Why isn’t India using polymer banknotes?

Ganga Narayan Rath | Updated on February 14, 2020

The switch from paper to polymer currency may be expensive, but the benefits gained will be worth the investment

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 this material is still 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, and 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 2.5-4 times longer than notes printed on cotton-based substrate. Polymer notes are also difficult to counterfeit.

Australia was the first country to introduce polymer banknotes in 1988. By 1996, Australia had completely switched to these banknotes. Other countries that have completely polymerised their currency notes include Canada, the Maldives, Brunei, Mauritania, Nicaragua, New Zealand, Papua New Guinea, Romania and Vietnam. By 2019, more than 20 countries had partially switched over to polymer notes.

Our tryst with polymer

The saga of a failed attempt by the government 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 volte-face on polymer notes by calling for an expression of interest (EoI) from global manufacturers for one billion pieces of polymer banknotes in the denomination of ₹10.

The annual reports of the RBI for FY 2009-10 and FY 2010-11 clearly talked about introducing polymer notes on a “field trial” basis, in select locations. So much so that, under the then RBI Governor, Duvvuri Subbarao, the central bank even commissioned a study by engaging The Energy and Resources Institute on the “environmental impact” of cotton-based bank notes vis-à-vis the polymer-based alternative.

While inaugurating the Bank Note Paper Mill at Mysuru in March 2010, 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 ban 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 (using) 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, Namo Narain Meena, had disclosed that the “field trial” of polymer notes would be conducted in five cities — Kochi, Mysuru, Jaipur, Bhubaneswar and Shimla — identified on the basis of their geographic location and climatic diversity.

The RBI’s annual report for FY 2012-13 highlighted the relative advantages of polymer notes as cost effective, more secured and difficult to counterfeit. Then, the 2014-15 annual report mentioned that the request for proposal (RFP) for banknotes in the ₹10-denomination had been issued and its technical evaluation undertaken.

However, startlingly, owing to certain ‘technical infirmities’, the process of acquiring one billion pieces of banknotes 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 ₹10 had been assigned to the Bharatiya Reserve Bank Note Mudran Private Ltd (BRBNMPL) and the government-owned Security Printing and Minting Corporation of India Ltd (SPMCIL).

While the fate of that 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 banknotes in the denomination of ₹100, in order to increase the life of Indian banknotes, as an agenda for the year 2019-20.

What technical infirmities?

This begs the question, what were the technical infirmities that forced the RBI and the government to abandon a project which could have brought to India latest technology in currency printing?

As seen in Chart 1, the requirement for currency notes has been on the rise over the years, despite coordinated moves — including demonetisation — to encourage a ‘less cash’ society. Demand for fresh currency in India 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, state-of-the-art polymer notes?

In keeping with the pressure to print and supply more currency notes, the expenditure incurred on printing currency is also ballooning over the years (Chart 2). Added to this is the cost of storing and distribution, the cost of disposal — which could be significant, as the data is not published by the RBI — and the environmental impact and loss to the general public, whose notes are rejected at bank counters on account of tearing and smudges.


Is investment a constraint?

Paper currency was issued in India around the 18th Century by European trading companies, through banks that they had set up. The Paper Currency Act of 1861 empowered the British colonial government to issue currency and the private banks lost their right to do so. The first official paper notes came in the denominations of ₹10, ₹20, ₹50, ₹100, and ₹1,000, and were printed by the Bank of England (or by Thomas De La Rue Giori of the UK, as per the 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 ecosystem built around paper currency is more than a century old.

Considerable investment has gone into setting up two printing presses by the government and two presses — at Mysuru and Salboni — by the RBI in 1995. Further, SPMCIL and BRBNMPL, in a joint venture, have set up a 12,000-MT per year bank-note paper mill at Mysuru 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 Mysuru.

Added to these massive production-related investments, commercial banks have also sunk a good amount of money in setting up the 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. What does this information tell us?

The country stands to write off a substantial portion of these investments if it decides to switch to polymer notes. Indeed, 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 give polymer notes a miss.

Through The Billion Press. The writer is former Chief General Manager of the Reserve Bank of India. Views are personal

Published on February 14, 2020

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