Raw material shortage is likely to hit India's ambitious plan to become self-sufficient in currency paper

NEW DELHI, Jul 21, 2010 (Mint - McClatchy-Tribune Information Services via COMTEX) -- The crisp currency notes nestled in your wallet are most likely made from a special type of paper that is imported every year because production capacity at the government's only mill to make similar paper has stagnated since 1968.

In an attempt to cut the import bill and curb the proliferation of counterfeit currency, the government plans to increase capacity at its paper mill located in Hoshangabad, Madhya Pradesh. But securing the cotton waste that is used as raw material for currency paper is going to be difficult, say experts.

The government plans to spend Rs18,000 crore to modernize the Hoshangabad mill and a new assembly line in Mysore, taking its output to 18,000 tonnes by 2013, said M.S. Rana, chairman and managing director of the finance ministry-controlled Security Printing and Minting Corp. of India Ltd (SPMCIL). Its capacity has been stuck at 1,000 tonnes since 1968.

The mill's current capacity is enough to print a billion currency notes a year, while India needs more than 15 billion notes to grease an economy where electronic transactions and credit cards are still not ubiquitous.

India's import bill for raw material, including paper, more than doubled from Rs328 crore in 2007 to Rs626 crore in 2008, according to a parliamentary committee report on public sector units released in April. In 2009, India imported 17,936 tonnes of paper for Rs1,173 crore, according to the the Reserve Bank of India (RBI) subsidiary Bharatiya Reserve Bank Note Mudran Pvt. Ltd (BRBNMPL).

Nearly 95% of the paper is currently sourced from suppliers such as Arjowiggins SAS, De La Rue Plc, Crane and Co. and Giesecke and Devrient GmbH (G&D), said an official who works at a currency press, asking not to be named.

In March, finance minister Pranab Mukherjee had laid the foundation of a 12,000-tonne paper mill in Mysore, a joint venture between SPMCIL and BRBNMPL.

Indigenization of security-grade paper production will help curtail the spread of fake currency notes.

The number of counterfeit notes reported to RBI doubled to 398,111 pieces in 2008, the year India's biggest haul of such notes worth Rs4.02 crore was unearthed in Uttar Pradesh.

RBI estimates eight notes out of every million are fake. But Sujeet Rawal, former national head at ICICI Bank Ltd's currency management division, said the problem was much more acute.

"All fake notes do not get reported. The data with RBI may not be accurate," said Rawal, adding that every note out of 25,000 is not genuine--or five times more than the RBI estimate.

To keep forged notes out of circulation, "we have to have control over the paper", said Govind Mohan, joint secretary at the finance ministry and a director at SPMCIL.

But boosting the production of security-grade paper faces a challenge--the supply of raw materials linter pulp and comber, both by-products of cotton.

India is the world's largest producer of cotton after China. Output crossed 29 million tonnes last year. Yet, linter and comber are hard to come by for paper production, say experts.

Linter, the viscose-rich cotton fibre that lies attached to the seed after cotton puffs are extracted, is widely used in the manufacture of defence propellants, varnish and paints, among other things.

Its production is also limited, with the bulk of cottonseeds going under crushing machines for oil and cattle feed, according to the All India Cottonseed Crushers Association. Only 45,000 tonnes was produced last year.

Comber, on the other hand, is abundantly available. About 586 million kg was produced last year, according to the Confederation of Indian Textile Industry.

But much of the comber generated during the spinning of specialized yarn contains impurities that render it unfit to be used for currency paper, said A. Ramani, a cotton analyst and a member of the government's Cotton Advisory Board.

Comber and linter are used in the ratio of 80:20. For 18 billion notes, 23,000 tonnes of material (20% margin for wastage) will be required.

Ramani suggests that the government offer incentives to entrepreneurs to boost their production. "We have the raw material (cotton). But we have to give assurance to suppliers with long-term contracts and premium prices to get steady supply of contamination-free comber," he said.

A delinting machine, which separates the linter from the seed, costs Rs1.2 crore.

Finance ministry officials said importing the raw material is also an option.

The parliamentary panel report on public sector units had recommended a full-scale indigenization of currency paper and called for the printing of Indian currency strictly within the country to avoid extra notes falling into the hands of terrorists, extremists and smugglers.

In 1997, RBI had outsourced printing of bank notes worth Rs1 trillion to three overseas firms--American Banknote Co., De La Rue and G&D--to meet the currency shortage. The panel criticized the move.

But as cash continues to be India's preferred mode of financial exchange, money in circulation has more than doubled in value to Rs7 trillion from Rs3.6 trillion in 2005, crossing 51 billion pieces in September 2009, according to RBI. This is likely to go on increasing.

"It's a big challenge," said Ramani, referring to the local production of security-grade paper. "But it's not an impossible challenge."