Why isn't India using polymer banknotes?
Banknotes or currency notes have been traditionally printed on paper made from cotton rags. The cotton-based paper is coated with special lacquer, applied in a microscopically thin layer to repel dirt and moisture. Although it is still being used all over the world, it is gradually being replaced by notes of polymer or plastic. Plastic banknotes are more durable since they are more difficult to tear, more resistant to folding and micro-organisms. They also work better in ATMs and automated sorting operations. Although they are twice as expensive to produce, they last two-and-a-half to four times longer than notes printed on cotton-based substrate. Polymer notes are also difficult to counterfeit.
Australia was the first country to introduce polymer bank notes in 1988. By 1996 Australia had completely switched to polymer banknotes. Other countries that have completely polymerised their currency notes include: Canada, Maldives, Brunei, Mauritania, Nicaragua, New Zealand, Papua New Guinea, Romania and Vietnam. By 2019, more than 20 geographies across the world had partially switched over to polymer notes.
Our Tryst with Polymer
The saga of a failed attempt by GoI and the RBI to introduce polymer notes in India started with a rather innocuous press release by the central bank on October 8, 2002 stating that it had no proposal to introduce polymer notes in place of paper notes. The clarification by the currency issuer, it is assumed, was in response to queries and market rumours that such a proposal was under consideration. After a gap of seven years, in October 2009, the central bank did a somersault and signified its interest in polymer notes by calling for an expression of interest (EoI) from global manufacturers for one billion pieces of polymer bank notes in the denomination of Rs.10. The annual reports of the central bank for FY 2009-10 and 2010-11 clearly talked about introducing polymer notes on a “field trial” basis, in select locations. So much so that, under the then Governor Dr. Duvvuri Subbarao, the central bank even commissioned a study by engaging The Energy Research Institute (TERI) on the “environmental impact” of cotton-based bank notes vis-à-vis the polymer based alternative. While inaugurating the Bank Note Paper Mill at Mysore in March 2010, Dr. Subbarao had said, “considering the relatively long life of polymer notes and their amenability to recycling, the ‘carbon footprint’ of polymer notes vis-à-vis paper bank notes is likely to be on the plus side. Regardless, this is one of the issues that we will study during the pilot phase, and will embark on polymer notes on a long-term basis only if the cost-benefit calculus is decidedly positive in all dimensions”.
In a written reply to the Rajya Sabha in March 2013, the then Minister of State for Finance Mr. Namo Narain Meena had disclosed that the “field trial” of polymer notes would be conducted in five cities – Kochi, Mysore, Jaipur, Bhubaneswar and Shimla – identified on the basis of their geographic and climatic diversity. The annual report of the central bank for FY 2012-13 highlighted the relative advantages of polymer notes as cost effective, more secured and difficult to counterfeit. The 2014-15 annual report of the central bank mentioned that the request for proposal (RFP) for banknotes in the Rs10 denomination had been issued and its technical evaluation undertaken; however, startlingly, owing to certain technical infirmities, the process of acquiring one billion pieces of bank notes could not be taken further. The central bank further stated that a committee was being constituted to evaluate means to elongate the life of bank notes.
The central bank, in its annual report for FY 2015-16, said that the project “field trial” of plastic notes in the denomination of Rs.10 had been assigned to the Bharatiya Reserve Bank Note Mudran Private Ltd (BRBNMPL) and the govt. owned Security Printing and Minting Corporation of India Ltd. (SPMCIL). While the fate of the project is unknown owing to the RBI’s conspicuous silence over the issue in the annual reports for FY 2016-17 and 2017-18, the latest annual report (2018-19) lists the field trial of varnished bank notes in the denomination of Rs.100, in order to increase the life of Indian banknotes, as an agenda for the year 2019-20.
What Technical Infirmities?
Thus, it begs a question, what were the technical infirmities that forced the central bank and the GoI to abandon a project which could have brought to India the latest technology in currency printing?
(Source: Annual Reports of RBI)
As can be seen from the chart above, the requirement of currency notes is on the rise over the years, despite co-ordinated moves, including demonetisation, to encourage a “less cash” society. Demand for fresh currency can be brought down only if the longevity of notes is increased by resorting to polymerisation, like the rest of the world. If we can bring the Japanese bullet train to India, why can’t we bring in the transparent, crisp, waterproof, crumple-free, difficult-to-tear, hard-to-counterfeit, fully recyclable, technologically state-of-the-art polymer notes?
(Source : Annual Reports of RBI)
In keeping with the pressure to print and supply more currency notes, the expenditure incurred on printing currency is also ballooning over the years. Added to this is the cost of storing and distribution, cost of disposal – which could be significant as the data is not published by RBI – and the environmental impact and loss to the general public on account of tearing and smudges resulting in the rejection of claims at the public counters of the central bank.
Is investment a constraint ?
The first paper currency to be issued in India was around the 18th century by European trading companies through banks set up by these private companies. The Paper Currency Act of 1861 empowered the British colonial government to issue currency and the private banks lost their right to issue currency. The first official paper notes came in the denominations of Rs. 10, Rs. 20, Rs. 50, Rs. 100, and Rs. 1,000 and was printed by the Bank of England (or by Thomas De La Rue Giori of UK as mentioned in BRBNMPL website). In 1928, India got its first currency printing press in Nashik and in 1935, the RBI came into existence. In 1938, the central bank issued its first note. Thus, the eco-system built around paper currency is more than a century old.
Considerable investment has gone into setting up two printing presses by GoI and two presses – at Mysore and Salboni – by the RBI in 1995. Further, the SPMCIL and BRBNMPL, in a joint venture, have set up a 12000 MT per year bank note paper mill at Mysore in 2010. Commercial production started in 2015, making India partially self-reliant in this area. SPMCIL also runs another mill for printing security and currency note paper at Hoshangabad in Madhya Pradesh. As part of the ‘Make in India’ campaign, BRBNMPL has also diversified into setting up a back-end project to manufacture note printing ink in Mysore. Added to this mass of production related investments, commercial banks have also sunk a good amount of money in setting up many ATMs which will require replacement of cassettes and recalibration, in case of a shift to polymer notes. The machinery used to verify and dispose paper currency also requires periodical replacement due to a high degree of wear and tear. Where does all this information lead us? The country stands to write off a substantial portion of these investments if it decides to switch to polymer notes. But then, all new technologies come with a price tag and the technology to manufacture polymer notes is no exception. However, the argument in its favour is too overwhelming to really give polymer notes the go by.
(The writer is a former Chief General Manager of the Reserve Bank of India. Views are personal)