India is running high inflation. As the base effect wears out, year-on-year inflation will come down. But prices, once they go up, seldom come down; so what has gone up must be endured. Inflation is profitable for the government because it can spend beyond its resources and the people bear the cost. But it profits in another way too. The higher the prices, the more people will need to spend to make the same purchases, and the more cash they will need. And the government is its monopoly manufacturer. Till July 30, it had issued currency worth Rs 8,362,160,000,000, manufactured at a fractional cost. As prices rise, the public has to carry more cash; so every year the Reserve Bank of India adds about 15 per cent to this vast hoard. It costs the same to print a 100-rupee note as a one-rupee one, so the RBI naturally prefers to issue high denominations. Consequently, one-rupee notes have virtually disappeared, 5- and 10-rupee notes are overused, ragged and filthy, 100-rupee notes are in common use, and so will be 1,000-rupee notes soon if prices go on rising at the present rate. The government’s most profitable businesses are the currency presses at Salboni and Mysore. Nowadays, with the availability of excellent copiers, it is easy to print out good fake notes. So the RBI uses paper that is more difficult to fake; instead of manufacturing it itself, it buys it from the world’s best note-paper makers. Now the paper it got from De La Rue has been found unsatisfactory, the RBI has complained, and De La Rue’s CEO has been shown the door. With all this turmoil, it is certain that in the next couple of years, notes will get scarcer and dirtier.

There are two solutions that the RBI should consider seriously. One is electronic cash, which can be stored on cellphones, laptops and similar devices. Their issue started in south India three or four years ago, but the RBI came down heavily on it. It is more than a year since it issued its discussion paper on prepaid payment instruments; it has seen no action. Till now, what has been considered is private issue of electronic cash issued. But it does not have to be so. The RBI can issue it itself; it can be a public monopoly just like paper currency.

The other practicable palliative is gold coins. The RBI is sitting on $279 billion of reserves. Recently, it has become wary of holding them in other countries’ currencies and bought gold. It could buy a good deal more. It is time it issued gold coins. They should have a substantial proportion of gold, though obviously not so high to make melting them attractive. They will have to be in high denominations; a 100-rupee gold coin would be easily swallowed. But Rs 1,000 and Rs 10,000 gold coins would be timely.