What fall in rupee value means

Proloy Bagchi

The value of the Rupee is gradually eroding. This was underscored in a recent RBI report which studied the share in circulation of various currency denominations in 2010-11. The study effectively reflects how the erosion picked up pace since the economic reforms process began in 1990-91 and, seemingly, accentuated since 2003-04. Pertinently, the research reveals that in 2010-11 the share of Rs 500 denomination notes "has gained significance and accounted for 47 per cent of the total currency in circulation" and quickly emerged as the second most important denomination since 1998-99 and then became the most important in 2003-04 replacing Rs 100 note.

This is not all. The report indicated that the Rs. 100 notes which had a significant presence in circulation even after introduction of the Rs. 500 one lost their second position after introduction of the Rs.1000 notes in 2007-08 and came to account for 27 per cent of the total currency in circulation. Accounting for nearly 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. Pertinently, rise in prices of goods and services is a problem that has been stalking the country since Independence. In fact, since India became free, prominent national leaders in almost every speech talked of fighting what they called a "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 wayside.

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, with the rise in the rate of growth. The decline in the rate of growth during the 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, 100 rupee notes occupied a significant position accounting for almost 50 per cent of the currency in circulation, as against around 14 per cent in 2010-11. Likewise the share of the 10-rupees currency that was pretty high before the 1970s, around 34 per cent during the 1970s-1990s, progressively declined and came down to only 2 per cent in 2010-11.

There has been enormous shrinkage in the rupee's value. Whereas at one time, especially during the 1950s-60s, Rs 10 commanded appreciable purchasing power, its value today is perhaps not even like that of one rupee of those times. The research also revealed that the currency note of Rs 20 denomination that was introduced to supplement Rs 10 notes remained important only until 1982-83 and constituted 8 percent of the notes in circulation. But it lost whatever little significance it had by 2010-11 when it accounted for only 0.6 per cent of the notes in circulation.

Similarly, the Rs 50 denomination currency, introduced presumably to reduce usage of Rs 10 and 20 notes, became the second most important denomination in the 1980-90s. While in 1992-93 it accounted for 32 per cent of the currency in circulation, its importance in 2010-11 came to an utterly insignificant position of 1.7 per cent. Notably, the study has not dealt with coins that used to be or are in use. Perhaps, it was confined to the circulation of currency notes of Rs 10 and above.

Alongside no mention has been made of the Rs 1, 2 and 5 notes. Possibly these are no longer being printed, having been substituted by coins. While Rs 1 and 2 notes have disappeared from circulation, one occasionally comes across soiled Rs 5 notes. Ditto the case of coins of fractions of a rupee which have long since disappeared. A cost-benefit analysis led to discontinuance of minting of 1, 2, 3, 5 and 10 paisa coins, eventually ceasing to be legal tender along with the 25 paisa in 2011. Though the 50 paisa coin continues as a legal tender, it is not seen any more, having lost practically all its value.

Alas, small change has simply vanished from the markets. Today's small change constitutes the Rs 1, 2 and 5 coins. The recently introduced Rs 10 coins are not yet quite visible. Undeniably, empirical studies generally reflect accurately the situation on the ground. Those of us who spent our adult life in post-Independence times know how over the years the Rupee saw its value being pared down.

Gone are the days of 1950s and 1960s when a seer (approximately a kilo) of grains --- rice or wheat --- and lentils would be available for 10-12 annas, from half to three quarters of a rupee and a kilo of mutton for Re 1. In those far-away days fractions of a rupee had value. One could have a meal for less than Re one.

Being packed with value, Rs 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 as 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! Clearly, the prospects for the rupee do not seem very bright, what with adverse trade balance, high current account and fiscal deficits, mounting external borrowings and slowing economic growth.

In addition, with large-scale political and bureaucratic corruption involving mind-boggling sums, enormous amounts of unaccounted wealth is floating 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 58 to a US dollar is a sign of weakening of the rupee. Soon the RBI might find that Rs. 500 currency notes have been displaced from their prime position by Rs 1000 notes!

- INFA