 16.721 billion pieces (17.165-0.444=16.721)?

In this context, I am giving you three possible scenarios considering the printing capacity of our four currency printing presses. I have not considered certain constraints here, like additional skilled manpower needed to introduce a 3rd shift for a prolonged period, raw material supply constraints, machinery maintenance, forced plus routine shutdowns and other surprises which can crop up anytime.

Then I have not considered additional output (?) possible with the reduced size of new notes too as some argue. So, take this estimation and earliest possible dates.

First Scenario

Mysuru & Salboni (3 shifts/day) AND Nashik & Dewas

@88.82 million/day needs 188 days: 16th June 2017


Second Scenario

Mysuru & Salboni (3 shifts/day) AND Nashik

@ 81.64 million/day needs 204 days: 2nd July 2017


Third Scenario

Mysuru, Salboni (2 shifts/day) & Nashik

@ 59.73 million/day needs 280 days – 16th September 2017


These are the earliest possible dates to replace SBN with new currency from a purely resources management angle.

Estimation of possible return of SBN

Now look at the way SBN is coming back to the banks. This table extracts information from various press conferences.

This table explains why the government and RBI are panicking and imposing new restrictions every other day.

Look at various possibilities on 30/12/2016 (20 days from 10/12/2016)

With an average daily inflow of ₹15000 crores, entire SBN valued ₹15.44 lakh crores will return to banks

With an average daily inflow of ₹12800 crores, total SBN valued ₹15 lakh crores will return to banks

With an average daily inflow of ₹10300 crores, total SBN valued ₹14.5 lakh crores will return to banks

My strong belief is that SBN valued around ₹15 lakh crores will most probably return to the system, the rest of the SBN will be trapped in Nepal and Bhutan and other countries for the time being. If ₹15 lakh crores of SBN return, then it will totally shatter and tear away all mighty claims by the Government and the RBI that a maximum of ₹11 lakh crores to ₹12 lakh crores of SBN only will return to banks.

Then the entire demonetisation hungama will fall apart as a monumental disaster. It is now only a matter of time.