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When the Reserve Bank of India discontinued 25 paise coins in April 2011, it left the product marketing division of Parle Products, India’s leading confectioner and biscuit maker, in a quandary.

Parle’s top-selling Kismi Toffee, wrapped in red and white paper, was immensely popular in small cities and villages. Priced at a quarter of a rupee, it was a sweet steal for customers. The size of the cardamom-flavoured toffee complimented its price. But that brand-product-price synergy changed when RBI withdrew 25 paise coins from circulation.

“We had to upgrade Kismi Toffee to 50 paise per piece, which was a crowded price point. Almost all Indian toffees and candies are priced at 50 paise and Re 1 per piece,” says Bhavin Panchamia, senior product manager, Parle Products.

“Our concern then was how to sell Kismi Toffee at double the cost; also, we did not want to discontinue the toffee as it was a great brand. We decided to increase the size of the toffee to justify the hike in price,” adds Panchamia.

While Parle acted in the interest of its customers by re-sizing Kismi Toffee, lesser-known confectioners and small-scale industrial (SSI) units that made products such as pickles in small packets, sweetened tamarind and gooseberries-in-brine,  never really bothered to add value. They just changed the price tag to 50 paise.

The discontinuation of 25 paise coins, in a way, ‘burdened’ 50 paise and Re 1 coins as countless articles priced at 25 paise got upgraded to these price points. Rising inflation worsened the situation, resulting in a severe shortage of both ‘small coins’ (up to 50 paise) and ‘rupee coins’ (Re 1 and higher denominations).

“Higher raw material costs and a shortage of coins at apt price points are causing a lot of problems for chocolate manufacturers. If we increase the price, we face stiff resistance from dealers and retailers; but if we do not, we’ll suffer losses. It’s a very difficult decision,” says Narain Jagwani, CEO of Pune-based Atlas Confectioners.

According to confectionery manufacturers, 98 per cent of toffees, candies and eclairs are sold in the Re 0.50-1 price range. But confectioners are now contemplating raising product prices to the next level.

“We have a Re 1 product (a lollipop), but it doesn’t make sense to focus on that price point. We’ll start promoting our Rs 5 product now,” adds Jagwani.

Inadequate supply of small coins can wreak havoc on the economy. It can jack up prices of small commodities and services, creating a kind of indirect inflation. Take the case of tollways: the Bandra-Worli Sea Link has increased the base toll to Rs 55 from Rs 50. Likewise, toll rates on the DND Flyway, between Delhi and Noida, have been marked up from Rs 11 to Rs 12 for two-wheelers and from Rs 22 to Rs 25 for cars.
9 billion coins were ordered by RBI in 2012-13 (Shutterstock)
“We raised toll rate for cars to Rs 25 as it was getting increasingly difficult for us to return Rs 3 (to users) due to the shortage of Re 1 and Rs 2 coins. We cannot keep people waiting for change,” says Anwar Abbasi, senior manager at Noida Toll Bridge Company, which manages the DND Flyway.

FMCG companies have also been impacted by the shortage of small coins and the consequent devaluation of the Re 1 coin. Shampoo manufacturers who revolutionised the Re 1 sachet, are among the worst hit. Re 1 and 50 paise sachets account for over 69 per cent of shampoo sold in India.

“Devaluation and shortage of Re 1 coins are prompting shampoo manufacturers to reduce ‘net quantity’ in sachets. Most shampoo makers have reduced their sachet quantities from 10 ml to 8 and 6 ml,” says C.K. Ranganathan, CMD of the Rs 1,100-crore consumer staples company CavinKare. “The value of Re 1 has depreciated significantly over the past few years; 50 paise as a price point may soon cease to exist,” adds Ranganathan.

Unavailability of coins could also encourage black-marketers to hoard them, only to  release them at a premium later. While it is not clear if shortage of coins is causing problems at the macro level, it sure is causing a lot of hardship to people on the street.

“There’s a shortage of Re 1, Rs 2 and Rs 5 coins. We mostly get Rs 10 for a ticket that is worth Rs 6. The onus falls on us to pay back the remaining Rs 4; many a time, we request passengers to forsake small change,” says Ashok Kutekar, a BEST bus conductor on the Worli-Elphinstone Ring Road route in Mumbai.

Kutekar’s problem is endorsed by Kishore Sonurlekar, who manages the ‘ticket and cash department’ at BEST’s depot in Colaba. “We don’t get enough change for the sum of money (including coins) we release from our coffers every day.  If  we give Rs 100 worth of coins and notes to our conductors every morning, we get back only Rs 20 worth of small change at the end of the day,” he says.

That said, Sonurlekar’s job is made easier by ICICI Bank, from where he sources coins. Earlier, transport corporations, tollways, hotels and others sourced coins from RBI offices directly. A few years ago, RBI scrapped direct coin purchase and instructed public sector and private banks to undertake the task of distributing coins in the country.

The Missing Pieces
Lack of minting infrastructure and poor demand estimation are said to be the reasons behind the shortage of coins in the country. RBI and its mint, Security Printing and Minting Corporation of India (SPMCIL), have failed to release adequate new coins into the economy. In fact, SPMCIL has been falling short of targets consistently over the past few years due to inadequate infrastructure.

As per RBI data, there are 84.72 billion coins in circulation (adding up to Rs 15,300 crore) as on 31 March 2013, up from 78 billion pieces in 2012. Of this, 14.78 billion are small coins (50 paise coins), 35.88 billion are Re 1 coins, 22.11 billion Rs 2 coins, 10.67 billion Rs 5 coins and just over 1 billion Rs 10 coins. There are also around 37 billion notes in Rs 2, 5 and 10 denominations. Despite the increase, the demand for coins continued to outstrip supply.

“I agree there’s a shortage of coins. RBI is working out ways to bridge the demand-supply gap. We’re also streamlining the distribution system; commercial banks have been directed to handle coins more efficiently,” says B.P. Vijayendra, principal chief general manager, RBI. “Our main problem is that SPMCIL has not been able to mint as many coins as we want in the system,” he adds.

It is usually RBI that decides the volume and value of banknotes and coins to be printed/minted each year. The decision is taken on the basis of inflation, gross domestic product (GDP) growth, replacement of soiled notes/defaced coins, metal prices and reserve stock requirements. In times of high inflation, the central bank is forced to print/mint more currency. This, perhaps, was the reason why RBI placed a request with SPMCIL to mint 9 billion coins last year — a sharp departure from its regular (annual) order of 6 billion pieces. But SPMCIL was not equipped to handle the sudden spurt in demand.

The mint could only supply 6.8 billion pieces against RBI’s order of 9 billion. The latest indent put forth by RBI (for 2013-14) requires SPMCIL to mint over 12 billion coins. Mint officials, however, see this as an unachievable target.
Today, the number of sub-Re 1 coins in circulation is less than a third of what it was in 2011

“RBI projections have been quite erratic. They just doubled the minting order from 6 billion coins in 2011-12 to 12 billion in 2013-14. We’ll never be able to achieve it. At best, we’ll be able to log 7.6 billion pieces this year,” says a senior SPMCIL official on condition of anonymity.

SPMCIL is fighting its own battle against inadequate infrastructure and outdated processes. The organisation needs at least Rs 800– 1,000 crore to modernise its mints. “Some 20 old machines will have to be scrapped. We’ll need at least 40 new coin processing machines (priced between Rs 8 and 10 crore a machine) to meet the RBI-projected coin demand. New polishing machines and dyes will have to be installed as well. There’s also need for more space for minting and storing coins,” adds the SPMCIL official.

While there’s a sense of urgency among RBI and SPMCIL officials, the finance ministry seems unperturbed by the roadblocks.  It is yet to take a decision with regard to modernisation of mints.

Past Comes Calling
India faced a similar situation in the 1980s, when it sought external help to tide over currency shortage. RBI had then outsourced the minting of 50 paise and Re 1 coins to the UK’s Royal Mint, the South Korean mint and the Royal Canadian Mint to meet demand.

RBI’s decision to place an important sovereign function in the hands of foreign players came in for flak from nationalists. Irrespective of how nationalists feel, it appears that the ongoing crisis may soon have RBI reaching out to overseas mints to meet the coin shortfall.

“Evidently, there has been a mismatch in demand and supply of coins that was not anticipated by RBI. There is less emphasis on minting coins of Re 1 and Rs 2 denominations as, with progressive inflation, there is little value in these coins,” says Madan Sabnavis, chief economist at CARE Ratings, a credit rating agency.

“Further, with erosion in the value of lower denominations, the demand for higher denomination coins has increased.  Such a situation has generated a black market for coins where the premium can vary between 5-10 per cent,” adds Sabnavis.

At Mercy Of Metals
In Rs 5 and 10 denominations, RBI prefers to mint coins as these notes have a lifespan of just about 8-12 months, as opposed to coins that can remain in circulation for 10-12 years. However, both RBI and SPMCIL lack a correct estimate of coins to be minted, in the absence of clear data on the number of ‘defaced’ coins withdrawn from circulation.

While coins last longer, minting them has its own issues as prices of metals keep fluctuating. The new 50 paise, Re 1, 2 and 5 coins are minted using ferratic stainless steel (FSS).

A few Rs 2 and 5 coins have also been minted using cupro-nickel as base, while the new Rs 10 coins are bi-metallic, with an aluminium-bronze outer ring and cupro-nickel centrepiece.

When minting bi-metallic and cupro-nickel coins, RBI and SPMCIL have to take into consideration the price of metals and signorage (the difference between the value of the bullion used and the face value of the coin). If metal prices are too high, it is not advisable to mint low-denomination coins.

“Mints are conscious of higher metal prices. This, perhaps, is the reason why new coins are smaller and lighter (in weight). Almost all coins have been resized a point lower,” says Ravi Shankar Sharma, secretary, Numismatic Society of Calcutta.

FSS is a good option for coins, but SPMCIL doesn’t have hot furnaces to recycle the tough metal. It uses the furnaces at the Salem Steel Plant to melt defaced FSS coins. A larger number of FSS coins would, therefore, require SPMCIL to install its own furnaces to recycle and re-use scrap.

Being an independent government body, SPMCIL has to think about its margins. As per the government’s procurement structure, it derives higher margins for minting Rs 5 and 10 coins compared to 50 paise and Re 1 coins. An email query sent to SPMCIL failed to elicit any response till the time of going to press.

Supply of coins from the mint is way short of requirements stated by RBI. The only exception was in FY12

Hoarders’ Delight
A couple of years ago, Indian intelligence officials swooped down upon organised gangs that helped smuggle coins to Bangladesh, where the coins (mostly Re 1, Rs 5 and 10) were melted down and turned into razor blades, chains and ornaments.

According to media reports, the coins were retrieved from ground-level collectors, including beggars, at a premium of 10-15 per cent. The practice coincided with periods of high metal prices. Such illegal practices were also prevalent in the 1980s when nickel and copper coins were melted down to make ornaments and other knick-knacks. “We haven’t come across instances of coin melting in the recent past. We are quite vigilant; such malpractices will not escape us,” affirms P.K. Dash, additional director general, Directorate of Revenue Intelligence, Mumbai.

While finance ministry mandarins and RBI policy-makers rack their brains to bridge the coin deficit, beggars and stall owners are having a swell time sponging out coins and selling them at a premium. Coins worth Rs 90 can easily fetch them a hundred rupee note in these times.

There are just two ways to resolve the coin crisis. Either the government fast-tracks mint modernisation or RBI approaches overseas mints to turn out rupee coins. If it’s still unable to arrive at a decision, policymakers can always flip a coin to decide.  

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(This story was published in BW | Businessworld Issue Dated 10-02-2014)