Demonetisation: Shortage in paper imports key reason for cash crunch

 Moneycontrol Bureau

The Reserve Bank of India's failure to promptly infuse cash in the aftermath of the demonetisation decision may boil down to one key issue.

The government failed to import significant amounts of paper before banning Rs 500 and Rs 1000 notes on November 8, 2016 -- a move in which it scrapped 86 percent of the economy's high-value currency in circulation -- a report in Mint says.

According to the Finance Ministry’s 2015-16 annual report, the annual requirement of Cylinder Watermarked Bank Note, another name for currency notes, in India is approximately 25,000 tonnes.

Commerce Ministry data shows that the government imported 15.2 percent more currency paper during the April-October period compared to the seven-month period in the earlier year, but it was only 61.5 percent of what it imported in the previous full fiscal year. For the seven-month period April-October 2016, the government imported only 15000 tonnes.

Former Chief Statistician Pronab Sen told the Mint newspaper that the import data shows the government was not fully prepared to carry out demonetisation programme.

"The import volume was at best meant to prepare for a normal planned monetary expansion after four years of marginal increase in money supply under governor Raghuram Rajan,” Sen said, adding that, "importing currency papers for demonetisation would have taken the volume altogether to a different level.”The Mint report says a major chunk of the currency note paper worth Rs 930.6 crore was imported from eight countries, mostly through the Chennai and Kolkata ports. Italy and Switzerland were the two top suppliers of the currency paper for Indian banknotes in the current fiscal.

However, India too has started the process of producing currency note papers indigenously with the establishment of Bank Note Paper Mill India Pvt. Ltd in Mysuru, Karnataka and Security Paper Mill at Hoshangabad, Madhya Pradesh.According to the latest RBI data, the currency in circulation as on 20 January stood at Rs 9.9 trillion, against Rs 18 trillion on November 4.

The government and the Reserve Bank of India have not recently disclosed how much of the Rs 15.4 trillion worth of old high-value notes has returned to the central bank.

The RBI last month said that Rs 12.44 trillion of old currency were deposited in banks by 10 December. However, the finance ministry disputed the figure, citing possible double-counting and calling for the data to be sanitized. Not data has been released after the finance ministry’s objection.