Economic Highlights

New Delhi, 7 May 2012

Small Coin Shortage

RBI’s BIG PROBLEM IN HAND

By Shivaji Sarkar

Small change can play havoc with the economy! The Government and the Reserve Bank of India policy is adding to at least three to five per cent inflation. The decision to scrap small coins makes products dearer for the consumers as the sellers, big or small do not return small change.

On an average every individual loses at least Rs 3 a day in such transactions. Sometimes the loss may be even Rs 10 or more if one enters into a multiple transaction. This apart it has led to rounding of most products to Rs 5 or 10. Recently, the Railway Ministry even took this specious argument to raise the train fares (calling it rounding off local train fares). Now even Rs 5 coins are vanishing so should such departments round it off to the next Rs 10 and when Rs 10 coins and currency notes become scarce it would be raised to the next higher amount.

It is a vicious method of depriving the common man, of their precious earnings. Lower availability of small coins leads to a rising price level. Let us assume that of a population of 121 crore only 25 per cent – 30 crore people – are losing Rs 3 a day. It comes to Rs 90 crore a day. It they are losing it for 300 of the 365 days, the loss to the common man, eventually becomes a whopping Rs 27000 crore a year, larger than the budgetary allocations to many ministries.

In cities such as Delhi, the customer demanding small change back is looked down upon by the shopkeepers, the taxi drivers etc. In fact, in many cases, they pocket even Rs 10 or Rs 50. The people who are being cheated grumble but can do little and get no relief.

It is also interesting to note that more affluent a region is, the larger is the loss to the consumers. In some of the remote areas of Orissa, Bihar and Jharkhand, the shopkeepers, it is learnt, take it as insult if someone does not take back small change like ten or 20 paisa. Yes, despite the RBI having stopped minting of coins of 5 and 10 paisa, these still remain in circulation in these areas.

Undoubtedly, this calls for a review of the RBI policy to do away with such small denomination coins. In fact, it has a wider social ramification as well. It causes bad blood among the people. In many cases, people avoid shops which gobble up their small change. The shopkeepers are also known to be gruff with people who insist on having their coins back. Some even force on their customers  sweets, toffees or lozenges even when they don’t want these instead of the small change.

Acrimony in retail or vegetable markets is a common phenomenon. In reality, consumers have a grudge that it is adding to the inflation. Businesses crib that people are so small-minded that they demand such small amounts back. The coin shortage is also posing problems for the businesses. In some cases, as in Kolkata, shopkeepers have been purchasing coins from beggars at a premium!

On the national front, India claims to have developed. It, however, still suffers from the psyche of poor developing nations. In the US, a consumer is returned 96 cents in coins if his bill is for say $1 and 4 cents. This in India is simply unthinkable.  

If businesses have to grow smoothly, the RBI has to make arrangements for easy supply of small coins. It needs to innovate. Coins worth crores get locked in donation boxes of large temples like Tirupati or Vaishno Devi. The RBI needs to formulate a policy to bring these back into circulation. Some of the temples send these coins into their chambers where with time the value gets appreciated.

The practice of the banks and credit card issuers to round off the change mostly to the nearest higher rupee also makes people lose loads of money. Banks are becoming richer with many unethical practices and surreptitious increase in bank charges. It is affecting the core of the economy.

Many other service industries such as telephone, gas, or petrol pumps also do the similar rounding off – gobbling up consumers’ money. Shortage of coins is having a ruinous effect on the economy.

Thomas J Sargent and Francois R Velde in their recently published book Big Problem of Small Change say that for the last many centuries shortage of small coins has been a phenomenon and governments have been finding it difficult to face the challenge. In a way it has been afflicting nations in different times. But the governments have to innovate to look for new ways to overcome such shortage.

The RBI certainly has a case for deciding the intrinsic value of such coins. It is stated that the razor blade industry melts one-rupee coins to manufacture six blades. In other words, they are earning huge profits as the quality of metal is unmatchable and selling the blades at premium.

Some artificial jewellers also melt the coins as the intrinsic value is more than the face value of the coins. The RBI is not supposed to provide raw material to this kind of industry. But it needs to evolve a system to mint coins with metals which should have a junk value. It calls for RBI to carry out research for minting coins or printing small value currency notes.

Sometime back there was a proposal to print small value plastic tokens with due security marks. Any metallic coin is certain to have the value appreciated. Of late, RBI has decided to change the raw material used for manufacturing of coins from Copper-Nickel to FSS (Ferritic Stainless Steel). But FSS is also a coveted metal for some industries, which would like to melt it to make fancy items and earn larger profits.

The challenge is perennial. The answer is not in giving up small denomination coins or currency notes. It is true that small coins and small denomination currency notes get soiled soon. Their intrinsic value also has to be kept lower than their face value. These call for looking for new methods.

It can be done in two ways. One is to mint plastic tokens with security marks perhaps with a small metal foil type cover and also issue small currency notes with plastic lamination. The other is also to print currency notes of odd denominations like Rs 6, 7, 9, 11, 15, 19 and so forth. The problem is often with odd figures. This may solve the problem to a large extent. However, giving up small coins  is no solution. The RBI should think how to handle the small change problem which has a severe economic and social cost. Any remedies? ---INFA

(Copyright, India News and Feature Alliance)