₹2,000 notes withdrawal: Ex-chief economic advisor gives 5 reasons why decision is good. See post

The Reserve Bank of India (RBI) surprised the citizens on Friday night by announcing a withdrawal on ₹2,000 denomination after 30 September. While the RBI's decision has been hammered by opposition parties, the BJP-run central government has staunchly supported the move. Amid the political contestation over the withdrawal of ₹2,000 notes from the Indian market, the former Chief Economic Advisor has given six reasons why the move is beneficial for India.

Ex-CEA Dr Krishnamurthy Subramanian said the move to withdraw ₹2,000 notes is overall a good one. Here's what the former Chief Economic Advisor said:

1. The withdrawal of the ₹2,000 denomination will prevent the hoarding of cash. "The move will help to ferret out a substantive part of the ₹3.6 lakh crores of Currency In Circulation (CiC) in ₹2000 notes currently (refer to the circular below, esp. the highlighted portion). As we have seen in several raids, where mountains of currency stored using the ₹2000 note were uncovered, all these instances of hoarding of cash involved ₹2000 notes. As the use of the ₹2000 note as a medium of exchange has declined significantly, it is being used primarily to hoard money. The 80-20 rule suggests that even if 80% of the people are legitimately storing this money in ₹2,000 notes, they are likely to be storing only 20% of the overall value. 20% of those who are storing the money in ₹2,000 notes are likely to be hoarders who may account for 80% of the value ( ₹3 lakh crores).

2. The role of physical currency notes, especially ₹2,000 notes, declined as digital payments are being used in huge numbers.

3. The ₹500 note (together with digital money) can be used as a medium of exchange to "seamlessly substitute even the minimal use of ₹2,000 note for this purpose".

4. "Digital transactions are expected to multiply 3x from now to 2026 (BCG report), thereby minimizing the need for the ₹2000 note as a medium of exchange even more in coming years," Dr Subramanian said.

5. "Most importantly, as RBI has said that the ₹2000 note will continue to be legal tender (even beyond 30-Sep-2023 is my current understanding though RBI may need to clarify this), genuine folks holding the ₹2000 note can exchange even beyond 30-Sep-2023," he concluded.

The RBI has allowed the public to exchange the ₹2,000 notes from the bank by 30 September. However, the federal bank of India did not comment on what would be the status of 2,000 notes in private hands after September 30.

₹2,000 denomination came into existence after Centre announced the ban on ₹500 and ₹1,000 currency notes in 2016. The Centre brought back ₹500 into daily transactions with a fresh look. Besides, the Centre also launched ₹2,000 denominations at that time. The RBI had stopped printing ₹2,000 notes in 2018-19 and the notes were rarely in circulation.

The total value of such banknotes in circulation has declined from ₹6.73 lakh crore at its peak as of March 31, 2018 (37.3% of notes in circulation) to ₹3.62 lakh crore constituting only 10.8% of notes in circulation as on March 31, 2023.