Seigniorage - The Concept:
Seigniorage involves the assessment of the profit or loss made on producing a currency. In case the Seigniorage is positive, the government makes an economic profit on the production of the currency. However, if the Seigniorage is negative, the government makes an economic loss.
For example, if the cost of printing a Rs 500 note in India is Rs 2, then Rs 498 is the profit made on the production of the note. Banks earn this profit by putting the note into circulation.
The costs are different for printing notes and for minting coins. In the case of coins, the cost will include the cost of the metal used. The government generally incurs a loss in the production of coins. This is because the melt value together with the production cost is higher than the denomination it represents.
Seigniorage forms part of the revenue for a government when the worth of the money is more than the cost of producing it. The revenue can be used by the governments to finance a portion of their expenditure without the need to collect tax revenues.
Seigniorage also refers to the number of goods or services a government can acquire by the printing of new notes. A government’s profit can also be affected by other factors, such as the need to make interest payments to the Federal Bank (Reserve Bank of India).
Generally, the RBI makes a profit from printing currency. In rare cases, it would make a loss. For example, in the FY2016-17, RBI made a loss due to demonetisation. About Rs 15.4 lakh crore currency was demonetised, and 90 per cent of it had to be reprinted in the same year. As per the income statement of the RBI, the cost of printing notes increased from Rs 3421 crore in FY16 to Rs 7965 crore in FY17.