Demonetisation to cost Rs.168 billion to RBI and Government

by Mahesh Vyas

There are at least four kinds of costs the government and the RBI have to bear in the demonetisation exercise. First, they have to print new currency notes; second, they would have to bear the cost of transporting the new currency notes to all bank branches, post offices and ATMs; third the government will have to pay highway toll agencies who have been asked to make the highways toll-free; and fourth they have their own costs in terms of human resources and corresponding overheads to manage this mammoth operation.

According to an article in the Mint newspaper on November 14, the cost of demonetising the old currency notes (writing off the notes printed earlier) and printing new ones could be about Rs.109 billion. To the best of our understanding this number has not been challenged since it was published. We therefore accept it as a reasonably reliable estimate.

We estimate the cost of transporting this cash to the various bank branches, post offices and ATMs as Rs.16 billion over the 50-day period. This cost consists of airlifting the cash to all 123 airports in the country in six sorties and then transporting them by road to the bank branches, post offices and ATMs. We have not taken into consideration a recent announcement that even petrol pumps would be used as cash exchange points.

Highway tolls became a major bottleneck immediately after the announcement of the demonetisation scheme. In response, the government announced that national highways should waive toll fees and the government would compensate them for the loss. This waiver was initially for a limited period but as the liquidity crunch has continued, the government kept extending the waiver. We believe that this waiver would continue till December 30 and will be applicable to all the 385 national highways.

News reports mention that the highway toll agencies are losing Rs.800-900 million every day on the national highways. For our calculations we take a cost of Rs.800 million a day. This implies a total cost Rs.40 billion. There have been some reports of state governments waiving state highway tolls as well but, we have not taken these into consideration.

Like bank employees are fully engaged in the demonetisation exercise a substantial contingent of the employees at RBI, Ministry of Finance, PMO, etc are engaged in managing the same. The government has been very quick to react to ground realities. It has made frequent changes to the rules of the game of exchange. At times its reactions have caused greater hardships, but the point here is that the government is fully engaged in the operations.

We have not been able to make any estimate of the direct monetary cost of this intense engagement of the government. We have therefore assumed that its costs would be one per cent of the cost borne by banks. This works out to less than Rs.3.4 billion. Implicitly, we do not consider the cost the government may bear in sending notices and following up on these after December 30, 2016. We also do not take into consideration that large volume of litigation that could follow such notices.

Given the above limitations of the exercise the cost to be borne by the government and RBI works out to be Rs.168 billion.