New notes: RBI mystifies with its mixed-up math

Deputy Guv says that total quantum of new notes disbursed to public till Dec 10 had gone up from Rs 4 trillion to Rs 4.61 trillion

Either the Reserve Bank of India (RBI) is uncharacteristically cavalier with the demonetisation-related figures it has given out periodically since November 8 or, more worryingly, its number crunchers are getting their math mixed up.

For, the numbers that the apex bank has put out so far do not add up and, indeed, lead to two inevitable conclusions.

One: There is an apparent shortfall of anywhere between Rs 5,000 crore and Rs 56,000 crore in terms of the new currency notes it says it has pumped back into the system.

Two: Even by the most optimistic of calculations, it appears that less than 2% of the crucial Rs 500 demonetised notes have been returned to the banking system, lending credence to stories of problems at printing presses.

 

To tackle Issue No. 1 first: On December 7, during the monetary policy press conference, the Deputy Governor of RBI, R Gandhi, informed the media that a total of Rs 4 trillion (one trillion one lakh crore) had been disbursed to the public in new currency notes so far.

Of this amount, Rs 1.06 trillion was in smaller denomination currency notes while the rest — Rs 2.94 trillion — was by way of high-denomination notes of Rs 2,000 and Rs 500.

The break-up of the lower currency notes — 19.1 billion in number — was as follows: 8.5 billion pieces of Rs 100 (amounting to Rs 85,000 crore), 1.8 billion pieces of Rs 50 (Rs 9,000 crore), 3.1 billion pieces of Rs 20 (Rs 6,200 crore) and 5.7 billion pieces of Rs 10 (Rs 5,700). The total value of small notes issued till December 6 was thus Rs 1.06 trillion (Rs 1.06 lakh crore).

In its most recent public utterances, on December 12, Gandhi told reporters that the total quantum of new notes disbursed to the public till December 10 had gone up from Rs 4 trillion, or Rs 4 lakh crore, to Rs 4.61 trillion.

Gandhi also revealed that a total of 21.8 billion, or 2,189 crore, pieces of currency of various denominations had been issued to the public by December 10.

The press release issued by the RBI next day, December 13, said that of this amount, 20.1 billion or 2,010 crore pieces belonged to small denominations of Rs 10, Rs 20, Rs 50 and Rs 100. The number of pieces of Rs 2,000 and Rs 500 notes issued were 1.7 billion or 170 crore.

Note that the increase in the number of small notes between December 6 and December 10 is just one billion or 100 crore. Assuming that all of these small notes were of Rs 100 denomination, the amount added to the December 6 figure would be Rs 10,000 crore, taking the total to Rs 1.16 lakh crore.

That leaves Rs 3.45 lakh crore to be accounted for by way of high denomination notes.

It is here that the math behind the RBI numbers begins to unravel. Here is how.

Let us assume, for argument's sake, that all the notes circulated to the public in the high-denomination set were of Rs 2,000 value. Even in this highly unlikely scenario, the total value of high-denomination currency would only come to Rs 3.4 lakh crore (Rs 2,000 x 170 crore), a shortfall of Rs 5,000 crore from the RBI's own implied figure of Rs 3.45 lakh crore.

But we know that not all of the high-denomination notes were of Rs 2,000 value. Indeed, over the past few weeks, the apex bank has consistently maintained — a claim also repeatedly echoed by the government — that its focus has shifted to printing more and more Rs 500 notes, so as to address the issue of liquidity in the economy.

If we assume that a very modest 10% of the 1.7 billion (170 crore) high-denomination notes circulated were of Rs 500 value (17 crore) and the rest were of Rs 2,000 (153 crore notes), the total amount of new currency in circulation would be Rs 3.14 lakh crore —a shortfall of Rs 31,000 crore from the required Rs 3.45 lakh crore.

And if we assume Rs 500 notes issued to be a little higher in the mix of high denomination notes, say, 20%, (34 crore notes) the total would be Rs 2.89 lakh crore and the shortfall would be even more — Rs 56,000 crore.

Now let's take a look at Issue No. 2. Since Rs 500 notes are needed desperately to act as a usable breakup of Rs 2,000 notes, how adequate is their circulation?

On November 29, the Minister of State for Finance, Arjun Ram Meghwal, told Rajya Sabha in reply to a question that as on November 8, there were 1,716.5 crore pieces of Rs 500 and 685.8 crore pieces of Rs 1,000 notes in circulation. The total amounts to Rs 15.44 lakh crore (Rs 8.58 lakh crore in Rs 500 and Rs 6.86 lakh crore in Rs 1,000 denominations).

If we go back to our earlier assumption of about 20% of the new high-denomination notes being of the Rs 500 variety, what percentage of these demonetised notes has the RBI managed to replace in one month?

That would amount to 34 crore notes or Rs 17,000 crore in value. This is just a miniscule 1.98% of the old Rs 500 notes (1,716.5 crore pieces and Rs 8.58 lakh crore in value) removed from circulation.

The RBI officials have a favourite line: There are enough new notes available in the banking system.

The math shows the reality may be substantially different.