Here's how much the currency shift is costing India

The mints of the Reserve Bank of India (RBI) have been busy printing new Rs 2,000 currency notes for a month and distributing them to various currency chests across the country. The cost of printing the new notes is expected to be around Rs 15,000 crore. The central bank called a meeting of bankers and ATM vendors asking them to expedite the process of replacing old notes in a non-disruptive manner.

The Rs 2,000 denomination notes will first put in circulation followed by the new Rs 500 notes.

According to the RBI data, as on March 31, Rs 500 and Rs 1,000 rupee notes constituted around 86% (Rs 14.8 trillion) of the total currencies in circulation. Rating agency Crisil said in a note, “Short-term reduction in usage of these notes, along with imposition of withdrawal limits, will lead to decrease in currency in circulation in the next few months.”

In 1978, the Morarji Desai government had also demonetised the Rs 500, Rs 1,000 and the Rs 10,000 notes in circulation, these notes just formed about 10% of the total currency in circulation.

India’s currency notes are printed at the Currency Note Press in Nashik, the Bank Note Press in Dewas, the Bharatiya Reserve Bank Note Mudran at Salboni in Mysore and at the Watermark Paper Manufacturing Mill in Hoshangabadh. The high-quality paper and ink for the printing is all imported which increases the costs. The government is setting up an indigenous currency paper unit in Karnataka but it is still not operational.

Crisil said in a report, “In 2007, the World Bank estimated the size of India’s shadow economy at 23.2% of GDP. Assuming this ratio still holds, that’s about $479 billion unaccounted for. Much of that money should get mainstreamed because of the demonetization move.”

Former finance minister P Chidambaram said in press conference in Delhi, “This is expected to cost the government about Rs 15,000 crore and we need to see if benefits outweigh costs.”

Bankers say that it will be difficult to meet the customers’ demands and that it might take a few days for things to settle down. Big rush is expected at bank branches for the next few days further aggravating the situation.

Rana Kapoor, managing director and chief executive officer, YES Bank, said, “The clean-up of the unaccounted money is the third attempt in India’s monetary history to restrain its growing parallel economy following similar attempts in 1946 and 1977 earlier. In a master stroke, the government has attempted to tackle all three malaises currently plaguing the economy - a parallel economy, counterfeit currency in circulation and terror financing.”