Opinion Plastic surgery?
Many countries are shifting away from paper banknotes. Will India?
The RBI is not independent. It was never meant to be. Consequently,we are used to the phenomenon of the RBI proposing something and North Block disposing. Thats evidently happened with BOPP too. BOPP is biaxially oriented polypropylene and has multiple uses,including polymer banknotes. These polymer banknotes were developed by Australians in an attempt to curb counterfeiting and were introduced in 1988. (An alternative polyethylene called Tyvek hasnt quite taken off.) One is not talking about commemorative banknotes and collectors items. The idea is to replace paper currency with polymer currency. First,security is better and counterfeiting becomes more difficult. That doesnt mean counterfeiting is impossible. It only becomes more expensive and takes more time. Second,polymer currency lasts longer. Conventional paper currency lasts 6 to 9 months. Polymer currency lasts at least four times longer. So though initial costs are higher,life-cycle costs are lower. Third,recycling is less of a problem,since polymer can be converted into other forms of plastic and we end up saving more trees. Fourth,once plastic notes are produced in bulk,economies of scale mean lower costs and India has a domestic polymer industry too. Fifth,plastic currency is more resistant to moisture,sweat,oil and water.
Sixth,though this is a bit difficult to swallow,plastic currency is non-cellulosic,while paper currency is cellulosic. The former doesnt allow microbes to grow,the latter does. So,plastic currency is better hygiene and health-wise. Even if this is difficult to swallow,plastic currency clearly can be wiped clean and washed more easily. Nor does it wrinkle. Other than Australia,six other countries have gone completely polymer Bermuda,Brunei,New Zealand,Papua New Guinea,Romania and Vietnam. Those that have some polymer currency are Bangladesh,Brazil,Chile,Hong Kong,Indonesia,Israel,Malaysia,Mexico,Nepal,Singapore,Sri Lanka,Thailand,Samoa and Zambia. Evidently,polymer currency has benefits.
To get back to the Australians,BOPP polymer currency was developed by the Royal Bank of Australia (RBA),Commonwealth Scientific and Industrial Research Organisation and the University of Melbourne. RBA and Innovia Films sell the technology as Securency and should a country so wish,printing can also be outsourced to Note Printing Australia. Therefore,there are different levels at which this technology can be imported from Australia. Initially,one can outsource printing to the Australians too. As one moves up the ladder,one can stick to importing printing technology alone,since material and film technology exist domestically.
Polymer currency technology is narrowly-held,at least currently. Specialty paper for paper currency is produced in several countries and several of these sell to Pakistan also,and presumably to the ISI. Therefore,it is going to be somewhat more difficult for the ISI to go polymer. Then,why isnt this an idea whose time has come? With so much plastic floating around,why hasnt polymer currency taken off in India? The idea has been floating around since at least 1995 and occasionally,some RBI source tells us we are thinking of moving to polymer currency. There will be a pilot. All that changes is the denomination of the note earmarked for pilot Rs 10,Rs 50,Rs 100,Rs 500,Rs 1000. Whats the problem? First,we are told polymer currency isnt appropriate for Indias hot and humid weather conditions. Reportedly,thats the reason a committee set up by the finance ministry rejected the idea. This is a strange argument. Several countries that have introduced polymer currency,apparently successfully,have hot and humid weather conditions. Indeed,weather-resistance is supposed to be one of the advantages of polymer currency. Second,there was apparently an experiment in 1995 and that didnt work out.
Thats the empirical evidence for the finance ministrys claim. What isnt clear is whether this experiment was based on BOPP,marketed as Guardian,or Tyvek. Tyvek didnt perform well in trials and some countries that experimented with Tyvek (Ecuador,El Salvador,Honduras,Venezuela) gave that up. Third,all our currency-sorting and counting machines are based on paper currency. A switch to polymer currency will impose transaction costs. This is an odd argument too and has parallels in many arguments advanced in favour of status quo. Even if there are such costs,efficiency and other gains more than compensate. Fourth,there is an odder argument that confidence in the rupee will be undermined. Since all currencies in the world are fiat currency now,it is doubtful that confidence is based on its physical composition. No one of course tells us what happened to the Rs 10 pilot project the RBI implemented under simulated conditions around 2005. That was presumably BOPP rather than Tyvek. Did that also fail in Indias hot and humid weather conditions? The real reason is probably a contemporary adaptation of Thomas Greshams law bad money drives good money out of circulation. And this happens because of resistance to any proposed reform measure. There are vested interests that benefit from status quo.
Paper currency requires special ink,paper and other ingredients. Indian currency paper comes from six European companies in the UK,Netherlands,Germany,Italy and France,since there is no indigenous capacity of requisite quality. For similar reasons,the ink comes from a Swiss company. These have exclusivity contracts with India,so that India-specific paper is not sold to third parties or other countries. There have been reports that some diversion has taken place to Pakistan and India has taken this up with the European Union. But that is a separate issue. Switch from any status quo hurts existing players. Commercial interests of existing suppliers of paper and ink are bound to suffer. Has that influenced our BOPP decision? Are we concerned about switch from Europe to Australia? Are we bothered that BOPP will mean a monopoly,unlike six companies for paper currency? (Thats only true of paper,not ink.)
About Los Angeles and Hollywood,Andy Warhol said,Theyre beautiful. Everybodys plastic,but I love plastic. I want to be plastic. Much of the world is going the plastic currency way. We have talked about it for a long time. Perhaps Pakistan and the ISI will provide the final nudge. Perhaps one should mention the RBIs High Level Group on Systems and Procedures for Currency Distribution set up in August 2008. A fake currency circulation figure of Rs 160,000 crore is incorrectly ascribed to this group. This group stayed away from BOPP,perhaps because that was in the finance ministrys court. But it did talk about use of better technology and that is what BOPP also is.
The writer is a Delhi-based economist express@expressindia.com
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