In just the last two months, authorities have detected several cases involving the use of counterfeit currency worth crores. The media has been regularly reporting the seizure of fake notes from various locations. As per reports, even counterfeit Rs2,000 and Rs500 notes is printed locally. Multiple other reports point to the recent busting of such rackets in Pune, Kolkata and Kanpur. The sheer quantum of such notes shows the urgency with which India needs to tackle the counterfeiting menace as it poses a significant threat to her economic security.
Even if the Reserve Bank of India (RBI) and government have been successful in improvising security features, paper banknotes are subject to a few inherent limitations. While there is a discussion on whether the introduction of digital currency may be an answer to this problem, one must note that cash in circulation continues to grow despite the recent boom in electronic payments.
The prevalence of physical cash in the Indian economy is best indicated by the data from the RBI’s annual report for FY2021-22. The report states that reserve money, which comprises currency in circulation, bankers’ deposits, and other deposits, increased by 12.3 per cent in FY2021-22. Currency in circulation (CIC), which consists of banknotes and coins, comprised 80 per cent of the reserve money. The number of ATMs stood at 2.48 lakh units while the value of total currency outstanding as of 26 August 2022 was Rs30,62,317 crore.
As such, it can be estimated that cash in physical form – banknotes and coins – will continue to remain an important mode of payment for the foreseeable future and can co-exist with digital payments. Considering this position, India must think of alternatives to paper currency. And it is here that the introduction of polymer banknotes becomes a solution to the perennial issue of counterfeiting.
Discussing the limitations of paper banknotes, Dhanendra Kumar, former Chairman of the Competition Commission of India and former Executive Director at the World Bank, says: “The paper material traditionally used for printing money makes currency notes vulnerable to wear and tear after prolonged use. Every year, they degrade in quality due to factors such as usage, weather, humidity, and other climate-related aspects. One often comes across notes that are pasted together from two different pieces, or specimens that become indecipherable with scribbles made by users on them. For a country pulling ahead in technology and modernisation, it is, therefore, worth the effort to bring in state-of-the-art, crisp, waterproof, difficult-to-tear, and hard-to-counterfeit polymer banknotes.”
The global experience
Polymer currency is made using special synthetic polymer material that can result in 3-4 times longer note life as compared to conventional paper currency. Such notes are made using a more energy-efficient manufacturing process resulting in a lower environmental impact. Owing to such benefits, more than 76 countries have adopted polymer banknotes.
To peep back into history, Australia was the first country to issue such currency. Starting with a $10 commemorative note in 1988, the country gradually issued a series of polymer notes in all denominations – $5, $10, $20, $50, and $100. This success led to the adoption of polymer in neighbouring countries and then gradually throughout the world.
Research by the Reserve Bank of Australia (RBA) using a cost-benefit analysis framework found that the switch to polymer resulted in net savings of close to AUD 1 billion over the past 25 years in inflation-adjusted terms for Australian taxpayers. This also resulted in reduced counterfeiting of notes. A paper by the RBA states that paper banknotes tend to wear out after six months or a year.
Comparatively, polymer banknotes provided better durability, thereby reducing transportation and logistical costs. The paper concludes that Australia’s shift to polymer banknotes has been very successful. Further analysis shows that A$50 polymer notes have a median lifespan of up to 10 years.
Due to such enhanced security features (especially those which are unique to polymer notes), Australia’s counterfeiting levels have remained relatively low over the past 20 years when compared with statistics from other countries.
Another country to reap the significant benefits of polymer notes is the United Kingdom. With a GDP of $3.1 trillion as of 2021, the UK is classified as a developed economy. Its Central Bank – The Bank of England – introduced polymer banknotes in 2016. Starting with £5, the BOE currently issues banknotes in denominations of £10, £20 and £50 respectively for the England and Wales region. A few other banks issue notes in Scotland and Northern Ireland.
As per various reports published by the BOE, a shift to polymer banknotes is necessary because they are cleaner, more secure and durable than their paper counterparts and provide enhanced counterfeit resilience.
The BOE’s chief cashier issued a statement explaining the importance of polymer banknotes. “Changing our banknotes from paper to polymer over recent years has been an important development because it makes them more difficult to counterfeit, and means they are more durable,” she says.
The BOE announced in June that it will retire its remaining paper currency worth £14.5 billion and replace it with polymer banknotes. With this transition, the UK will become the world’s largest economy that only issues polymer currency. The country will also replace existing banknotes depicting Queen Elizabeth II with the portrait of the new monarch following her death. Other major countries that have benefited from polymer include Singapore, UAE, the Philippines, Canada, New Zealand and Hong Kong.
The Indian context
Despite substantial advantages, there has not been a significant effort by the government or the RBI to initiate concrete steps for introducing polymer currency. The RBI had expressed its intent to initiate a trial of Rs10 polymer notes at various junctures. Under the leadership of Governor D. Subbarao, it engaged a research institute to conduct a study on the environmental impact of cotton-based bank notes vis-à-vis the polymer-based alternative.
Similarly, the Minister of State for Finance had directed field trials of polymer notes in five cities during 2013. The trials were held in Kochi, Mysuru, Jaipur, Bhubaneswar and Shimla, based on their unique weather conditions. In fact, the central bank also made multiple references to polymer notes in its annual report during the mid-2010s. However, these efforts did not result in further progress.
But, why should India adopt polymer banknotes? Polymer banknotes offer multiple advantages. They are suitable for all climatic conditions due to the non-porous material which prevents absorption of humidity, moisture, or dirt. Such notes are also capable of withstanding wide variations in climate including both high temperatures and cold temperatures which can be especially beneficial for a diverse country like India.
The coatings used for polymer banknotes make them resistant to stains and crumpling. On the other hand, elastic properties allow such notes to recover from normal handling damage such as bending or folding for storage in a wallet or billfold. Like their paper counterparts, a polymer banknote will also stick in wet conditions. But, if such notes are separated and wiped dry, they will be undamaged, unlike paper banknotes which can degrade in quality each time this happens.
Most security features seen on paper can be recreated for polymer as well. Additionally, they offer a unique opportunity to integrate many different features into a unified design that offers high security. For instance, the Monetary Authority of Singapore prints polymer banknotes on a specialised polypropylene plastic which helps it to utilise advanced security features such as ‘Complex Clear Window’ on S$ 2, 5, and 10 notes. This enables building high security features in the notes which are not easy to counterfeit.
As per Kumar, transition to polymer notes will help in reducing the environmental impact as well. “By staying in circulation for a longer duration and being made from a comparatively efficient manufacturing process, it brings in a significant improvement over paper notes,” he says.
At a time when the world is grappling with a shortage of water, energy and raw materials, this can contribute to sustainability and help in achieving cost-effectiveness. “To ensure ease of transition, there can be selective switching initially in certain denominations like Rs2,000, Rs500 and Rs100, with the rest to follow,” adds Kumar.
Making India ‘Atmanirbhar’
Recent geopolitical events have reiterated the need for developing economies to become self-reliant in important areas of technology. This protects them from uncertainties arising from sanctions or similar actions by the developed nations.
Realising this much earlier, India has been focusing on becoming ‘Atmanirbhar’ by developing indigenous solutions to meet the challenges of its society. It has achieved significant success by developing technologies in key sectors like mobile telephony, space exploration and digital payments. A similar feat can be achieved in banknote technology if India transitions to polymer by encouraging local innovation and industry.
A recent report by the New Delhi-based independent research-oriented think tank Council for International Economic Understanding (CIEU) titled ‘Making India Atmanirbhar in Counterfeit Proof Currency’ analyses the potential benefits that may accrue to India from the transition. As per the report, local production of polymer substrate will reduce India’s dependence on imports, which will bring a critical component of currency manufacturing technology under Indian jurisdiction and contribute towards employment generation, supporting the ‘Make in India’ initiative.
Reduction in costs
Data from RBI’s annual report shows a preponderance of soiled banknotes in the country. The RBI deploys substantial resources to replace them. The process of issuing, circulating and retiring paper banknotes involves a substantial expenditure. While the quality of polymer banknotes also depreciates over time and usage, it shows better resilience compared to its paper counterparts. This means that a potential investment in additional printing capacity worth several hundred crores can be avoided.
As per CIEU’s report, the introduction of polymer notes may not require substantial capital expenditure. It can be adopted through a few modifications in printing machinery. Once the machines are set up, there is no impact on the speed of processing polymer when compared to processing paper substrates. Cash processing machines can handle paper and polymer banknotes simultaneously. There are several countries that co-circulate polymer and paper banknotes of different denominations through the same machines at the same time.
Sustainability is another issue. The RBI uses cotton-made paper for printing notes, a majority of which comes from local cotton agriculture which is highly water- intensive. Further, the paper manufacturing process consumes high levels of energy, chemicals and other inputs during the end-to-end process.
The use of polymer substrate can help in reducing the consumption of such elements that are getting scarcer by the day. While the cash flow to the agricultural sector may seem to go down initially, the resultant savings in natural resources will prove to be rewarding.
The other dimension is reducing the carbon footprint. Polymer banknotes can be recycled into a range of reusable plastic objects. They can be used in industrial and construction applications. Shredded polymer banknotes can be used as RDF (Refuse Derived Fuel), allowing the energy used in the manufacture to be ‘reclaimed’ as electricity in properly designed incinerators.
With the renewed focus on sustainability, the introduction of polymer banknotes can thus help in reducing the carbon dioxide emissions associated with the printing and circulation of notes.
One should also take into consideration durability and economies of cost. By extending the shelf life of smaller denomination notes of Rs20, Rs50 and Rs100 through the use of polymer, India can reduce its banknote consumption by several billion pieces each year. This would obviate the need to invest in additional banknote printing capacity for producing extra volumes of notes. However, some time may elapse before this results in optimum benefits.
Polymer notes are also known for their durability. Being a stronger substrate, they do not suffer from limpness and torn edges – a characteristic commonly associated with paper notes. They are resistant to dirt and soiling because of their non-porous nature. This provides polymer banknotes with resistive properties against humidity, oil, greasy substances, liquids and other solvents.
These properties can considerably improve the circulation quality of low to mid-range denominations of Rs20, Rs50 and Rs100 as they tend to remain in circulation without being returned to banks for extended periods and are more widely used.
Coins and their usage
India’s rural economy is predominantly dependent on agriculture and ancillary activities. Its landscape is dotted with home-run, small size and micro businesses that include hawkers, mom-and-pop stores, labour-intensive industries and artisanal jobs. While the RBI’s main focus is on large denomination notes, coins and their usability also demand equal attention.
Small businesses and marginal shopkeepers (kirana stores, panwalas and hawkers etc) utilise coins (Rs1, Rs5, Rs10) for their day-to-day transactions and as a medium of change. They may not have access to smartphones and good internet connectivity. With significant accumulation of coins, such businesses face issues with storing, exchanging and depositing coins with banks, creating logistical challenges.
News reports indicating issues with acceptability of new coins prompted the Minister of State for Finance – Pankaj Chaudhary – to recently clarify that Rs10 coins are legal tender and can be used in all transactions. Melting or destruction of coins is another challenge. Even though classified as punishable offence under the Indian Penal Code, there are several instances where the police have busted units that melt coins and sell the precious metal in the open market.
With its inherent problems, paper currency will not be a suitable replacement for coins. These issues can be addressed by replacing them with polymer banknotes that will offer better convenience, durability and ease of use.
Is the domestic industry ready?
The landscape of currency printing in India has been transformed during the last two decades. India has achieved significant success in reducing the import of various materials by substituting them with indigenously manufactured ones. It has made substantial investments in reducing dependency on imports of banknote paper.
Polymer represents the next phase of banknote technology that is increasingly being adopted throughout the world. It is therefore imperative for India to develop indigenous solutions and create a supportive ecosystem for polymer that will pave the way for the country to become a leader in this sector as well. But the question is whether the domestic industry is up for this challenge.
The answer is an overwhelming yes! The possibility of becoming Atmanirbhar becomes even stronger as India is the second largest producer of BOPP films which form the substrate for the polymer films that are used for making currency notes. India has a couple of leading BOPP film manufacturing companies whose experience will be helpful in initiating this process.
The Indian polymer industry has already developed capabilities to offer high-tech films. Now it is the turn of the government to explore whether there are any existing companies that can potentially meet these requirements indigenously.
The key materials required for polymer notes are already available in India and are being exported for currency applications. The technology required for conversion of film to a printable substrate can be replicated under the Make in India initiative. The transitional costs in this entire process will be minimal as existing security printing presses can be calibrated for polymer currency. The existing infrastructure for cash circulation can be used – with minor modifications – for polymer as well.
With such advantages already in place, India has the potential to become a major hub for exporting polymer currency notes to other parts of the world if the government is successful in partnering with and encouraging the growth of this industry.
As India aims to become a superpower, it cannot miss out on becoming a leader in this critical area. A lack of progress will only mean that India’s journey towards self-sufficiency is delayed even further – something we should avoid at all costs in today’s competitive global landscape.