2 min read.Updated: 01 Sep 2019, 11:18 PM ISTVivek Kaul
It takes fewer notes and less space to store black money in the form of cash, if higher-value notes are available
As of March 2017, the ₹2,000 note formed 50.2% of all bank notes in circulation
One of the reasons the Centre offered while banning the ₹500 and ₹1,000 notes was that “high-denomination notes facilitate generation of black money". It then introduced a ₹2,000 note. Over the last two years, that note seems to be taking a back seat. Mint takes a look.
What makes it easier to store black money?
It takes fewer notes and less space to store black money in the form of cash, if higher-value notes are available. To avoid this, the $100 is the highest denomination US dollar note available and the £50 is the highest denomination British pound note available. In November 2016, when the Centre, along with the Reserve Bank of India, carried out demonetization of the erstwhile ₹500 and ₹1,000 notes, this was precisely the logic it offered. However, the government then introduced the ₹2,000 note and went against what it was trying to achieve. It is easier to store black money in ₹2,000 notes than ₹1,000 notes.
Has the government been taking any steps?
It’s easier to store black money in the form of cash in larger denomination notes. Let’ say someone had ₹1 crore of black money. It took 10,000 notes of ₹1,000 to store that money; with ₹2,000 notes it took 5,000 notes. By banning the ₹1,000 note and introducing the ₹2,000 note, storing black money turned easier. Having said that, over the last two fiscals the government and RBI have been trying to correct this by limiting the number of ₹2,000 notes in circulation. In volume terms, the ₹2,000 note formed 3.3% of the total notes in circulation as of March 2017. This dropped to 3% as of March 2019.
How big is the drop in terms of value?
As of March 2017, the ₹2,000 note formed 50.2% of all bank notes in circulation. This dropped to 31.2% as of March 2019. This is due the number of ₹2,000 notes staying largely constant.
What’s replacing the ₹2,000 note?
The ₹200 note and the ₹500 note are replacing the ₹2,000 note. In terms of volume, the ₹500 note formed 5.9% of all bank notes in circulation as of March 2017. This jumped to 19.8%, or around a fifth of all bank notes in circulation, as of March 2019. As the economy expands, more ₹200 and ₹500 notes are being introduced. But the ₹500 note is gradually forming a larger part of all bank notes in circulation. In terms of value, it formed around 51% of all notes in circulation, as of March 2019. This figure was 22.5% as of March 2017.
In what way does this help the situation?
It takes four ₹500 notes to hide ₹2,000 as black money in the form of cash. Having said that, this is just a small part of the overall fight against black money. The May 2012 white paper on black money, using data from the search and seizure operations carried out by the income tax department, suggests only around 5% of black money is stored in the form of cash. The bulk of the black money is in assets such as real estate and gold, or simply leaves India.
Vivek Kaul is an economist and the author of the Easy Money trilogy.