Our Bureau Mumbai, Feb. 18
The average value of a currency note did not keep pace with inflation in the past four decades, according to a Reserve Bank of India study. The empirical study on modelling currency demand said the average value of a currency note (for denominations of Rs 10 and above) increased nearly eight-fold while there was a 18-fold rise in the price level. The study referred to the significant change in the composition of currency circulation across denominations during the past four decades.
“The evolving denominational distribution of currency notes, even with the introduction of higher denomination notes (Rs 500 and Rs 1,000) was not commensurate with the underlying demand for the various denominations necessitated by the inflation path.
“The implication is that a consumer would need to carry a much larger number of currency notes than was the case earlier to purchase the same volume of goods and services,” said the study. Since inflation rate exceeded the growth in the average value of a note, there has been a decline in the average real value of a currency note of Rs 10 and above (Base: 1971-72) from Rs 21.6 in 1971-72 to Rs 5.8 in 1997-98 before a modest rise to Rs 8.9 in 2008-09. There could be several different factors behind such trends in the denominational pattern of currency circulation, said the study co-authored by D.M. Nachane, A. B. Chakraborty, A. K. Mitra and Sanjib Bordoloi.
Factors
First, note printing in India was dependent on the production capacity of the two government presses at Nashik and Dewas till the setting up of two more note presses in Mysore and Salboni in 1995-96. As such, there were supply constraints on meeting the growing demand of notes, which resulted in importing notes in the 1990s.
Second, the use of alternative payment channels such as cheques, credit/debit cards and internet banking has been spreading over the years. These are not only more efficient instruments than paper currency but also leave paper/electronic trails facilitating tax audit.
Third, the possibility of use of high denomination notes for black economy transactions and the demonetisation of Rs 1,000 and higher denomination notes in 1978 to curb hoarding/circulation of black money might have had a role to play in postponing the introduction of new higher denomination notes for some time.
(Source: The Hindu Businessline)