With an unexpected public announcement that is popularly dubbed as the “Surgical Strike” on the black money Prime Minister Mr. Narendra Modi unveiled a significant event in the Indian economic history. The announcement backed by the statutory changes and the recommendation of the Central Board of Reserve Bank of India (RBI) rendered all High Denomination Notes of the value Rs. 1000 and Rs. 500 as invalid for legal tender.

People often refer to this as demonetisation and there are various economic analyses of the pros and cons of this process. Of particular interest to economists is the manner in which the RBI is finally going to handle the withdrawn notes from circulation. To take a back-of-envelope calculation, out of the Rs. 17 lakh crore worth of currency notes in circulation (at March 2016 as per RBI reports), 80% or Rs. 14 lakh crore (approx.) is in the HDNs. Now there is this element of black money that was hoarded in cash hitherto, a portion of which may not be turned up to the formal banking channel for exchange with new notes for possible taxation aspects. Assuming if the notes worth of Rs. 12 lakh crore have been tendered for exchange with new HDNs, two questions merit attention would be:

  1. What happens to the Rs. 2 lakh crore that is currently residing as liability of central bank (issued in the form of currency in circulation) but has not been tendered for exchange?
  2. What happens to the physical currency notes worth of Rs. 12 lakh crore that are tendered for exchange with RBI as they no longer represent currency note of value, but a mere physical paper?

The views of economists w.r.t. the first question (a) seem to be divergent. Since these are forming part of liabilities of RBI, and are (after the last date for exchange of old notes with new notes officially as per law) unclaimed notes, these can either be transferred to reserves or can be used to set off against the government bills against which these notes have been issued in the first place. The most plausible explanation seems to be that these liabilities need to be phased out in tandem with the tenancy of the government T-bills against which these are issued in first phase.

While the final action that is going to be taken by RBI can only be known in future, there seems to be some good precedence for the possible answer to the second question. Historically, the activity of exchanging the old notes with new notes is undertaken by RBI on a regular basis (remember the soiled notes concept?). Now these all notes are sorted by RBI manually once again to see if they are re-usable notes. After this, these notes are subject to the machine scrutiny named as Currency Verification Processing Systems (CVPS).

Each CVPS is capable of processing 50,000-60,000 notes per hour. It counts, examines the genuiness of notes, sorts notes into fit and unfit and destroys the unfit notes on-line. The shreds are on-line transported to a separate briquetting system where they are compressed into briquettes of small size. The system is also environment-friendly, as it does not create pollution that was created by burning of notes in the past. The briquettes can be used as residual fuel in industrial furnaces. They can even be used for land fillings or for making items for use at office and home and paperboard.

Even in the United States this briquetting technology is administered with utmost security standard so that the currency is crushed almost to the extent of a powdered form (so that there is no security information that can be gleaned from these pieces). The briquettes are then used in several major military installations that still use some coal-fired furnaces on their campuses. These installations can augment the coal by co-mingling it with wastepaper briquettes, meaning lower emissions and a little less pressure on how much coal gets used.

In Hungary, the government decided to use these briquettes to help the needy in the deadly cold snap. Hungarian central bank pulped wads of old notes into briquettes to help heat humanitarian organisations. Since these briquettes have a high calorific value, they require only a few bits of wood and the rooms are kept really warm.

The journey of a currency note thus begins its life as cash once the notes are issued into circulation by the country’s central bank, becomes a trash once they are stripped off its legal tender status by law and finally becomes ash when they are briquetted and finally destroyed. And mind you, in the end, it is not the “money” that is getting destroyed, it is just the “currency note” that is being destroyed, which by virtue of its legal status played an important role for a major part of our life – and subsequently lost its life legally.

Written by Dr Srinivas Yanamandra

Originally published on his blog. Reproduced with the consent of the author.