A report appeared recently of a Reserve
Bank of India (RBI) study about the share in circulation of various currency
denominations in 2010-11. The study effectively reflects how the value of the
country’s currency unit, the Rupee, has gradually eroded. The erosion seems to
have picked up pace since the economic reforms process began in 1990-91 and
was, seemingly, accentuated since 2003-04.
The study has revealed that in
2010-11 the share of Rs. 500 denomination bank notes “has gained significance and accounted
for 47 per cent of the total currency in circulation”. These quickly emerged as
the second most important denomination since 1998-99 and soon became most
important denomination in 2003-04 replacing Rs 100 denomination. The
report further indicated that the Rs. 100 bank notes which had a significant
presence in circulation even after introduction of the Rs. 500 note lost their
second position after introduction of the Rs.1000 bank notes in 2007-08 that
came to account for 27 per cent of the total currency in circulation.
Accounting for close to 50 per
cent of the value of the total currency in circulation from 1970s to 1990s,
the share of Rs 100 steeply declined
to 14.8 per cent in 2010-11.
Going progressively back in time,
the study has traced the changes that occurred in circulation reflecting the
emerging usage pattern of currency notes of various denominations since 1970s. It
also reflects changes in the state of the economy over the last few decades.
Rise in prices of goods and services is a problem that has been stalking the
country since independence. In almost every speech since independence prominent
national leaders talked of fighting this, what they called, “monster” and yet
they could never put a leash on it. The prices kept moving northwards and
simultaneously the smaller denominations, rendered valueless, kept falling by
the way side.
During the “license-permit raj”,
with the so-called Hindu Rate of Growth of 3 to 3.5 per cent there used to be
incremental price rises barring the sporadic bouts of high rate of inflation.
The currency did lose its value but the process was gradual except during years
of extraordinary stress on the economy. However, with the opening up and
liberalisation of the economy in the 1990s the fall in value of the rupee gathered
momentum and it picked up pace in tandem, as it seemed, with the rise in the
rate of growth. The decline in the rate of growth during economic slowdown since
2008 has surprisingly failed to arrest the Rupee’s depreciation.
All this is amply illustrated by
the RBI study. Between 1970s and 1990s Rupees 100 notes occupied a position of
significance accounting for almost 50 percent of the currency in circulation as
against around 14 percent in 2010-11. Likewise the share of Rupees 10 currency
notes that was pretty high before the 1970s and was around 34 percent during
the decades of 1970s and 1990s progressively declined and came down to only 2
percent in 2010-11. As we all know, there has been enormous shrinkage in its
value. Whereas at one time, especially during 1950s and 1960s, Rupees 10/-
commanded appreciable purchasing power its value today is, perhaps not even
like that of a Rupee of those times.
The study also revealed that the
currency note of Rupees 20 denomination that was introduced to supplement
Rupees 10 currency notes remained important only until 1982-83 and constituted
8 percent of the notes in circulation. However, it lost whatever little
significance it had by 2010-11 when it accounted for only 0.6 percent of the
notes in circulation. Similarly, the Rupees 50 denomination currency note,
introduced
presumably to reduce usage of Rupees 10 and 20 notes, became second
most important denomination in 1980 and 1990s. While in 1992-93 it accounted
for 32 percent of the currency in circulation its importance declined in
2010-11 to an utterly insignificant position of 1.7 percent.
The study has not dealt with the
coins that used to be or are in use. Perhaps, it was confined to the
circulation of currency notes of Rupees 10 and above. No mention has been made
in the report of the currency notes of Rupee 1 and Rupees 2 and 5. Perhaps
these are no longer being printed having been substituted by coins. While notes
of Rupee 1 and 2 have disappeared from circulation one occasionally comes
across heavily soiled Rupees 5 notes. Coins of fractions of a Rupee have long
since disappeared. A cost benefit analysis led to discontinuance of minting of
1, 2, 3, 5 and 10 paise coins, eventually ceasing to be legal tender along with
those of 25 paise in 2011. Though the coin of half a rupee, that of 50 paise,
continues to be legal tender, it is not seen any more, having lost practically
all its value. Small change has just vanished from the markets. Today’s small
change is constituted by the coins of Rupees 1, 2 and 5. The recently
introduced coins of Rupees 10 are not yet quite visible.
Empirical studies generally
reflect accurately the situation on the ground. Those of us who spent our adult
life in post-independence years know how over the years the Rupee saw its value
being pared down. Gone are those days of 1950s and 1960s when a seer (approximately a kilo) of grains –
rice or wheat – and lentils would be available for 10 to 12 annas, from half to
three quarters of a rupee and a kilo of mutton for a like amount. In those
far-away days fractions of a rupee had value. One could have a meal in less
than a rupee. halwai (confectioner) would sell a paav (quarter seer) of puris (about 8 puris) in 10 annas with a substantial
plate of vegetables (aloo tamatar or aloo matar) on the house. I recall having
had a meal off an eating joint in Agra in early 1950s in four annas comprising
four chapattis with free daal, sabzi (lentils,
vegetables) and delicious pickled
mixed vegetables. For breakfast in a restaurant near St. John’s College we used
to get an omelette of 2 eggs and 2 buttered toasts for 6 annas.
Being packed with value, Rupees
1, 2 and 10 were very precious. Incomes were by and large low and so was
consumption and hence what circulated more were the coins and currency of lower
denominations. Even the then prestigious Civil Services commenced with only
three-figure salaries, slowly progressing to four figures and retiring off
officers when they came close to five figures. Today, with the steep fall in the
Rupee’s value the pension of the same officers is in five figures.
The prospects for the Rupee do
not seem very bright, what with adverse trade balance, high current account and
fiscal deficits, mounting external debts, slowing economic growth and current
political instability. In addition, with large scale political and bureaucratic
corruption involving mindboggling sums enormous amounts of unaccounted wealth
is floating around in the system pushing the demand that a weak supply network
is not able to meet. The consequential inflationary pressure on the economy is
most likely to further weaken the Rupee. Sinking to 57 to a dollar is a sign of
weakening of the Rupee which, none would believe, was equivalent to a dollar in
not-too-distant 1947.
From the way the things are going
soon the RBI might find that Rs. 500 currency notes have been displaced from
their prime position by Rupees 1000 notes.
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