Another negative fallout of demonetisation is the proliferation of soiled and tattered notes in smaller denominations such as Rs10, 20 and Rs50. This is a menace in certain areas but since the problem is largely in non-metros and does not affect the ATM-using crowed, it has remained largely out of the public eye. After all, nobody cares about the issues affecting rural or less privileged classes whose livelihoods are earned in smaller denomination currency. (See feedback on soiled notes at the end of this report).

Based on data gathered through multiple sources, we took up the issue with the Reserve Bank of India (RBI). To his credit, RBI Governor Dr Urjit Patel responded immediately and we had an opportunity to present the data to senior officials. The RBI has assured us of a quick action but officials who spoke to us do not want to be quoted. Let us first look at why the RBI's clean note policy has gone for a toss after demonetisation last year and what can be done about it.

It is now well acknowledged that RBI did not have enough time to prepare for demonetisation and dependence on Rs2,000 notes as the main denomination for re-monetisation was a mistake. So it appears that the printing of Rs2,000 notes has been stopped after 3.8 billion notes were printed. Instead, the printing of new Rs500 notes, which were in acute short supply was cranked up and 18 billion of these notes have now been printed. The printing of Rs500 notes too has stopped. A new denomination of Rs200 has been introduced and adequate supply is expected to be available by the end of October or early November, say RBI sources. The Rs100 and Rs50 denomination is less of a problem in cities, since ATMs require a certain minimum quality to be used for machine counting.

But it is a different story among small traders, vendors and daily wage earners in cities and especially in smaller towns. We have shocking feedback from Amritsar, Goa, South Odisha, Chandigarh, Ranchi and even in Gurgaon, Mumbai suburbs, Chennai and Bengaluru. Someone from Bengaluru even reported getting a patched up Rs100 note from an ATM in the city.

 
What is the source of soiled and tattered notes? Why is it becoming an issue? As rising public outrage over the deaths and long queues of people waiting to get their own money back during demonetisation was rising, the RBI decided to pump all the currency held in its vaults into the public domain, including the safety reserves as well as 12 billion pieces of soiled and tattered notes that had been collected from banks for destruction. However, even after the currency shortage eased, such soiled notes have not been pulled out for destruction; nor has the fresh stock of soiled notes generated over the last year been picked up for destruction, to avoid shortage.

According to official estimates, nearly 25 billion pieces of soiled notes are in circulation (Rs12 billion reintroduced during demonetisation plus fresh soiled notes generated since then) and the worst denomination is the Rs10 currency, which is widely used. The life of a currency is 3.5 years and the RBI has a clear "Clean note policy" to deal with withdrawal and destruction of notes, which was introduced after severe outrage over tattered currency in the 1990s.

The problem is made more acute by the Finance Ministry, which takes care of minting of coins. The government has been continuing to mint and dump into the market Rs10 coin with different designs. This is causing panic and confusion among people about the coins being fake. RBI sources are emphatic that there are no fake Rs10 coins, but since designs differ and the government hasn't bothered to clarify and educate people, these coins are taboo in many parts of India, despite the currency shortage.
 

 
There is one more issue that the RBI needs to address. With new currency having been announced and introduced in multiple denominations, it has the task of replacing old currency as quickly as it can.  The fact that a Rs500 note is smaller than a Rs100 note is agonizing to the blind and there is a change.org petition started by them to demand quick action by the RBI. According to my sources, there are 105 billion pieces of currency in circulation today of which nearly 55 billion need to be replaced - these include soiled notes and older currency (Rs50 and Rs100 which has multiple designs floating around and newer versions are introduced) that needs to be replaced.

The question then is, why is the RBI not withdrawing old notes fast enough? We understand that the pressure of printing new notes has dwindled so much that the government's spanking new press at Mysuru, which delivered spectacularly during demonetisation, may be largely idle at the end of November.

It is ironical then currency presses are going to be idle, while public outrage over soiled notes is increasing. We understand that the RBI still has its hands full over counting and destroying demonetised currency, because of the government request to check and count it multiple times for fakes.
We now have a strange situation where the RBI is overstocked with new currency, but it is not going out to the public. We understand that after our representation and feedback, instructions have been issued to accelerate replacement, which had slowed down. While we watch what happens, take a look at feedback on currency from across India.