Was Rs500 demonetised as last-minute afterthought?

As more and more facts are revealed about how Narendra Modi decided to take the radical decision to make all Rs 1000 and Rs 500 notes illegal tender within four hours of his announcement on November 8, niggling doubts are giving way to rising certainty that his decision to replace the Rs 500 note was a hasty afterthought.

It was a ill-planned, last minute addition to his 'carefully planned strategy' over many months to replace the banned Rs 1000 note with Rs 2000, in aid of his objectives to wipe out counterfeit notes, stop terrorism financing and control the hoarding of black money to some extent. What caused him to make the monumental blunder of blanket banning the Rs 500 note without having it been part of his calculations initially can only be a matter of conjecture, but the facts available will reveal that there was absolutely no plan or preparation to print the Rs 500 note until weeks before his demonetization announcement.

The Rs 500 note is the most important of all the currency notes in circulation. The 1,660 crore old notes of Rs 500 denomination (total value of these notes was Rs 8.3 lakh crore), was more than half the total value (Rs 16.28 lakh crore) of the entire currency in circulation. In the case of the Rs 2,000 note, the government only has to print half the number of 6 billion Rs 1,000 notes that were in circulation (3 billion). But at least 15 billion pieces of the Rs 500 notes need to be printed, the same quantity that was withdrawn from circulation.

Narendra Modi is no economist, but he possesses sufficient common sense, and even a school child capable of doing simple maths will realize that four times the amount of new Rs 500 notes needed to be printed to balance the number of new Rs 2000 notes released by the RBI, so printing these notes should have begun much ahead of the Rs 2000 notes and at four times the rate.

However, the opposite happened. While the new Rs 2000 began to be printed soon after the new RBI Governor Urjit Patel took up his post on September 6, printing of the Rs 500 note began only in the first week of November, just a few days before Narendra Modi made the demonetization announcement. The central government-owned Security Printing and Minting Corp of India Ltd (SPMCIL), started printing the new Rs 500 notes at its printing presses in Nashik and Dewas in Madhya Pradesh after designs were hastily dispatched in the last week of October.

Meanwhile, the RBI-owned Bharatiya Reserve Bank Note Mudran Pvt Ltd, (BRBNMPL ), began printing the Rs 2,000 notes at its two state-of-the-art presses almost two months in advance. But the capacity of the presses was in inverse proportion to the requirement. BRBNMPL's annual capacity is almost twice that of SPMCIL.

The Rs 2000 notes were with the banks within 48 hours of Modi's announcement. The first Rs 500 notes only began to be made available to various banks on November 16 or 17, a full week after demonetization was announced, and that too in a much lesser quantity of 5 million pieces per day, compared to the Rs 2000 note.

In the first three weeks, the two presses were only able to deliver 1 crore notes but to return to normalcy, an additional 1,659 crore notes were needed to be delivered. In other words, RBI has replaced just 0.06 percent of Rs 500 notes which were in circulation before in 21 days. Could this serious miscalculation simply be an oversight by the RBI and lack of foresight and planning by our Prime Minister, or could there be another reason?

The Rs 2000 note printed at the RBI's own two state-of-the-art printing presses were on new machines which could churn out notes in huge numbers and at a much faster rate, while the Rs 500 note began to be printed at the much slower, older machines, prone to breakdowns, owned by SPMCIL, which functions under the Ministry of Finance. Since Narendra Modi did not take his own finance minister, Arun Jaitley, into confidence while planning this crucial exercise, but only confided in his revenue secretary instead, as well as the RBI Governor, (both these stalwarts belong to Modi's home state of Gujarat), the desire to maintain secrecy so that word did not leak out to the Ministry and the public at large could have been a reason to delay printing of the Rs 500 notes, but it is inconceivable that these two worthies would not have pointed out to the PM about the chaos that would ensue if the Rs 500 note was printed at one-fourth the rate of the Rs 2000 note instead of the other way around.

It is impossible to believe that Narendra Modi himself could not foresee the consequences of not printing sufficient Rs 500 notes well ahead of time. So there must be some other explanation for this monumental blunder.

Why was there a delay in sending the new design, paper and approval of Rs 500 note to the presses? This last-minute decision to print Rs 500 notes in SPMCIL presses in early November led to many unforeseen problems. The government and the Finance Ministry was well aware that the SPMCIL presses were not equipped to print large numbers of currency notes.

Frequent printing errors, old and faulty machinery, and slow rate of printing because of only 1,300 employees, so that even officers had to engage in the printing of the new Rs 500 notes was hardly an ideal situation. The company did not even have a CMD, as he had been removed due to several inquiries in corruption cases, including tender anomalies in the acquisition of imported printing machines which were faulty, prone to daily outages, and could print far fewer notes than had been claimed.

In addition, there was no love lost between SPMCIL and the RBI, as the former saw the RBI encroaching on its own turf as a currency printer by running its own presses and also laying down the law on finer points of design and printing, instead of sticking to its role as a regulator. So instructions from the RBI would not be implemented with much enthusiasm here, to say the least.

Even after the SPMCIL printing presses ramped up production to 15 million pieces Rs 500 notes per day, often resulting in frequent breakdowns, huge disruptions because of maintenance crews having a tough time fixing faults, with errors caused by "untrained and unskilled" workers, and retired employees, who had been drafted to help the massive exercise, it was simply not able to reach the target of 25 million notes per day.

Since there are 1 lakh bank branches and 1 lakh operational ATMs, that means each bank branch/ATM could get only 75 notes each per day. That is enough only for 20-25 people. Such was the pressure that SPMCIL had to do away with the group lunch break for its workers, and overtime of up to Rs 10000 was being paid to employees and Rs 30,000 annual incentives announced for officers so shifts could run round the clock. But the in spite of being told it was a war-like situation, the bosses realized it would still take many months or years before normalcy is restored.

So the RBI, which itself was under such pressure that it was initially releasing Rs 2000 notes even before the ink was dry, has had to summarily halt printing of the Rs 2000 notes at its own presses in Salboni in West Bengal and in Mysuru, so that all four presses belonging to both RBI and SPMCIL will now only churn out Rs 500 notes on a war footing. Not only will it cause a further shortage, as lack of Rs 2000 notes means that much more Rs 500 notes will be needed to tide over the difference, RBI will have to shut down its presses for 21 to 25 days to realign machinery to start printing Rs 500 currency instead of Rs 2000.

This will mean a huge delay in restarting the printing of the remaining Rs 2000 notes. In spite of such emergency measures, according to a report in the Quint, 'the four printing presses operated by two companies of the Reserve Bank of India and the Finance Ministry are together producing only 45 million pieces a day of the new Rs 500 notes, amounting to a total face value of Rs 2,250 crores.' But the impression being given out is that these presses are producing Rs 12000 crore to Rs 15000 crore a day and therefore the currency shortage will easily be tackled in the next few weeks, leading to near normalcy by December 31, which is very far from the truth.

The Nashik and Dewas presses had the capacity to print only 5 million pieces of the Rs 500 notes daily but were forced to print 12 to million notes daily due to the time crunch. It takes 25 days for one lot of Rs 500 notes to be printed, but since production was rushed, it caused several printing errors in many of the new Rs 500 notes. Sources in Dewas revealed that the "colour examination" step in the five-stage process involving the printing of the new Rs 500 notes has been deliberately skipped because of the tremendous pressure that the printing unit has been faced with since production of the new note.

The decision to skip the crucial phase was taken by senior Finance Ministry bureaucrats and conveyed to the Dewas Press unit. Skipping this crucial stage leaves banknotes vulnerable to counterfeiting, easy drainage, bleeding and removal of ink from the banknotes. More importantly, the colour examination phase helps detect defective notes, which was not being done at Dewas earlier. Since the printing of the new Rs 500 notes began, 2-5 percent of defective notes have been printed but were not segregated from the normal ones and in a callous decision, were released into the system by the RBI, causing much consternation among the public.

Rumour is that in later batches, millions of flawed notes were scrapped, and printing almost halted at the two presses after three weeks, causing further scarcity of this precious commodity in the system and also a loss to the exchequer.

Also, no new or extra security features have been incorporated in the Rs 500 note (or the Rs 2000 note either). To do this would take several years, so the rush job means only the superficial design has changed, and these notes are as vulnerable to forgery as the previous ones.

In addition, fresh printing of the Rs 10, Rs 20, Rs 50 and Rs 100 notes have stopped completely at all the presses, when smaller currency notes are the need of the hour to provide change for the Rs 2000 note. If fewer small notes now come into the system it means it will also be difficult to get change for the new Rs 500 note as well.

SPMCIL bosses were earlier told that they would have to start printing new Rs 500 notes from January 1. No indication was given of the number of notes they would have to print. This is significant, as the entire demonetization process is supposed to end on December 31.

Therefore they had little time to prepare or to order for essential supplies. Everyday new tenders are being issued for everything from gunny bags to pack the new notes in, to manpower to work round the clock, to arranging transport logistics, as the notes are being airlifted on a war footing, and, of course, the huge amounts of paper and ink needed to print this mind-boggling amount of currency. Both the ink and the paper are of special character.

The ink, OVI or optically variable ink, is obtained from the Swiss firm, SICPA, which gives the Rs 500 currency one of its anti-counterfeiting features. The government has approached at least nine foreign companies, including a few that had previously been blacklisted for their acts of "commission and omission", to supply 20,000 tonnes of currency printing paper. Currency paper is obtained from firms like UK-based De La Rue, which was, until recently, blacklisted by the Government for supplying currency paper to Pakistan and for influencing RBI officials to obtain business.

Many of the present problems the RBI is facing, according to a RBI ex-deputy governor is the "severe supply constraints, some of which can be traced, directly or indirectly, to the operations of the global suppliers and vendors in the banknote industry". It could take as much as three months for the paper supplies to reach India. Add to this the additional production time, which will further prolong the mammoth printing and distribution exercise.

Modi bears some responsibility for this too. He could have easily arranged for new currency notes to be printed abroad as many of these vendors like De La Rue have vast experience in printing currencies from across the world, including Indian currency, and could have done a much more efficient job than our own presses, though it would certainly be much more expensive. But pressing times call for pressing measures, and if these European companies had started printing our notes from or before November 8, we might have been in a much better situation now.

Now it is too late to print notes abroad as the window of opportunity has passed, since it would take the notes at least a couple of months to reach India.

But Modi bears responsibility for decision as well, as this goes against the grain of Modi's make In India philosophy, and his belief paper and ink to print currency should be manufactured in India alone. He also believes bank notes are imported from countries which are members of NATO. If there is a sudden embargo on India then our currency will be crippled if we rely so heavily on imports, so it is imperative to push production in India.

Modi not only acted in haste but consulted very few officials who had no knowledge of how to deal with the Herculean task before them. It is now also clear that Narendra Modi had initially not planned to demonetize the Rs 500 note and Rs 1000 at one go, at least not right up to the very end, and even if he did, the plan was for it to co-exist with the old Rs 500 note for quite some time.

But what made him change his mind. Could it be that as his plan progressed he became increasingly more over-reaching and over-confident and it was simply no longer enough for him to replace the old Rs 1000 note for the new Rs 2000 note? Though that might have been somewhat effective in his initial game plan of tackling counterfeit notes and temporarily halting Pakistan's efforts to fund terrorists and destabilize our economy, it would not be enough for his new dream -- the claim that he was a crusader who had created history and punished the corrupt by destroying all the black money in India, as he realized people would simply exchange their Rs 1000 notes of black stash for Rs 500 notes, for a fee. He may have foreseen the shortage of Rs 500 notes of a limited amount, say 6 per cent of the currency, if black money was hoarded in Rs 500 notes instead of Rs 1000, and thus arranged for the printing of new Rs 500 notes from January 1, along with sufficient Rs 2000 notes to replace all Rs 1000 currency by December 31, as it would not only be more cost-effective but also more efficient as a much lesser number needed to be printed.

But what he didn't plan on was that his over-weaning ambition to be India's most successful Prime Minister would cause him to lose all sense of proportion and ban all Rs 500 notes in circulation with immediate effect because some bright spark advised him that it would be best to do a dramatic house-clean and start on a clean slate and he also never imagined people would seriously take him at his word and everyone would stop using all old notes within an hour of his announcement.

He may also have been forced to hastily bring forward the demonetization date as news reports had started appearing about the printing of a new Rs 2000 note, and demonetization of large currency notes, and his realisation that a sudden spurt in bank deposits from September onwards meant there had been a leak of his secret down the line and if he didn't act immediately, his plan could collapse faster than pinpricked balloon.

Pakistan's previous army chief was also acting up then and patriotism and jingoism was rising in the country, so what better time to harness the sentiment to launch a war against counterfeit currency and terrorist money sources rather than a war against Pakistan itself. That election in several states were round the corner could only be an added bonus.

The Modi government has become mired in a morass of its own making which is sinking deeper into by the day. Even after BRBNMPL combined resources with SPMCIL, the timeline to replace the existing stock of 1,658 crore pieces of Rs 500 notes will run into May 2017, or even until the end of 2017 if there are shutdowns.

The extreme shortage of new Rs 500 notes in the wake of the ill-planned demonetisation move has now forced a panicky Narendra Modi government and the Reserve Bank of India to turn desperate and issue orders that a new series of Rs 50 notes will be printed without a vital step, intaglio printing, making counterfeiting it relatively easy. But sufficient quantity of smaller notes is an absolute must, as the already limping economy might then come to a grinding halt. So all the aims of the demonetization drive have come a cropper and leave alone rewriting history, Narendra Modi is in danger of becoming it.
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