India Grapples with Small Change Dilemma

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by Richard Giedroyc

Projecting future demand for coins and bank notes should be part of the logistical economic considerations planned by any government. Unfortunately for India the demand for “small change” in both mediums continues to outstrip the supply.

There are multiple reasons that are likely to blame for why these shortages are becoming a long-term problem. Regardless of who may be to blame the problem has to be solved. Some of the short term solutions are innovative and typically non-mainstream.
According to the February 12 The Times of India newspaper, “In the absence of small denomination currencies, the grocery shops and tea vendors have evolved a unique way to address the issue. They are offering chocolates against balance, in place of the small denomination currencies or coins.”
Rajwada Cloth Market Merchant Association President Dhanraj Wadhwani told the same newspaper, “In the absence of small denomination currencies, we issue coupons to customers against balance amount.”
There are some inconsistencies regarding availability that haven’t been explained. Florists often prepare garlands for marriage ceremonies that are comprised of crisp new bank notes rather than flowers. Sources indicated the florists are still able to get the needed low denomination bank notes they need despite the currency shortage crisis.

Bankers are not waiting to be rescued by the Reserve Bank of India either. Special exchange counters at which low denomination coins and bank notes are offered are opening at local banks across India. Bankers have indicated they understand many people are simply leaving their small change at home rather than carry it on them, which of course does not help alleviate the shortage, but the bankers have not yet found a way to encourage people to redeem such hoards.

Perhaps India could learn from what the Philippines has been doing about a similar coinage shortage. The Philippines central bank has launched what it calls the “Tulong Barya Para sa Eskwela” program through which people are encouraged to use rather than store coins. The Philippines central bank reported that the program has resulted in an estimated 6 million coins re-entering circulation in the past two years. The Philippine program includes advertised coin redemption programs, an organized school campaign to encourage coin redemption, and a contribution from redeemed coins to the Department of Education and Culture.

The RBI determines how much coinage should be supplied to each of its many regional offices throughout India. Any form of a ration system has been denied by banking officials. Local banks receive the coins from these offices, however due to a lack of interest in issuing coins by these banks coinage distribution has evolved into a private enterprise in which coin traders rather than banks typically supply businesses and private individuals with needed coins for a price. These traders get their coins from these distribution points.
Typically it costs 125 rupees to receive 100 rupees in coins. A 1,000 rupee face value bundle of 10-rupee bank notes will sell for 1,050 rupees, while a 2,000 rupees value bundle of 20-rupee bank notes will sell for 2,050 rupees.

While some of these street merchants supply coins to retailers and to the public, others have chosen to illegally melt the coins to produce products of greater value than was the face value of what was scrapped.
Hoarding by the general public may be part of the problem, but jewelers have been blamed by the government and by the press as being yet another culprit, scrapping coins for their metallic rather than for their face value. Police in Ahmedabad recently arrested several people for illegally holding what was described as being 72 gunny bags full of 1-, 2-, and 5-rupee coins the individuals planned to scrap. Newspaper accounts of the seizure indicate the stash may have weighed four tons.

Regardless of what the public may be doing with the coins already issued to them, the RBI is responsible for ensuring there are sufficient coins and bank notes in circulation to keep the economy going. This hasn’t happened. An unnamed Office of the Director of Coins and Currencies senior official was recently quoted by The Times of India as saying, “We are receiving complaints, including from members of Parliament, related to shortage of such currencies. We had minted 6,900 million pieces of total currencies during 2011-12, as compared to 6,000 million during the previous fiscal [year].”
India has taken steps that should help allow its mints to have the necessary production capacity they so sorely need. During 2010 the 25-, 10-, 5-, 3-, 2-, and 1-paise coin denominations were demonetized due to their lack of purchasing power. None of these denominations were being used much in circulation, while their continued manufacture would have consumed valuable production time need to strike 50-paise, and 1-, 2-, 5-, and 10-rupees coins that do circulate.
Part of the logistical problem may be that the RBI has stopped printing bank notes in denominations of 1 rupee to 5 rupees. The number of coins of the same denominations needed for circulation has increased for this reason, but appears to remain unsatisfied.

India has minting facilities in Hyderabad, Kokkata (Calcutta), Mumbai (Bombay), Nashik, and New Delhi. In recent years the RBI has contracted with the British Royal Mint, Tower Mint in Great Britain, Daegu Korea in South Korea, Royal Canadian Mint, Pretoria Mint in South Africa, Mexico City Mint, Kremnica Mint in Slovakia, and the Moscow Mint in Russia for additional coins needed for circulation.
The official RBI web site includes the statement, “The various mints in the country have been modernized and upgraded to enhance their production capacities. The government has in the recent past, imported coins to augment the indigenous production. Notes in denomination of 5 rupees have been reintroduced to supplement the supply of coins.” [The web site appears to need clarification regarding the status of 5-rupee bank notes.]

Help may be on the way regarding bank note production. An official at the new Bank Note Printing Line of the Security Printing and Minting Corporation of India Limited (SPMCIL) in Dewas recently said larger orders are being anticipated for bank notes since an automated machine has been imported from Germany. Any additional machinery is welcome, but it is doubtful a single additional press will solve all the bank note shortage problems.