Banknotes on the clock

In a move that has sparked ample debate, the Reserve Bank of India (RBI) has recently taken the definitive step of withdrawing the ₹2000 denomination banknotes from circulation. This decision has been a subject of intense discussion and critique, but we are here to highlight an overlooked aspect amidst this furore - the lifespan of paper currency.

Tucked away in the RBI’s press release is a nugget of information that hasn’t garnered the attention it deserves. It is stated therein that an overwhelming majority — nearly 89 per cent — of the ₹2000 denomination banknotes were brought into circulation before March 2017. The significance of this fact lies in the understanding that these notes have reached, or are on the brink of reaching, their estimated life expectancy of 4 to 5 years. This raises vital questions about the ephemeral nature of paper currency, the sheer volume of banknotes that reach the end of their lifespan each year, and the systemic implications these have on our financial infrastructure.

The transient nature of paper currency was acutely manifested in the year 2021-22, as the number of decommissioned soiled banknotes escalated by a significant 88.4 per cent, reaching an unparalleled quantity of 1,878.01 billion pieces. This number starkly contrasts with the preceding year’s figure of 997.02 billion pieces. This substantial increase underscores the rather fleeting lifespan of paper currency, revealing a robust frequency of circulation before they succumb to the inevitable wear and tear. In essence, our financial system is running on a ceaseless treadmill of paper currency production, circulation, and subsequent disposal, emphasizing the transitory existence of our banknotes.

Paper currency traces its origins back to China’s Tang Dynasty (618–907), created as a lighter, more portable alternative to metal coins. This innovation, known as “flying money,” found its way to the Mongol Empire where Kublai Khan made it the sole legal tender. Marco Polo’s accounts sparked Europe’s interest, but it wasn’t until the 1660s in Sweden that paper money truly took root. The Massachusetts Bay Colony was the first to print paper money in future U.S. territories during the 1690s, due to a scarcity of English coins.

In India, paper currency emerged in the late 18th century, amidst the fading Mughal Empire and rising colonial influence. The General Bank of Bengal and Bahar, founded in 1773, was an early issuer. Despite its short existence, it demonstrated the importance of state support for the successful circulation of banknotes. Institutions like the Bank of Bengal, established in 1806, played significant roles in promoting the use of banknotes, issuing three series of them: the ‘Unifaced’, the ‘Commerce’, and the ‘Britannia’. The Paper Currency Act of 1861 later centralized the issuance of banknotes to the Presidency Banks, marking a major shift in India’s financial landscape.

Paper currency, despite its global usage, grapples with serious issues such as durability and counterfeiting. The inherent weakness of paper, coupled with daily usage, reduces its lifespan, leading to recurring replacement expenses for central banks. Additionally, modern technology has enabled intricate counterfeiting, posing considerable risks to economic stability. Despite efforts to introduce complex security features, counterfeit currency continues to pose significant challenges to governments and financial institutions. Polymer banknotes could offer a solution, boasting better longevity, security, and eco-friendliness.

First unveiled by Australia in 1988 to combat rampant counterfeiting, these banknotes are crafted from a durable plastic known as biaxially oriented polypropylene (BOPP). Their longevity, security, and ecological sustainability considerably surpass that of traditional paper currencies. The incorporation of robust security elements, such as transparent apertures and intricate holography, render them a formidable challenge to counterfeiters. With adoption in over 30 nations owing to their increased resilience and extended lifespan, polymer banknotes underscore a substantial leap forward in the evolution of global financial practices.

The study “Polymer Banknotes: A Review of Materials, Design, and Printing” found that the mechanical properties of polymer banknotes retain their integrity even after exposure to temperatures between 120–200℃. In stark contrast, paper banknotes show a marked deterioration when heated to 80℃. Armed with composite materials and nano-materials embedded in their fibre network, polymer banknotes serve as a formidable barrier against counterfeiting. Moreover, the smoother surface of polymer notes results in less pollution, offering a cleaner alternative for both humans and the environment.

India’s trysts towards the transition to polymer notes is a striking tale of anticipation and unexpected obstacles, traversing almost two decades. This audacious venture was launched in 2009, when the Reserve Bank of India (RBI) publicly signalled its desire to procure one billion polymer banknotes in the ₹10 denomination, following an earlier seven-year period of refuting such a proposition. The motivation behind this shift was to significantly increase the lifespan of banknotes and amplify their resistance to counterfeiting, by conducting field trials across regions diverse in geography and climate. Yet, despite comprehensive technical assessments, the project was abruptly interrupted by unforeseen technical challenges. In response to this setback, the RBI tactically pivoted its strategy, concentrating instead on investigating means to extend the durability of existing paper notes. As disclosed in the 2018-19 annual report, the most recent approach to extend the longevity of banknotes involved varnishing ₹100 denomination notes, though the conclusive results of this intriguing attempt continue to remain elusive. Certain media outlets report that RBI has decided against introducing polymer notes, with speculative reasons being that these banknotes could react adversely to high temperatures, potentially complicating their exchange process. However, as mentioned above, the research suggests otherwise.

As put eloquently by author Jacob Goldstein in his book, “Money: The True Story of a Made-Up Thing”, “money changes because the way people use money changes.” This rings true with the evolution from coins to paper, and possibly to polymer, in our ceaseless pursuit for improved economic exchange.

Bibek Debroy is Chairman, EAC-PM & Aditya Sinha is Additional Private Secretary (Policy & Research), EAC-PM. Views expressed are personal