The paisa will soon be history; the rupee is the new paisa

A couple of months ago, India bid goodbye to the char anna - the 25 paise coin. From 1 July, this coin ceased to be legal tender.

In practical terms, it means everything now has to priced in multiples of 50 paise. At the current rate of inflation, which is 8-10 percent, the Re 1 coin will be worth 50 paise by around 2018-20.

Put another way, by the end of this decade, the 50 paise coin, too, will have no reason for existence, as nothing will really be priced below Re 1. It will all have to be in multiples of rupees.

[caption id=“attachment_59614” align=“alignleft” width=“380” caption=“On the verge of history. Ritam Banerjee/Getty Images”]  [/caption]

When the 50 paise disappears, the concept of the paisa will itself become history. Reason: there will be no physical currency-note or coin-that will physically denote the paisa.

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For practical purposes, since we have the decimal system, we may still have prices quoted as Rs 10.99, but in future this transaction can be executed only when you pay by credit card or buy multiple items and write off the balance paise.

That is, you can buy 10 kg of alu priced at Rs 10.90 a kg and pay Rs 109 in currency, but you can’t buy one kg of it at Rs 10.90. You will pay Rs 11.

The paisa, if it exists, will exist only in cyberspace, in digital accounts and smart cards. Only the rupee will exist in hard cash - notes or coins.

Why is the paisa enroute to becoming history? The answer, in one word, is inflation. When prices undercut the value of currency and coins, you need multiples of the basic unit to pay your bills over time.

Since 100 paise make one rupee, the paisa becomes irrelevant when inflation multiplies 100 times over a long stretch of time. Between 1900 and 1999, inflation reduced the value of Re 1 to less than one paisa. And now, it is worth even less than one paisa.(To have fun figuring our what the rupee in various years of the 20th century is worth in any subsequent year till 1999, click here. Use the GDP deflator measure for your answers).

This is why the paisa is irrelevant. It is now all about rupees.

On Thursday, Parliament quietly acknowledged the reality of the declining rupee when it passed the Coinage Bill 2009 that enables the government to mint-hold your breath-even Rs 1,000 coins.

Finance Minister Pranab Mukherjee was quick to assure everyone that he has no intention of doing this immediately - it was just an enabling resolution.

But enabling resolutions have a way of becoming reality sooner or later.

When Sher Shah Suri, the creator the original rupiya, issued the first ancestor of the rupee during his reign in 1540-45, it was a silver coin. This coin lasted almost four centuries with minor variations till the early 20th century.

The paisa, though, has lasted just about a century.

But in one sense, Suri’s rupaiya is coming back: our paper rupees are becoming metal at a faster rate than even before. Already coins upto Rs 5 are now the norm. The Rs 10 coin is slowly coming into regular usage. The Rs 100 coin will soon be a reality. As for the Rs 1,000 coin, who knows?