On May 19, the Reserve Bank of India announced the withdrawal of the Rs 2,000 denomination notes from circulation. The pink note came into circulation following the infamous demonetization of Rs 500 and Rs 1,000 notes nearly seven years back. People who have been through the horrors of demonetization now look at this exercise of withdrawal of Rs 2,000 notes with a sense of déjà vu, notwithstanding the RBI’s assurances to stakeholders, experts’ views, and opposition parties’ criticism. The Pioneer’s Amartya Smaran looks at the implications of the withdrawal of India’s highest value currency notes.
Professedly in an attempt to curb corruption, Prime Minister Narendra Modi, on the evening of November 8, 2016, announced that Rs. 500 and Rs. 1000 notes would be demonetised. Thesudden decision triggered controversies and wiped out 85% of the currency in circulation overnight. While the Prime Minister’s supporters hailed the decision, his detractors, including economists, opposition parties, and many segments of the population,decried the heartless manner in which it was eventually implemented.
As per the Reserve Bank of India, the total value of Rs. 2,000 notes in circulation witnessed a drop from 37.3% (March 31, 2018) to 10.8% (March 31, 2023).
RBI governor Shaktikanta Das reaffirmed on May 22 that Rs. 2,000 notes continue as legal tender. People can exchange these notes-upto 10 notes or Rs. 20,000 at a time-in all banks starting from May 23 until September 30. And one neednot be an account holder of a particular bank to exchange Rs. 2,000 banknotes.
If individuals need more than Rs. 20,000 in cash for business, or other purposes, one can also deposit the Rs. 2,000 notes into their accounts without any restrictions. However, as per income tax rules, one must quote PAN for transactions exceeding Rs. 50,000 in a single transaction. Later, people can withdraw cash from deposits accordingly. There is no need to pay a fee in order to exchange the notes.
Speaking to the media, the RBI governor emphasized that this particular exercise was part of the currency management operations of the Reserve Bank of India. He also said a somewhat similar exercise was undertaken in 2013-2014, whereby notes printed before 2005 were withdrawn from public circulation.
“According to section 27 of the RBI Act, the Reserve Bank is required to not issue notes which are excessively soiled, defaced, or damaged. Under that section, for a long time the Reserve Bank has been following what is called a ‘Clean note policy’. Therefore, from time to time, the Reserve Bank withdraws currency notes of particular series, and issues fresh notes,” the RBI governor said.
The Rs. 2,000 notes were introduced to counter the loss of value created in currency as a result of demonetisation. Now, according to the RBI governor, that primary objective has been fulfilled as there are enough notes of other denominations in circulation. The circulation of Rs. 2,000 denomination notes dwindled down from 274 million (end of March 2020) to 214 million (last fiscal year).
The government has reduced the printing of Rs. 2,000 notes from 2017. A total of 3,500 million notes were printed in the year 2016-2017, 111.507 million in 2017-2018, 46.690 million in 2018-2019, and the years following that (2019-2020, 2020-2021, 2021-2022 (as on 31-12-2021)), not a single note was printed. All the years put together; 3701.188 notes were printed. As per 2019 reports, the share of Rs. 2,000 notes seized during searches conducted by the Income Tax Department declined from around 68% in 2017-2018 to around 43% now.
Dr. Vikas Singh, an economist and author who has created sustainable livelihood opportunities and impacted millions of Indians, does not see the withdrawal of Rs. 2,000 notes as an effort to curb corruption. Dr. Vikas Singh shares: “It’s a non-event. It will not impact its fight against the corrupt in any meaningful manner. The welcome feature will be nudging the of people to digital currency.”
Post demonetisation in November 2016, there has not been any sort of decrease in corruption and the government’s aim to go cashless hasnot really showed an uptick. He continues: “Corruption is both a cause and effect of the political process. Money supply (currency) is only one aspect; and decreasing. The corrupt no longer (compared to a decade ago) hoard cash. There are other avenues to profit. They use several loopholes to launder money. Mauritius with a GDP of $12 billion, houses over 6,000 companies. It is easy to see what’s happening there and how entities are capitalising on the loopholes. The rich farmers pay no taxes, corner over two-thirds of the agri subsidies.”
“If the government is serious about eradicating corruption, it must bring in radical reforms, and start with the electoral reforms,” observes Dr. Vikas.
“It’s not only the source but also the tributary that funnels cash. Reforms will be needed across the administrative and judicial ecosystem too. It must equally create laws and enable the judicial system to make examples of the corrupt. The corrupt know that it will take a generation to be convicted.
21st century India cannot be governed by 20th century institutions. Many of our institutions lack both the will and the capacity to fight corruption. However, there are some to look up to. The RBI (proactive, agile). CAG too (doing the right things the right way). Similarly, the Election Commission can teach other institutions a lesson or two.”
The citizens have a bigger role to play than imagined. Most individuals, who ‘experience’ corruption, regrettably do not understand the malaise. Many do not appreciate the impact it has on the economy and society, and therefore neither fight back, nor ‘discourage’ the corrupt. The impact of corruption on society is intangible, yet more profound. Corruption leads to a permanent loss in productive & human potential, limiting opportunities, narrowing social and economic mobility, according to the expert.
Dr. Vikas hints at the correlation between 2016 demonetization and the present withdrawal of Rs. 2,000 notes. However, he says that both are fundamentally different. As per his observation, “This may well be a no ‘event’. The masses will not be impacted. Over 99% of the Indians ‘keep’ less than 50k in currency. And with digitisation, most middle- and low middle-income people are moving to the UPI.”
Sachin, a taxi driver from the city, laments: “All this makes no sense to any of us. Even more so, it doesn’t even have any impact on the ones with black money! For someone who earns as little as me, what difference does it make? All this will ultimately open new avenues for the guys with black money to come up with new ways to launder their money. If you ask me, nothing really happens to them. Imagine the money the government must have spent to make up for the banned Rs.500 and Rs. 1,000 notes? It is again the taxpayers money they are using to all this drama. I don’t get it.”
What kind of impact the withdrawal of Rs. 2,000 notes will have on the economy? According to Dr. Vikas, several parts of the economy may swing one way or the other, but the impact will be for a quarter or two; and certainly not meaningful. It impacts just about a tenth of the currency. The velocity of Rs 2,000 notes is low, meaning it does not turn over as many times as the smaller ones. The Rs 2,000 notes ‘sit’ in the vault of the corrupt. Hardly sweat. So, the impact is going to be even less.
Akash, a former banker, says, withdrawal of Rs 2,000 notes makes sense only when one realises that demonetisation was a futile exercise. It will only weaken the credibility of the government and the central bank. He amplifies: “Demonetisation failed to achieve any of the objectives outlined by the government as the reasons behind carrying out the exercise. There was no reduction in corruption or decrease in usage of cash (except when citizens were deprived of currency notes and forced to adopt digital transaction platforms). It did not lead to elimination of ‘black money’ (one can see the use of unaccounted cash during elections across India after demonetization) or reduction in terrorism (increase in number of terrorist attacks in J&K, and resurgence of left-wing extremist organisations in Chhattisgarh). The first round of demonetization was a colossal exercise. It failed spectacularly. And damaged the economy in more ways than one. What made the govt withdraw the Rs 2,000 note that was seen as a tool for fighting black money and terrorism back then is a mystery as of now. It will however do what demonetization did: reduce trust in the government and its policies.”
During demonetisation, one of the many questions people had asked was: “If Rs 1,000 notes are seen as promoting corruption, how does having a Rs 2,000 note reduce corruption? It is difficult to see any logic behind both moves – replacing the Rs 1,000denomination with the Rs 2,000 one, and withdrawing the Rs 2, 000 note later,” says Akash. “It might be that the Rs 2,000 note is being hoarded by businesses and politicians for carrying out transactions that they might not want the authorities to notice. But then it proves that demonetization was just a farce. If the government wants to hurt the opposition by rendering Rs 2,000 notes useless, then the opposition will use Rs 500 notes. Also, it is patronising of the government to believe that all who vote for the opposition are being brought over by use of cash.”
Strongly criticising the Modi government, the former banker, who had witnessed his colleagues in the banking sector experience the horrors of having to put in countless hours to implement demonetisation, pointed to the inefficiency of the present government at the Centre: “There are a sizeable number of people who support the govt and defend demonetization. They do so not because demonetisation was the right thing to do but because they choose to support the government no matter what it does. This group will continue supporting the government and the recent measure.
But the rest, who might account for as much as 60% of the electorate, do not see any logic behind such a move — certainly not in terms of combating black money or corruption or terror. In fact, all three of these have increased. So, this might make 60% believe that this government is more clueless about economic and monetary policies than they believed. Which will make them even more critical. Opposition supporters might see it as another cynical move to target their ‘camp(s)’. The government has completely lost the public narrative when it comes to corruption. Except for its core support group, no one buys their claims.”
“I feel it’s a good move withdrawing Rs 2,000 notes as it was completely out of white market and seems available in different colours. It plays a major role during elections. I feel withdrawing the Rs 1,000 notes led to an increase in the usage of Rs 2,000 notes as they carry more value with lesser weight. Once these notes are rigorously used in black market, that is the time to stop the circulation of Rs 2,000 rupee notes and way forward, reducing the usage of physical currency and increase in digital currency will reduce the corruption to some extent,” Vamsi Viswanadh, a Chartered Accountant with more than a decade of experience told The Pioneer.
Vamsi says that the Prime Minister has his own plans of eradicating black money by introducing digital money and withdrawing currency notes. He shares that the move might not have completely removed black money but works to an extent.
The CA shares: “People choose different ways to get black money converted into white money and fall in their bank accounts in some or other way. Even the keen watch by setting a threshold on deposits & withdrawals in savings account is one of the best practices to track. Huge deposits, and withdrawals in current accounts apart from normal trend balances of business also helps to identify genuineness of business/personal transactions.”
Giving his advice on how one can go ahead with exchanging, and depositing their money, the CA advises: “The best way is to diversify notes in order to increase the usage of currency notes with lesser value. Currently, payment of 6/- for chai is happening in digital mode. Going digital is one of the best ways for eradicating black market.”
There is no clear-cut idea over the validity of the notes after the deadline(September 30) set by RBI. The RBI governor told the media that they are expecting most of the notes to come back before September 30.
While the RBI, as an institution, assures that they are sensitive to the possible difficulties that different stakeholders might face in future leading up to the deadline, the matter of what happens to the notes after the legal tender status disappears remains to be the big question.
